PMBOK 3

PMBOK3 

PMBOK GUIDE EDITION 3

PMI had release their third edition guide book. It took them 2 1/2 years to finally complete it and got it published and delivered to PMI members.

For those who are going for their PMP certification after October 2005, they will have to master the new guidebook elements.

There are many changes made as compared to the 2000 Edition. Changes to the standard affect the structure, content and language of the PMBOK Guide. While the Knowledge Areas remained as nine, seven new processes were added and two previous processes were deleted. The new processes are:

Develop Project Charter (Section 4.1)
Develop Preliminary Scope Statement (Section 4.2)
Monitor and Control Project Work (Section 4.5)
Close project (Section 4.7)
Create WBS (Section 5.3)
Activity Resource Estimating (Section 6.3), &
Manage project team (Section 9.4).

In addition, PMI renamed 13 Processes, presumably for greater clarity. I am not sure if members felt the same.

Going through all the Chapters in the new PMBOK, I gather, many of those who are going for their certifications after October may feel the text structure tougher than previous version.

Although, the chapters and processes may be new, but actually, they are not. What had been added was basically an expansion of the write up and segregating them into new processes to provide clarity.

Personally, I suggest that those who wants to get their certification may consider to do it before October 2005 which will still be based on the PMBOK 2000 Edition, which to me, is much simpler, easier to understand and apply and readable to non-Americans.

From my own analysis, I would prefer the 2000 Edition although the new Edition provides more detailed information. To me, those information are necessary, but unfortunately are expressed in a language to cater for generic project management industries. In fact, the language is so "American" and it will take those who are weak in the American English and its Jingo to have insights to its intended meaning and expression.

The Project Integration Management Knowledge Area are much better than the previous. It has more detailed discourse and provides an extensive description of integration from the Project Management Process groups perspective. This is an area I felt was worth all the efforts taken by PMI.

IN Project Scope Management, Project Initiation was rewritten and moved to Project Integration Management. I would have thought that it was more appropriate to add a new chapter for Project Initiation Management as the subject matter and its various processes are extensive in real life and is thus not appropriate to be only a small sub-section of Project Integration Management. In fact, Initiation could not be considered as a whole process within Integration as only after the project award and project charter would integration to the 9-knowledge areas and the processes group be effectively propounded. This, I hope PMI would reconsider. For example, in the construction industry, the contractors would be sourcing for projects, tendering for projects, getting information such as feasibility study, market study, financial analysis and potential buyers' background information - all these activities are presumably within the Project Initiation Management. Then, when they were awarded the project, a project charter will then be forwarded to the project manager appointed, to authorize him to use organizational resources to organize and implement the project.

With the mandate, the project manager would then need to, first get the full contract documents (which he may not get them all), visit the project site (assuming he was not involved during the tender stage; such as the cases in Malaysia), and begin the Scope Planning exercise. Unfortunately, project charter in construction projects are mostly informal, unwritten, largely word of mouth from the project sponsor. The project manager will have to assume his authority (based on his past working experience with his organization, of which PMI now call it "Organization Process Assets and based on the "Enterprise Environmental Factors" to begin the planning process. Due to a lack of structured framework in scope planning, project managers will have little knowledge of the organizational resources that will be made available to him and what are the constraints he would be facing, such as - What would be the financial outlay & amount of financial working capital allocated for the project, how would be the appointment of sub-contractors (many of whom will be existing sub-contractors who are well entrenched into the system of cronyism and nepotism), what are the tolerance and thresholds levels in areas such as risk management planning, scheduling (what resources will be available if the sub-contractors have yet to be appointed and the Nominated Sub-contractors are unknown) and cost management (is it top-down budgeting: "Do it and complete the project at $xxx,xxx no matter what)?

Project Time Management would surely ranked as one of the best chapters in the PMBOK as they are clear, concise and pragmatic. The only weak area here is the lack of information as to critical path methodology and Monte Carlo Simulations which are worded in the tools and technique but with little information to readers. The reader at such, will need to read up more books to explore the usage of such tools, the interactions and integrations of these tools into the schedule, cost and risk management system. Tho' textbooks may provide the knowledge exploration, somehow, it is written in an academic language and contextual form that makes non-academic practitioners difficult to understand.

