What goes into your costs?

Young workers checking blue print at building place

Think of project costs as a blueprint for project work — no pay, no play 

Project cost estimates are based on several categories:

  • Direct costs — labor & materials, things you can see
  • Overhead — utilities, legal expenses, marketing, etc
  • Fixed costs — leases on equipment, facilities, financing costs
  • Variable costs — commissions, pay-per-hour resources

OK, how do you assign those costs to your project? Get help. Most likely, you will not have to do this work in isolation. In fact, you shouldn’t. There are a number of managerial and financial considerations that your financial, legal and managerial teams can share with you so that your project accounts for all the necessary costing. Leave out a key costing element and your career as a project manager may be short, at that organization, at least.

Where do you start? Your project scope statement defines the work to be done. It can be a challenge, however, to assign a price tag to the scope statement. Direct costs can be associated with the scope statement using a rough guess approach, comparing similar efforts (called analogous estimating) or a per-unit figure such as cost per unit (a technique called parametric estimating). These techniques are quick although the estimates created from these quick methods may not reflect the reality of the work, leaving money on the table, under-funding work or loss of profit. Project managers, especially those in the commercial space, should be keenly aware that profit represents the ability to do good things — pay bills, taxes, and do other projects in the future. Your role as the project manager is to sew up the gaps in understanding by creating as detailed an estimate as time / knowledge permits and to continually revise your estimates as the work moves forward (this practice is called “progressive elaboration” if you are preparing for the PMP exam or just want to impress your colleagues with jargon, and who doesn’t secretly love intimidating the uninitiated, right?).

So, how do you sew up the gaps in understanding? The most accurate method of estimating the work is called bottom-up estimating. This is a team effort. In bottom-up estimates, the team that will be doing the work or has expert knowledge of the work (as is the case on large projects that use professional project estimating teams), breaks down the scope statement into distinct deliverables. Often, the project contract, an agreement to work with an outside organization and a precursor to the project’s charter, contains this lower-level information. When it does, you can take the deliverables and break them down into the work needed to create those deliverables (this approach is called decomposition). While you are decomposing the work, it is a good idea to use the four cost categories as a checklist.

  1. Have we accounted for all the direct costs? Where will the work take place? Do we know the costs of doing work in that location, especially internationally?
  2. Are there any indirect costs we haven’t considered, especially risks associated with the activities and management of those activities?
  3. What are policies and laws governing how we apply overhead to the project? Are we missing cost elements that could cause revenue leakage?
  4. Have variable costs such as the additional costs for overtime and extra equipment hours been included, just in case? Have we included money for testing and inspections? Remember, what we fail to invest in quality we usually pay for later as the result of poor quality.

Details on these approaches can be found in a number of resources, which I will gladly share should anyone be interested — just drop me a line. Cheers! Gordon


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The (Lasting) Power of Acceptance

I was speaking to a group of project managers the other day about team-building. We shared examples of ropes courses, timed games, and other high-adrenaline situations that are designed to bring people together, depend upon one other in stretch situations (things out of one’s comfort zone), and foster deeper understanding and trust. I added that team-building can leverage these events but a project manager’s primarily responsibility is to build that productive, trusting environment for the team. No one else is going to do it.
At that moment two podcasts from National Public Radio came to mind. The first is a new jobs program in CA providing increased access to work for transgender employees. Kristy Ramirez, interviewed for the story, owns 6 Pollo Loco franchise stores in CA. She opened her first store prior to transitioning. In 2012, when she hired her first transgender employee, that employee told her how tough it was to find a job. Turns out that transgender people have twice the unemployment rate of the rest of the population. Ms. Ramirez hired several more transgender employees and found that her business increased, beyond transgender customers, that one might expect on the surface. Respect for individuals seems to be a recognizable, marketable practice, I told the project managers. Nods of recognition.
I shared a second NPR story that supported my point — Subaru’s profound business turn-around linked to the lesbian population. Turns out that in the 1990’s Subaru recognized a small but dedicated following of its all-wheel drive vehicles were lesbian. This happened almost by accident as Tim Mahoney, head of Subaru’s marketing team had a colleague that was gay and he shared this insight with Mahoney. Smartly,  Subaru pursued this market segment. Subaru hired a small advertising firm to create subtle cues to lesbians in their national advertising. Appealing directly was too risky at that point in time. Subaru could alienate heterosexuals from the brand if things didn’t work out. Subaru took the plunge. Using inside jokes that were  glaringly obvious to the lesbian community but innocuous to the rest of the population (that’s a hidden joke, after all), Subaru hired Lucy Lawless, the actress behind Xena, Warrior Princess to appear in their ads. The also placed a few clues on license plates in the ads, all inside jokes to the community. That campaign reinforced what Subaru learned, effectively saying, “Hey. We know you are out there. Thanks for doing business with us. We like you.” And it worked. That ad campaign was nearly 25 years ago and the power of acceptance, the power of saying, “I see you” has stuck.
Wow! How’d you like to make THAT happen on your projects, in your business? That’s some powerful stuff! At that point in my stormdp-otaku-obsessed-with-drivingy to the project managers I noticed the hair on my arms standing on end. I was electric.
Recognizing and accepting
people for who they are, where they are and appreciating them.
Now that’s something to drive home.
You are great!
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Fifteen formulae to foment fabulous (f)results

