Dear PM Advisor,
I'm learning about the different types of contracts: Fixed Price, Cost Plus, etc. I'm curious what my current project would be classified as. It is a Turnkey EPC (Engineering, Procurement & Construction) Contract with a Price Variation Clause.
Various in Varanasi,
Dear Various,
I'm not sure what the Price Variation Clause is on your particular project but it usually varies depending on certain commodities like the price of oil or steel. If that is the case, you are dealing with a Fixed Price - Economic Price Adjusted type of contract.
In these contracts the price of the work is set and agreed to by both parties but the commodity is split out and varies based on the world price over the course of the work. As people use oil and steel, the buyer pays that commodity price in addition to the work being done.
Good luck,
PM Advisor.
Send your questions to Bruce@RoundTablePM.com
Showing posts with label Budget. Show all posts
Showing posts with label Budget. Show all posts
Monday, November 17, 2014
Friday, August 1, 2014
Small oversight leads to huge problems in largest tunnel project
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| Bertha before drilling began in July 2013. Ted S. Warren/Associated Press |
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| A hole dug by Bertha, the tunnel-boring machine that went dormant last December.David Ryder for The New York Times |
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| A crane hoisting a tunnel-boring tool at a construction site where a large shaft is being dug to get to Bertha. David Ryder for The New York Times |
Monday, March 24, 2014
Dear PM Advisor. Mar 24, 2014
Dear PM Advisor,
I am a team member on a project and my Project Manager is strict about me meeting my activity deadlines. So I add a buffer when she asks me how long an activity takes. Recently I admitted I was doing this and she got real mad at me. She gets a buffer; why shouldn't I?
War On Buffer in Cambridge, MA
Dear War On,
Buffers are a very tricky thing. Let's take your example to the extreme to see why not everyone should get a buffer and then show you why the way your PM is acting is correct.
Say the project is composed of a bunch of activities and all the team members add 25% as a buffer to the schedule and cost of each of these activities. Then their functional managers add another 25% to ensure their departments don't look bad. Then the PM adds 25% to make sure she can hit the baselines. The Steering Committee adds 25% before they decide if they want to pursue it. What does this do to a project that should have taken a year and cost $1,000,000?
12 mo x 1.25 = 15 mo. $1,000,000 x 1.25 = $1,250,000 (Team Member buffer)
15 mo x 1.25 = 19 mo. $1,687,500 x 1.25 = $1,562,500 (Functional Manager buffer)
19 mo x 1.25 = 23 mo. $1,562,500 x 1.25 = $1,953,125 (Project Manager buffer)
23 mo x 1.25 = 29 mo. $1,953,125 x 1.25 = $2,441,406 (Steering Committee buffer)
So our project more than doubled in size by adding all these buffers. Sounds good to you, right? But the steering committee may look at this and decide the project is not worth doing. And your leaner competitor will beat you to the market. So you won't be doing projects much longer here either way.
Buffer given out it is rarely given back. If you realize that the three day activity has been buffered to seven days, you probably won't start it right away and you won't feel the pressure to finish it in three days. So you'll start it on day three and finish it on day seven and feel proud of your accomplishment.
Here is the right way to add buffer to a project:
Let's look at what this does to our project:
12 mo x 1.00 = 12 mo. $1,000,000 x 1.00 = $1,000,000 (Team Member NO buffer)
12 mo x 1.00 = 12 mo. $1,000,000 x 1.00 = $1,000,000 (Functional Manager NO buffer)
12 mo x 1.10 = 13 mo. $1,000,000 x 1.10 = $1,100,000 (Project Manager Risk buffer)
13 mo x 1.20 = 16 mo. $1,100,000 x 1.20 = $1,320,000 (Steering Committee Management Reserve)
Now our project has an appropriate buffer but is still doable. The Team Members will feel pressure but they can accomplish their work.
But pay close attention to how we use this buffer. When you estimated three days on an activity, you need to do it in that time. Even though the overall project's schedule has been increased by 32%, you don't get to use that on every activity. That buffer belongs to the PM and she gets to distribute it when needed. She should be stingy with it. Remember it was placed there for Known Risks and Unknown Risks.
So you get three days for your activity. If you run into a problem you hadn't expected or hit a risk you had identified and you need another day, the PM should provide this from her four-month buffer. If you finish the next activity a day early, give that day back to her so she can add it back to the buffer. She will need every day she can get for that big problem that hits every project.
Wow! Long answer for a simple question but that was an important question that a lot of people get wrong.
Good luck,
PM Advisor.
Send your questions to Bruce@RoundTablePM.com
I am a team member on a project and my Project Manager is strict about me meeting my activity deadlines. So I add a buffer when she asks me how long an activity takes. Recently I admitted I was doing this and she got real mad at me. She gets a buffer; why shouldn't I?