Project Quality Management chapters are almost identical to previous version. This is the Knowledge Area which I felt is too simplified and lack depth. The chapter maintain the 3-major processes, that is, Quality Planning, Perform Quality Assurance and Perform Quality Control. Personally, I would have it expanded into 5-Major Processes: Quality Management Planning, Quality Assurance Planning, Perform Quality Monitoring and Assurance, Perform Quality Control and Quality Audit.

The main problem in quality management is that the project quality plan is written in a language and documented in such manner that only a few of the project team members can understand. The performers of project activities are largely skilled and unskilled workers who may not be able to read those documents (worse, if they are not given one). At such, it is necessary to translate those quality plan into systematic action plan consisting basically flow charts and graphics, of which the workers will be able to understand and apply. This step, I called it "Quality Assurance Planning", which has not being practiced in the construction industry (probably, this step may not be necessary for IT Industry as the team players are trained in their own project language).

Project Risk Management and Project Procurement Management are similar to the previous edition, which I believe should have provide more indepth knowledge of the tools and techniques to be used. There were some graphics and metrics shown in the guidebook which are not user friendly. This is largely due to the fact that PMBOK Guide is generic, and at such, not specific industry friendly. For example, in Project Risk Management, the useful tool is Monte Carlo Simulation and there isn't any information and details as to how that tool can be used and applied during the risk quantification process.

Overall, with due respect to PMI, I would prefer the PMBOK 2000.

Globalization & Challenges of Project Management

“Globalization refers to all those processes by which people of the world are incorporated into a single world society, global society” [Albrow, Martin. 1990. Introduction: Globalization, Knowledge And Society. London: Sage].

Globalization, according to Robertson is “ the crystallization of the entire world as a single place. Globalization is the compression of the world as well as the intensification of consciousness of the world as a whole” [Robertson, Ronald. 1990. mapping The Global Condition: Globalization As The Central Concept. Theory, Culture And Society 7].

During the period between the 1980’s and the 1990’s, the pace of business in Malaysia and other East Asian countries were fast and furious. The rate of growth that companies could achieve was astonishing and seems “ miraculous”. During these boom times (1989 – 1997), many middle size Malaysian companies have grown into large conglomerates because the owners have seized every opportunities available simply because the opportunities were available and they were tempted to bullishly inflate their business size, even thought the business opportunities may not match their fields of expertise. Many entrepreneurs simply jump into business every each way as opportunities comes abegging and not much thought was placed on the overall synergies of the business. Many of these conglomerates have grown exceptionally big, grossly diversified and unfocused, and as a result, they were too poorly managed, lack structure, lack transparency, and are devoid of internal checks and accountability. The structures of these conglomerates are at best, chaotic.

In those good times, we often read of those companies expanding at an accelerated and uncontrolled pace. These companies took excessive risks but they were justified by excessive returns during those period. Poor utilization of resources is camouflaged with high rates of turnover. When business is booming, companies focus on sales volumes of trade. In those frenzy mood, management were no longer sensitive to increased operating costs, expenses and wastages. Productivity and efficiency drops drastically, but this weaknesses are obscured by higher sales volume. In such times of boom, CEO’s and senior management often develop a euphoria regarding their business success and they get carried away and were obsessed with issues regarding corporate images, and personal images. They start by opening more branches; elaborated renovations and many even purchase or build new buildings for their headquarters. They make commitments in fixed assets, which tie the company in great financial obligations for which they would have to service the huge debts in the next few decades. Their overhead expenses are growing faster than their sales performance and profits. Suddenly in 1997, there was the sound of crash landing, the East Asian economic crisis, which caught every enterpreneur by surprise. By then it was too late to back track as they had jump into the deep pit, an abyss.

What really contributed to the financial crisis in the East Asian economies was indeed due to the bubble economy, extremely high growth rate caused by the Governments push for greater privatisation through external borrowings which was unsustainable, and it was further aggravated by the liberalization and globalization of economies.

No century in human history has experienced so much social transformations and such radical changes as the 20th. Century. CHANGE is threatening. There is no right way and there is no learning without mistakes. There are stages to transformation. Although an organization may skip over one, inevitably it realizes it must retrace its steps to cover the missing ground. Everyone must accept the premise that fundamental change is necessary.