OK, so the alliteration went a bit too far.
The PMP® exam commonly addresses the following fifteen formulae. Knowing this is helpful, but not critical to passing the exam. While there is no way to forecast what will appear on YOUR exam, the likelihood of encountering 10 or more of the following is high. So, 10 points is good, right? Here are the formulae. Practice using them will be delivered in future posts, ranked by reader feedback.

(singing Bob Marley) “No feedback, no cry.”

15 Essential PMP® Exam Formulae

  1. PERT: (P + O + 4ML) / 6
  2. Standard deviation: (P – O) / 6
  3. Calculating a range of estimates based on confidence: PERT plus or minus the “confidence-factor adjustor”
  4. Expected Monetary Value: Probability * Impact
  5. Point of Total Assumption: (Ceiling Price – Total Price) / Buyer’s share of over-runs + Seller Cost
  6. Channels of communication: N * (N – 1) / 2
  7. Duration: Effort / Percentage Availability
  8. Earned Value = 8 formulae, rounding out the 15 essentials:

    1. Cost Variance: EV – AC
    2. Cost Performance Index: EV / AC
    3. Schedule Variance: EV – PV
    4. Schedule Performance Index: EV / PV
    5. Estimate at completion: BAC / CPI
    6. Variance at completion: BAC – EAC
    7. Estimate to completion: EAC – AC
    8. To-Complete Performance Index: (BAC – EV) / (BAC – AC)

  • So, which formulae would you like to hear more about? It’s really not as painful (or boring) as it sounds!

    You are great! Gordon

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    Visually monitoring risks: a supplement to the Risk Register

    Often, great ideas just pop out of discussions. Today is a great example. As the class discussed the PMBOK Guide approach for monitoring risks, one of the students shared their experience of managing a multi-million dollar project’s risks using a war room (extra credit if anyone recalls how war rooms are used and which knowledge area they relate to) and this simple graphic:

    Risk Radiation Chart

    Depicts changes in risk events over time

    How do you use it? It is pretty intuitive, no? For additional detail, simply, cross-reference to your Risk Register. All the event details, including its owner, the proposed “a priori” response and results should be listed there (or in the Issues Log).

    What is so appealing about this graphic is its simplicity. You see the trend for, potentially, hundreds of risk events without scouring line after line of Risk Register. Very nice!

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    Design of Experiments, distilled

    If you are preparing for the PMP® Exam, you have probably encountered the Plan Quality Technique of Design of Experiments (DOE). Realizing that you may want this technique distilled down to manageable, exam-appropriate material, consider these points:

    Design of Experiments:

    • Systematically blocks project variables
    • To reduce the effects of random error
    • Improving project quality decisions (what to measure, how to measure it and the final deliverable)
    • Saving time and money on the project

    Enough to be dangerous. 

    Keep at it — you 

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    Design of Experiments

    I love to cook. I am not always successful in turning out tasty dishes, however.

    When I first learned about spices my modus operandi was to use a little bit of EVERY spice in the meal. The end result … a dog’s breakfast. I ended up wasting a lot of time, money and the patience of my family in the process.

    Had I known about Design of Experiments, however; my learning curve may have been steeper (which is a good thing). Design of Experiments is a technique (used in the Plan Quality process) to combine project variables in groups and systematically change those variables until the desired outcome, a “blueprint” for the project emerges. That is the gist of what you need for the PMP exam.

    For those of you looking beyond the exam and considering what Design of Experiments can do, consider it a discipline worthy of study if you are going into high-tech fields. As proof, several of my past students, members of the military working on weapons systems, described their experience working with Design of Experiments and how they were excited about transitioning into civilian life as several consulting companies were courting them to come and teach Design of Experiments to their clients.

    Food for thought?

    If any statisticians out there are familiar with and would like to discuss Design of Experiments, we welcome your comments.

    As always, You Are Great!

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    Vendor Bid Analysis vs. Contracts

    An easy-to-overlook technique of Estimating Costs is called Vendor Bid Analysis. It is simply considering the costs (via quotes, bids, proposals, etc) being offered for project work. Once the contracts for that work are finalized, the contract figures are used in the process Determine Budget.

    Exam tip:
    Vendor Bid Analysis – technique of Estimating Costs
    Contract – input for Determine Budget

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