War On Buffer in Cambridge, MA
Dear War On,
Buffers are a very tricky thing. Let's take your example to the extreme to see why not everyone should get a buffer and then show you why the way your PM is acting is correct.
Say the project is composed of a bunch of activities and all the team members add 25% as a buffer to the schedule and cost of each of these activities. Then their functional managers add another 25% to ensure their departments don't look bad. Then the PM adds 25% to make sure she can hit the baselines. The Steering Committee adds 25% before they decide if they want to pursue it. What does this do to a project that should have taken a year and cost $1,000,000?
12 mo x 1.25 = 15 mo. $1,000,000 x 1.25 = $1,250,000 (Team Member buffer)
15 mo x 1.25 = 19 mo. $1,687,500 x 1.25 = $1,562,500 (Functional Manager buffer)
19 mo x 1.25 = 23 mo. $1,562,500 x 1.25 = $1,953,125 (Project Manager buffer)
23 mo x 1.25 = 29 mo. $1,953,125 x 1.25 = $2,441,406 (Steering Committee buffer)
So our project more than doubled in size by adding all these buffers. Sounds good to you, right? But the steering committee may look at this and decide the project is not worth doing. And your leaner competitor will beat you to the market. So you won't be doing projects much longer here either way.
Buffer given out it is rarely given back. If you realize that the three day activity has been buffered to seven days, you probably won't start it right away and you won't feel the pressure to finish it in three days. So you'll start it on day three and finish it on day seven and feel proud of your accomplishment.
Here is the right way to add buffer to a project:
- Each Team Member estimates the activity duration and cost given the most likely scenario while feeling pressure. They don't add buffer.
- The Functional Managers review the TM's estimates and make adjustments if they think the TM made errors. They also don't add buffer.
- The Project Manager adds up all the costs and durations and determines the overall budget and schedule for the project. She also looks at the risks associated with this project and suggests a buffer based on all the known unknowns. She adds that to the request to the Steering Committee.
- The Steering Committee adds a buffer to account for all the things that go wrong on projects that we don't identify during the planning session. These unknown unknowns are taken care of using the Management Reserve, usually around 20%.
Let's look at what this does to our project:
12 mo x 1.00 = 12 mo. $1,000,000 x 1.00 = $1,000,000 (Team Member NO buffer)
12 mo x 1.00 = 12 mo. $1,000,000 x 1.00 = $1,000,000 (Functional Manager NO buffer)
12 mo x 1.10 = 13 mo. $1,000,000 x 1.10 = $1,100,000 (Project Manager Risk buffer)
13 mo x 1.20 = 16 mo. $1,100,000 x 1.20 = $1,320,000 (Steering Committee Management Reserve)
Now our project has an appropriate buffer but is still doable. The Team Members will feel pressure but they can accomplish their work.
But pay close attention to how we use this buffer. When you estimated three days on an activity, you need to do it in that time. Even though the overall project's schedule has been increased by 32%, you don't get to use that on every activity. That buffer belongs to the PM and she gets to distribute it when needed. She should be stingy with it. Remember it was placed there for Known Risks and Unknown Risks.
So you get three days for your activity. If you run into a problem you hadn't expected or hit a risk you had identified and you need another day, the PM should provide this from her four-month buffer. If you finish the next activity a day early, give that day back to her so she can add it back to the buffer. She will need every day she can get for that big problem that hits every project.
Wow! Long answer for a simple question but that was an important question that a lot of people get wrong.
Good luck,
PM Advisor.
Send your questions to Bruce@RoundTablePM.com
Monday, September 9, 2013
Dear PM Advisor. Sep 9, 2013
Dear PM Advisor,
Why should I add the project cost number to my Objective if my management doesn't ask for it? They never tell me my budget anyway. I'm told, 'Money is no object.' They do authorize project budgets but keep that information at their level.
Feeling Wealthy in Reading, PA
Dear Wealthy,
All companies are somewhere along the continuum of Project Management Maturity. Your's is mature enough to authorize projects and assign budgets but not mature enough to let you know what that amount is. We hope that they will get there some day. In the meantime you should try to get that number and work towards it.
If they refuse to give you the number, work with the hours and capital costs that you know. Plan the project with the level of effort for each task and add the capital costs and place that total in your Objective.
This will allow you to plan costs and see how good you are at hitting those costs as the project proceeds. Then you can improve your predictions on future projects.
Eventually management will come up to your level of maturity and be happy with the data you have generated.
PM Advisor
Send your questions to Bruce@RoundTablePM.com
Why should I add the project cost number to my Objective if my management doesn't ask for it? They never tell me my budget anyway. I'm told, 'Money is no object.' They do authorize project budgets but keep that information at their level.