"In a rapidly changing business world, nothing stays constant even a short while. The worlds around us have changed fundamentally and that attitudes to the cost as well as the benefits of business activities and economic growth had undergone a profound transformation. The underlying causes which reflect turbulence in the economic, technological, political and social environments, ‘Triggers For Change’"(Peter Drucker). There are so many external factors that can suddenly present themselves and make a company less competitive or drive a firm out of business if they do not adapt and respond to the changes. Companies that are merely focusing on cost cutting without doing anything new or innovative to win new business will achieve their self-fulfilling prophecy of reduction and diminishing themselve into extinction. According to Abraham Lincoln, “the dogmas of the quiet past are inadequate to the stormy present. The occasion is piled high with difficulty, and we must think anew and act anew. We must disenthrall ourselves”.

From the crisis, we have learned that the old way of doing business is no longer an alternative. Everyone must be aware of the situation everyone is trying to do something – often anything – for survival. No society in history has faced these challenges. But equally new are the opportunities of the knowledge society. Access to the acquisition of knowledge is by learning, which will become the tool available to acquire the skills, technologies and knowledge. The knowledge society will inevitably become far more competitive. Knowledge has become the key resources – for a nation’s economic strength as well as its military strength. Knowledge is not tied to any country and it is portable. It can be created everywhere, fast and cheap. But knowledge is constantly changing. Knowledge always makes itself obsolete within a short period of time. For this reason, the acquisition of knowledge through learning can no longer stop at any age. “Life-long learning” will increasingly be a requirement for any knowledge worker.

Every country, every individual and every business have to take into serious consideration its competitive standing in the world economy and the competitiveness of its knowledge competencies.

Project management is ideally positioned to meet many of the challenges confronting global business enterprises. The compression of the product life cycle and the project life cycle is perhaps the most prodigious force driving changes in the process of managing projects. Due to the intensified global competitiveness, there is a need for sustained innovation and process improvement of which these activities are being represented in a projects environment. As projects become the focal point of business, organizations will naturally adapt and change to support more effective project management.

Project management philosophy and techniques are based on the ideas of performing to maximum potential within the constraints of limited resources. Thus, it is obvious that project management will offer the logical and attractive method for increasing profitability in the business. At such, the rise of project management as a profession is likely to be a key element to the continued development and industrial expansion in Malaysia and around the world.

According to Clifford Gray (Project Management – The Managerial Process, McGraw Hill, 2000), "the organizational culture of most successful firms of the future will be one that support flexibility, places a high importance on projects, and maintains a sustained effort to learn and improve processes." The challenge is to adopt and commit a culture that supports continuous improvement, renewal, and organizational learning.

Project Quality Management

The advent of the globalization of the market economy has been described as “the customer’s victory.”(Dupuy, 1999) We have moved from an economy where products were scarce to one where products are plentiful and customers have just too many choices. This has led to the need to develop our capacity to listen and to learn, to become learning organizations. “Learning and listening (in our organizations) is a set of behaviors, of arrangements, of co-operative efforts…” (Dupuy, 1999) To ensure success, organizations need to embrace a single quality philosophy, its management needs to lead and embrace quality, exudes quality leadership, provides systems and structures needed to suit quality objectives, provide training to employees and empower them in quality initiatives, and ensures the existence of a quality values system that are developed into a living culture within the organization.

Quality is defined as “The totality of features & characteristics of a product or services that bears in its ability to satisfy explicit & implicit needs.” (BS 4778; ISO 8402 Standards). Dr. JM Juran defines quality as, “The fitness for purpose,” and Philip Crosby defines it as, “Conformance to requirement.”

According to quality guru Dr. Armand V Feigenbaun, the author of ‘Total Quality Control’, “Quality is the total composite product and service characteristics of marketing, engineering, manufacture and maintenance through which the product and service in use will meet the expectations of the customer.” To the industry, "quality" is an essential component of the organizational approach and philosophy to management. Quality system management underpins the product and the marketing programmes to provide goods or services that satisfies the customers, and at the same time provides shareholders return on investment.

James Houghton, the Chairman of Corning Glass described quality as "...knowing what needs to be done, having the tools to do it right, then doing it right - first time."

The guiding philosophy for quality is performance improvement and continuous improvement. The key to quality is its people and the processes. The primary barrier to success is the appalling stupidity of most managers about people and their lack of competency in handling processes that causes wastages, scraps, reworks and warranty claims. Central to the quality philosophy is the people that function within social, economic and organizational systems and that, with a well-design processes, the people within can achieve the results envisaged. Programs for improvement that fail to take those interactive systems into consideration, in planning and in execution, are doomed to failure or to trivial results. Quality is impossible without well trained people and a good understanding of the processes that bring about results.

