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Cost Management and Cost Control

Manuel Suarez

October 2011

Agenda
1. Introduction 2. Reasons for cost overruns in government led projects j 3. 3 Project management techniques management and control 4. References 5. Questions for cost

1. INTRODUCTION
Australia: Problems with the installation of an ERP system at Crane Group Ltd. led to an estimated cost overrun of $11.5 p million.* y p j y p India: As many as 274 projects currently under implementation in the Central sector are suffering serious cost and time overruns.** Pakistan: Pakistan has sustained a cost overrun of Rs 1.798 billion (over $30 million U.S. dollars) in the execution of the 66.5 megawatt Jagran Hydropower Project in the Neelum Valley. Valley *** United States: Northern California lawmakers were outraged over Governor Arnold Schwarzenegger's announcement that Schwarzenegger s commuters should have to pay construction costs on Bay Area bridges. Maybe it takes the Terminator to help control costs!****

*Songini, Marc L., Australian Firm Wrestles With ERP Delays, ComputerWorld (July 12, 2004). **Srinivasan, G., 274 Central sector projects suffer cost, time overruns, The Hindu Business Line (May 4, 2004). ***Mustafa, Khalid, Rs 1.8 ***Mustafa Khalid Rs 1 8 billion cost overrun in Jagran hydropower project Daily Times project, (November 19, 2002). ****Gannett Company, Governor Refuses to Pay for Bay Bridge Cost Overruns, News10 (August 17, 2004).

2. REASONS FOR COST OVERRUNS IN GOVERNMENT PROJECTS 2.1 Ambiguous P j t S 2 1 A bi Project Scope/Objectives /Obj ti I d i and construction of major projects In design d t ti f j j t there has been a trend toward starting field construction with a lower percentage of design definition A lot of government-led projects are developed for political interest so there is not enough engagement when defining the scope. scope

2. REASONS FOR COST OVERRUNS IN GOVERNMENT PROJECTS 2.2 Ineffective decision 2 2 I ff ti d i i making system ki t In government-led project, bureaucracy is a major i j issue l di leading t project d l to j t delays and d subsequent cost overruns Lack of alignment between the project objectives and stakeholders causes disputes leading to delays delays.

2. REASONS FOR COST OVERRUNS IN GOVERNMENT PROJECTS 2.3 Poor cost estimation There is little sharing of actual, reliable cost data ithi the d t within th construction i d t t ti industry. M t Most published cost data are viewed as lacking credibility i th real world. dibilit in the l ld Even within companies a feedback of actual companies, costs is not consistently used to review and adjust the basis for estimating future projects Lack of stakeholders (contractors vendors (contractors, vendors, suppliers) involvement when gathering cost estimation data data.

2. REASONS FOR COST OVERRUNS IN GOVERNMENT PROJECTS 2.3 Poor cost estimation

2. REASONS FOR COST OVERRUNS IN GOVERNMENT PROJECTS 2.4 Inadequate monitoring and control 24I d t it i d t l O i i Omissions or i improperly d fi d scopes l d l defined lead to unreliable baselines so the monitoring and control techniques cannot be implemented effectively. PM tools and techniques for cost control are useless if the data is not collected in a timely and accurate manner

2. REASONS FOR COST OVERRUNS IN GOVERNMENT PROJECTS 2.4 2 4 Inadequate monitoring and control In large projects, sometimes, the work packages are too large to be managed effectively so the data collection becomes difficult leading to inaccurate reports. No spelt out procedures f assessing and for quantifying the amount of work done in relation t th amount of money spent at l ti to the t f t t each stage of the project

2. REASONS FOR COST OVERRUNS IN GOVERNMENT PROJECTS 2.4 2 4 Inadequate monitoring and control

3. PROJECT MANAGEMENT TECHNIQUES FOR COST CONTROL


Current learning phase of a project can be used for future decision making thorough effective stage gate reviews. In order for stage gate reviews to be successful they must be treated as corrective actions rather than just simple reports. Also, it is very important the engagement of all stakeholders because they need to understand the g urgent of the situations. Configuration management is a vital process in project management as every change during the project life cycle will be documented and subsequently the cost of any changes will be captured helping on the generation of robust cost data and updating the project budget budget.

3. PROJECT MANAGEMENT TECHNIQUES FOR COST CONTROL


Lessons learnt can be used for cost estimating but must be analyzed carefully to identify what the relevant information is because all the projects are performed in different environments, f example diff diff i for l different personnel. l Network analysis must be updated throughout the project life cycle to identify the critical path and try to minimize floats because they can cause risks. Updating Stakeholder analysis must be done throughout the project life cycle because interest fluctuates and it must be determined how to maneuver the risks within the stakeholders. Some has more interest and power consequently high attitude to accepting and mitigating risks

3. PROJECT MANAGEMENT TECHNIQUES FOR COST CONTROL


Earned-Value analysis is the best bridge between cost reporting and cost control but its success depends on the existence of effective framework of planning including timely and accurate collection and reporting of cost d i l d ll i d i f data

Issues with Earned-Value: Earned Value: Most of mega projects are divided into small sub-projects so if the data for those sub projects are assessed sub-projects independently, it will produce less accurate results than when using the data for the whole project is used therefore it can cause severe errors in the future estimates and forecasts.

4. REFERENCES
1. 1. Dennis Lock (2000). Project Management. 7th ed. Hampshire, England: Gower Publishing Limited. 557557 583. 2. 2. 2 2 Kerzner .H (2009) Project Management : A Systems H (2009). Approach To Planning, Scheduling, and Controlling. 10th ed. Hoboken New Jersey: John Wiley and Sons, Inc. Inc 629 - 676 676. 3. Gray .F, Larson .W (2006). Project Management : The Managerial P M i l Process. 4th ed. N Y k McGrawd New York: M G Hill/Irwin. 418.

5. QUESTIONS

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