Feeling Wealthy in Reading, PA
Dear Wealthy,
All companies are somewhere along the continuum of Project Management Maturity. Your's is mature enough to authorize projects and assign budgets but not mature enough to let you know what that amount is. We hope that they will get there some day. In the meantime you should try to get that number and work towards it.
If they refuse to give you the number, work with the hours and capital costs that you know. Plan the project with the level of effort for each task and add the capital costs and place that total in your Objective.
This will allow you to plan costs and see how good you are at hitting those costs as the project proceeds. Then you can improve your predictions on future projects.
Eventually management will come up to your level of maturity and be happy with the data you have generated.
Good luck,
PM Advisor
Send your questions to Bruce@RoundTablePM.com
Monday, June 10, 2013
Dear PM Advisor. June 10, 2013
Dear PM Advisor,
You advise the teams to develop their own project objectives during their first planning session. That's all great and it must be pretty easy to meet this objective since you get the dates and budget from bottom-up estimates. But in my company we are handed those constraints from management before we ever start planning the project. How do you handle that?
Constrained in Maryland
Dear Constrained,
Don't be concerned. I'm here in the real world with you. Projects don't enter the planning phase from a vacuum. There is usually a lot of work done in advance before a project is authorized to enter the planning phase. And in these earlier phases there are promises made about budget and schedule. Regardless of how many assumptions and questions we attach to these earlier objectives, management is still hearing a date and a budget and expect you to meet these.
So the typical scenario is that your team starts planning the project but are told by those who authorized the project when they expect you to finish and how much money you are expected to spend. What you need to do is record that information as the management mandated constraints and then go ahead and plan the project from the bottom-up anyway. Answer all these questions:
From the answers to these questions you will determine the bottom-up estimate of project budget and schedule. And they won't match the management mandated constraints. What do you do next?
Try some alternatives analysis to see if fast-tracking or crashing will reduce the timeline to meet the constraint. Try using cheaper suppliers or resources on some items. Remember that these techniques add risk and cost to the project. Look at reducing scope.
Then it is time to have the conversation with management. Here is the talk-track I want you to use:
Once management has made their decision, re-baseline the project and strive for early delivery of each activity so that you have some buffer when problems occur and you can still hit the deadlines.
Good luck,
PM Advisor
Send your questions to bfieggen@gmail.com
You advise the teams to develop their own project objectives during their first planning session. That's all great and it must be pretty easy to meet this objective since you get the dates and budget from bottom-up estimates. But in my company we are handed those constraints from management before we ever start planning the project. How do you handle that?
Constrained in Maryland
Dear Constrained,
Don't be concerned. I'm here in the real world with you. Projects don't enter the planning phase from a vacuum. There is usually a lot of work done in advance before a project is authorized to enter the planning phase. And in these earlier phases there are promises made about budget and schedule. Regardless of how many assumptions and questions we attach to these earlier objectives, management is still hearing a date and a budget and expect you to meet these.
So the typical scenario is that your team starts planning the project but are told by those who authorized the project when they expect you to finish and how much money you are expected to spend. What you need to do is record that information as the management mandated constraints and then go ahead and plan the project from the bottom-up anyway. Answer all these questions:
- What activities are required to complete the scope?
- How long does each activity take?
- How are the activities linked to each other?
- How much does each activity cost?
From the answers to these questions you will determine the bottom-up estimate of project budget and schedule. And they won't match the management mandated constraints. What do you do next?
Try some alternatives analysis to see if fast-tracking or crashing will reduce the timeline to meet the constraint. Try using cheaper suppliers or resources on some items. Remember that these techniques add risk and cost to the project. Look at reducing scope.
Then it is time to have the conversation with management. Here is the talk-track I want you to use:
- You've asked for us to do A for $X by Y
- We haven't figured out how to deliver A by that YET (Yet is a powerful word)
- We can run these two deliverables in parallel but that adds the following risk
- We can use this supplier and these cheaper resources to these activities and add this risk
- We can add resources to these three activities and reduce the end date by this amount
- We can reduce the scope by this item and bring the date to your expected end date
- Please let me know your thoughts on these alternatives
Then allow them to make the trade-offs required to deliver what they can. It is up to the team to perform the alternatives analysis so that management has the facts to make the intelligent decisions. This is why they get the big bucks. This is another reason why you need to make assumptions in your activities regarding cost and schedule so that this alternatives analysis can be performed.
Once management has made their decision, re-baseline the project and strive for early delivery of each activity so that you have some buffer when problems occur and you can still hit the deadlines.
Good luck,
PM Advisor
Send your questions to bfieggen@gmail.com
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