A commitment to quality management cannot be expressed through charades, which encourages form over substance, and mean nothing. Quality management cannot be reduced to recursively trivial plan, which are relevant only to the performing organization, but irrelevant to the real customers; the ultimate reason why the company survives, and why the organization and its people exist.

All efforts at performance improvement, for purposes of quality, must be defined in terms of the customers. Efforts labeled quality improvement that cannot be linked to the ultimate customers and end-users, are 'much ado about nothing' and are, at best, trivial imitations of quality management. In the service industry, the processes of service delivery must be designed into the service delivery system so that the results are achieved the first time.

Quality improvement mythology holds that efforts at performance improvement, aimed at quality, are doomed to failure, unless upper management is behind all the efforts. According to Dr. Joseph M. Juran, in his assessment, 80% of quality problems are caused by upper management. Good intentions and sheer determination are not a guarantee of success in implementing total quality management system in the company. Total Quality Management System and its success cannot just come from raw enthusiasm of the participants, which is its management and workers.

To be successful, a Quality Management System must aim to improve product quality within design, manufacturing and customer service. It must also include the suppliers, vendors’ distributors and retailers. We should expect everyone with whom we do business to implement a company wide quality control programme which emphasizes continuous improvement of quality and productivity. Such a programme should demonstrate a management philosophy that reflects:

i. Top management commitment to quality as a business strategy

ii. Management’s involvement and providing a work system and an environments which will result in promoting employee involvement in both quality and productivity

iii. Teamwork approaches to problem solving and process control using statistical methods.

No longer can successful organizations focus inward on their own capabilities and processes; they must understand the complex relationship they have with their stakeholders and co-operate with them to develop new products and continuously improve their products and services according to changing demands and technological potential. Understanding Customers’ need include the gathering of service quality information to identify what is working well and what isn’t, and to increase our knowledge of customer requirements. Assessment of current processes and our ability to meet customers’ expectations will also be needed if these new measures are going to change the quality of our service capabilities.

Once we have gained an understanding of customer needs, we will then need to listen to the voices of our internal customers – our employees. If caring to succeed with customers is going to permeate our very culture, we need to provide organizational systems that engage our people in planning how to meet these expectations, focusing on performance and knowing how to measure it, and help employees develop the new knowledge and skills it will take to be successful. The design and implementation of customer-focused, strategic planning processes that involve staff in learning and caring about customer needs, current dissatisfactions with the system, and future priorities, will be the key to increasing employees’ commitment to engage in challenging efforts that can have the most important strategic impact on outcomes for customers.

To succeed in this new culture, management and its people must be guided by their organization’s infrastructure and support systems to focus on continuous quality improvement. If systems are not in place to support a culture, employees will not be able, willing, and committed to transform their work efforts as needed by changing customer demands. As we begin gaining the skills to assess needs, listen to, and co-operate with our customers in designing our services and products according to their constantly changing needs and expectations, we need to learn how to re-engineer and improve processes that we use to produce desired results. Let’s become a learning organization - experimenting, seeking new ways and new methodologies, and designing our organizational systems that involve, engage, develop, and increase the commitment of our people, our partners and our customers to design the future we want and need.

Financial Management & Project Cost Management

Financial management is instrumental in identifying the need, determining the timing, and negotiating with potential sources of outside capital. Decisions to whether to engage in short-term or long-term borrowing are dependent on cash flow expectations, capital structure determination, and the cost of capital employed. To discharge this function effectively, managers must maintain close contact with financial markets and be sensitive to macroeconomic development that may influence the availability and cost of capital to be acquired.

Finance is also the focal point for information requested by creditors, lenders, and stockholders regarding the financial posture of the organization. Accuracy, timeliness, and tactfulness are the primary characteristics required for these activities.

The role of finance, particularly in the areas of scorekeeping and capital utilization are all-pervasive and impacts on the managerial discretion of non-finance activities. Therefore, all managers must develop an understanding of the objectives, tools, and functions of finance.

A matter of immediate concern for all managers is an appreciation of the purpose, underlying assumptions, and interpretation of the budgeting process. The ability to present a case for a budget and to discuss it, and to provide the data required for top management’s approval is a prerequisite for organizational survival. Any major allocation or request for funds will require forecast of benefits.

Effective financial management must take into account the needs and concerns of those who supply capital to the organization – lenders and stockholders. The observe is also true: effective lending and investment requires a thorough understanding of the tools and practices of financial management. In assessing the desirability of a loan to a potential borrower, or the injection of capital by stockholders, the funders must assure themselves of the viability and financial potential of the enterprise or a project. Analysis of past financial statements, prevailing financial plans, and control procedures will provide the much relevant information. By understanding the financial language, tools and procedures, investors can place themselves in the decision and information framework of corporate management, thereby gaining a better appreciation of the risks their capital is exposed to and the returns they may realize.

Financial Planning

Financial planning is a reasoned approach to allocating economic resources to maximize the satisfaction one gets from life. A financial plan or budget is a convenient decision-making tool, which is based on the fundamental economic principles of scarcity, choice and opportunity cost. In the absence of a financial plan, impulse buying may make it difficult to "make ends meet" no matter the level of income.

It is important to realize that every purchase involves cost (opportunity cost). Maximizing satisfaction depends on an analysis of the costs and benefits of purchases. Equipped with an understanding of the financial planning process, students are better able to adapt to ever-changing economic conditions.

One of the key functions of financial management is the allocation of existing resources with the expectation of reaping benefits in the future. The relationships between investment and returns are asymmetrical. While the costs of existing resources are expended with certainty, the benefits anticipated from the investment are not guaranteed. Thus returns may deviate from expectations and such deviation serves as the definition of uncertainty or risk.

The most carefully planned programs face great uncertainties as to the potential outcome of the course of events envisioned during the investment phase. Each of the events would have implications on the cash flow and profit. Planned benefits are uncertain and may deviate either direction from those assumed initially. Since risk cannot be avoided, it must be treated explicitly in the financial planning process. This can be accomplished by stipulating a range of likely outcomes, varying these stipulations, and observing the changes that occur in expected benefits as the assumptions are altered.

With the development of mathematical programming techniques and the availability of computers, econometric forecasting techniques have gained considerable acceptance. These forecast predict the stability of certain economic relationships and the ability to capture these relationships in mathematical terms. Before the forecast can be generated, certain assumptions regarding political events, tax legislature, demographic factors, technological developments, and consumer behaviors must be incorporated into the forecast, explicitly or implicitly. The cost of developing an econometric forecast is relatively high which preclude most small businesses from developing their own capability in this area. Alternatively, small corporations may procure these programmes from external source, but the reliability and accuracy, and the assumptions incorporated into the system may be improper and unrealistic. another less sophisticated technique, which can be used for forecasting, is the judgmental forecast, displaying in quantitative terms (such as GDP, interest rate, employment data).

Once a sales forecast is presented, company support plans can then be developed. The financial plan will then translates all these support plans into monetary terms, identify the source of fundings, and present an approach for the raising of capital from external source, if so required.

Project Cost Management

Project Cost Management includes the processes required to ensure that the project is completed within the approved budget (PMBOK, PMI, 2000). The major processes are: Resource Planning, Cost Estimating, Cost Budgeting and Cost Control. Project Cost Management is primarily concerned with the cost of the resources needed to complete project activities.

The principle objectives of which profit-oriented business organization tend to pursue are wealth enhancement, maximization of profit, maximization of return on investment of shareholders and satisfying stakeholders. Though wealth enhancement may not be a perfect description of what businesses seek to achieve, it is almost certain that wealth is something which business cannot ignore. A particular business only has a certain amount of wealth (capital) and it will take only a limited number of “wrong” decisions to see the business collapse. Therefore, business needs decisions such that it would be worth more as a result of the decision. When valuing businesses, managers need to take into account future profitability, both long-term and short-term, and the risk attached with the investment

The important issue for the success of an organization is not to whom specific responsibilities have been assigned, but rather that these functions are addressed in a timely fashion and are handled effectively. The functions of finance should be handled in accordance with the goal and objectives of the organization. In a profit-oriented enterprise, this goal should be maximization of the wealth of the shareholders.

Cost is often measured in monetary terms. The success of projects is judged by the efficiency with which we achieve the project objectives and that efficiency is assessed by measuring against two constraints – Cost & Time. In assessing the project duration, the duration of individual activities and resource usage have been optimized and further reduction of project duration must increase the direct cost of the project due to overtime and uneconomic use of the plants and machineries.


Cost Estimates

Estimating is never simple. Project managers must recognize that time, cost and resource estimates must be accurate if project planning, scheduling, and controlling are to be effective. At the work package level, the person most familiar with the task should make estimates. The line supervisors who are responsible for getting the job done and who are experienced and familiar with the work should be asked to develop the estimates at this level. The advantage is that the line supervisors will be responsible to ensure that the work activities as estimated by them would be achievable.

There are two practical problems in estimating. First, you are simply too optimistic. It is human nature at the beginning of a new project to ignore the difficulties and assume best-case scenario - in producing your estimates (and using those of others) you must inject a little realism. In practice, you should also build-in a little slack to allow yourself some tolerance against mistakes. This is known as defensive scheduling.

Second, you will be under pressure from senior management to deliver quickly, especially if the project is being sold competitively or the project is fast track as specified within the terms and conditions of contract.

Historical estimates has some inherent danger because they assume the past represents the future and may miss uncertainties that are associated with the new task. Any time estimates should reflect efficient methods for the resources normally available. Estimating of time must consider if normal time is calendar days, working days, weekends, mandays and hours. Many schedules developed by project managers are over optimistic (or faulty) because they do not take into considerations public holidays and other non-working days. Therefore, in developing the schedule, project managers are advise to formulate the project calendar to take into consideration the possible non-working days and other risks associated with schedule (workers can be sick, take leave, or raining days). Unfortunately, padding carries a price. While increasing the allowed time will reduce schedule risk, we will also increase the possibility of an increase in the budgeted cost – this is the time/cost trade-off. The objective of all planning should be to develop a “realistic plan” and if padding is required, it must be done on a “task-by task” basis. There will always be some variation in working times, caused by external factors outside the control of the project team.

Several types of estimates are required as a project evolves. They are:
 Conceptual Estimates,
 Detailed Estimates and
 Definitive estimates.

Conceptual Estimates (preliminary estimates) are generally made in the early phases of a project, during the pre-tender stage. The estimates tell an owner whether a project is economically feasible.

Detailed Estimates, commonly called “quantity take-off” where quantities are then multiplied by selected unit costs, and the resulting sum represents the estimated direct cost of the facility. The addition of indirect costs – plant & equipments, overheads, profit, escalation costs and contingencies will develop the total estimated project cost. The contractor’s bid estimate is his foundation for a successful project. He must bid competitively to win a tender and yet make a profit.

Definitive Estimates are prepared after the project has achieved substantial progress and the major works has been more or less confirmed, and is unlikely to have further changes. These estimates will forecast the final project cost with little margin for error.

Cost Budgeting

Project Cost Budgeting involves allocating the project cost estimate to individual work items. A properly constructed budget must be capable of being baselined and used as the basis for performance measurement and control. It must reflect the way that resources are applied to achieve planned objectives over time. It must be structured in relation to the build-up of estimates, and to the collection of actuals. In converting an estimate to a control budget, two important differences should be considered. First, the organization and the categorization of costs suitable for preparing an estimate are often not compatible with realistic field cost control. Second, estimates must deal in averages, whereas tighter standards are sometimes desirable for control purpose.

In building the project budget we should consider providing certain buffer of extra money. Padding is a standard procedure in managing any project. There is no way that every risk can be fully calculated or anticipated. By assuming that the project might run over budget, we could have a cushion against unexpected incidents or cost overruns. As a project manager, you must have as much direct control of your budget as possible if you are going to be held accountable for the project outcome.

A properly constructed budget must be capable of being baselined and used as the basis for performance measurement and control. It must reflect the way that resources are applied to achieve planned objectives over time. It must be structured in relation to the build-up of estimates, and to the collection of actuals. The budget assumes special importance in project environments as the only basis against which to measure achievement.

Project operating budget is developed initially from the original project budget approved at the conceptual stage. Once the key stages of the project have been identified and the logic developed, the budget can be divided and apportioned to each stage. Operating budget is derived from the work breakdown structure, initially focused on the key stages of the plan. Cost for each key stages are assessed based on the level of details developed and identified at the time. As we layer the plan progressively, the operating budget for each key stage is developed. As the detailed budget for each key stage is derived, we must compare the total with the project budget and analyze the variance. Any negative deviations must be subject to close scrutiny and action planning to determine what action, if any, be taken to contain the situation. Operating budget may include costs divided into the following types: -

1. Capital Costs

 Usually associated with purchased items that can be depreciated.
 Capital costs can be determined with reasonable accuracy from tender and quotations and allowances made for inflationary effects.


2. Revenue Costs

Written off as running costs of the project, i.e. all except the people cost and contract.
The revenue costs are often derived by a rule of thumb based on factors such as length of the project and the number of people involved.

3. People Costs

Measured as time and converted to a charge rate for costing, often with normal working hour and overtime working rates. The people costs are attributed to the project in a variety of ways from zero through to accurate analysis; based on an individual’s actual cost plus an overhead charge to cover fixed costs of the organization.

4. Contract Costs

Costs derived from valid tenders and quotations that form the basis of an official order or contract. The contract costs are derived from tenders and quotations called for all external supplies. We must check the validity of all prices quoted and preferably request such prices to be given with sufficient validity to avoid having to rebid.

5. Contingencies or Reserve

Additional funding held separate to the main budget for unforeseen events and to cover the uncertainties in the original estimates. Project contingencies is a reserve set aside by management with strict controls to ensure additional monies can be injected into the budget when problem occurs.

Cost Control

Effective control of cost gives the opportunity to forestall inevitable cost escalation, foresee potential problems and take advantage of possible savings. Cost is best controlled at source and designed into the project, not inspected in after the event. This allows us to resolve problems before they occur and to respond quickly to those that do occur.

Project Cost Control includes monitoring cost performance, ensuring that only appropriate project changes are included in a revised cost baseline, and informing project stakeholders of authorized changes to the project that will affect costs. It must be remembered that cost, time and specification are inextricably linked. Most massive overspends on projects are caused by over-runs in time or unclear and ever changing specifications. Effective control of specification and time can make the cost control task much simpler.

Several tools and techniques assist in project cost control. There must be some change control system to define procedures for changing the cost baseline. Another tool for cost control is performance measurement. The Earned Value analysis is especially useful for cost control as it helps to determine what is causing the variance and to decide if the variance requires corrective action. Computerized tools such as project management software and spreadsheets are often used to track planned cost vs. actual costs and to forecast the effects of cost changes.

Pitfalls in Costing

Trevor L. Young listed some of the common pitfalls in costing the work, which include: -

1. Misrepresentation of the scope of work statement;
2. Poorly defined scope;
3. Lack of standards and specifications;
4. Poorly defined work schedules;
5. Omissions in the WBS;
6. Poor assessment of individual skills and work rates;
7. Ignoring cost escalations and inflation effects;
8. Avoidance – especially bought-out services leading to guessing.

Variations and Claims

The term Variation is used to describe any difference between the circumstances and/or content of the contract works as carried out, compared with the content and/or circumstances under which the works are described in the contract documents as intended to have carried out. Any change shall entitles the contractor to an adjustment of the contract price. A change is implied by the actions or omissions of the contracting parties.

Usually, contract does have a clause empowering the contract administrator to issue instructions for change, and employers does have a right to make any change covered by the clause for which he is willing to pay and, if necessary, grant more time.

A sound understanding of why change occurs is important in relation to the circumstances leading to and impacts on time and cost. The starting point is to decide what precisely is the extent of the work, which the contractor has undertaken to perform under the original contract. The significance of change must be considered in relation to whether the effect of change is:

 Discrete to the change itself
 Has consequences beyond itself
 Requiring action to minimize its effect, whether there are choices available and which one is appropriate, and
 Who needs to know about it?


A starting point in consideration of whether there is a change is: “what is the necessary and implicit work which the contractor is required to do under the contract and upon what basis can that work be varied?”

“Variation” in the PAM 1998 Form contract covers five main areas. Clause 11.1(i) to (v) intend a tangible change in the works. Clause 11.1(vi) excludes any default and/or breach of contract by the contractor from being a variation. This clause relates to changes in the obligations or restrictions imposed by the employer in the contract with regards to matters connected with the manner the work is constructed. It sets out situations where the employer may affect the contractor’s activity under the contract on the project. Clause 11.2 of the PAM 1998 Form goes on to provide that no variation shall “vitiate the contract”. The purpose of the statement is to ensure that the ordering of substantial variations will not entitle the contractor to treat the contract as at an end and claim to be paid on a “quantum meruit” basis rather than in accordance with the contractual terms. It is only “the works” as described in the contract documents that may be altered or modified. The architect’s power does not extend to ordering additions or substitutions that would require the contractor to execute work clearly not contemplated by the contract.

Project Performance Reporting

Information is a valuable resource. Every manager needs to know that he is acquiring, producing and using information wisely and effectively in support of the organization’s goals and objectives. Managing information requires the imposition of order, structure and discipline within a strategic direction. Information management is aided by the availability of technologies, methodologies, and development tools.

The availability of new and modern Technology has vastly increases our ability to access resources, both those we own and control and those outside of our own sphere of influence. As information management becomes more important every day, managers will need to ensure that people within the organization get the information they need to do their job effectively. Competitive advantage of organizations is very much governed by the effectiveness with which we manage these information resources.

The project management information system (PMIS) contains the intelligence essential to the effective planning, organizing, directing, and control of the project. All too often projects are characterized by too many data and not enough relevant information on where the project stands relative to its schedule, cost and technical performance objectives as well as the project’s strategic fit in the parent organization’s strategies.

Information is essential to the design and execution of decisions allocating resources in the management of a project. Decisions coming out of the planning and control of the project must be based on timely and relevant information. Project managers and his team members require information by which intelligent decisions can be made and executed effectively. Information flow is a critical consideration in the speed and eloquence with which the efficient and effective use of resources is carried out in meeting the purpose of the enterprise.

The objectives of an information system is to provide the basis to plan, monitor, integrate project evaluation, and to show the interrelationships among cost, schedule, and technical performance for the entire project and for the strategic direction of the organization. In addition, information should provide a prospective view to identify project problems before they occur, so that they can be avoided or their impact minimized. Information is also required by the project team to continuously monitor, evaluate, and control the resources used on the project. There is also a need by senior management to be kept informed of the status of the project. The hardest part of any management job is not having all the necessary relevant information, yet having the responsibility of making the ‘right decision’.

In the construction industry, it is important that project information is shared between the project stakeholders so as to promote trust, empathy, and more mature relationships amongst them. Sharing of project information is one of the more important dimensions of keeping the team members working together cohesively and concurrently in the utilization of the project resources. Such sharing also facilitates the building of networks with the stakeholders through continuous interpersonal contact and dialogue.

Information provides the intelligence for managing the project. Information must be processed so that decisions can be made and executed. Information is essential to promote understanding, establish project objectives and strategies, develop mechanisms for control, communicate status, forecast future performance and resources, and changes recognized. Information is needed to prepare and use the project plan, develop and use budgets, create and use schedules, and lead the project team to a successful conclusion of the project. The project planning function establishes a structure and a methodology for managing the information resources which encompass defining, structuring, and organizing project information, anticipating its flow, reviewing information quality, controlling its use and source, and providing a focal point for the project’s information policies.

All companies have an integrated information system which includes estimating, job costing, accounting, payroll, and scheduling. A management information system is integrated by means of a cost code of accounts.

A project cost system must interface with accounting systems and report cost of material, labor, equipment and machineries (including overhead cost). The objective of a cost system is to track and forecast costs for comparison against budget. A material management system tracks materials from the requisition stage through to surplus disposal stage. Scheduling require several levels of reporting to meet the needs of the management hierarchy and therefore should be capable of the “roll-up” techniques. A scheduling system must be capable of scheduling all the activities, identify critical activities, level resources, progress tracking, and be produced graphically.

Reporting and feedback must be accurate and timely if it is to be effective for control purpose. Feedback must occur to the project team as well as management level. Management level reporting, that is for owners, contractors and project management teams, must provide statements of accomplishments versus planned cost and schedule objectives, forecast final costs and completion period. It should also review current and potential problems and indicates action taken to overcome the effects of the problems.

Weekly or monthly meetings are held to assess the progress on work. The review meetings are aimed at translating latest work status and critical problems into specific action plan. Weekly or bi-weekly (perhaps monthly) reports with information on the actual and ‘forecast to complete’ quantities of work serve as the agenda for the review meetings. By analyzing the actual manpower, material distribution, and equipment usage, the allocation and availability of resources can be adjusted.

Computer programs for project planning and control have been available for a long time. A software package must be able to meet the needs of a project. There are numerous commercial software packages available. Although most project management software programs can run on the basic PC computer system, users of programs with graphical user interfaces often require a more powerful system.