01 June 2020

Project Management

Cost guard

Construction companies need to familiarise its managers with project cost management techniques says SRINIVASAN IYER 


With the Narendra Modi government announcing its decision to pull out shelved projects out of the freezer and to fast track those that have been delayed in order to take India back on the growth track most project managers are now increasingly focused on raising all round efficiency levels and keeping cost and time overruns under check. Very few actually know that controlling project costs stems not just from being efficient in the course of the project. Sound financial management of projects and achieving a better bottom-line stems from a lot of other factors. Companies like L&T, Thermax, Voltas, Ion Exchange and TCE Consulting are regularly known to benefit significantly by coaching their project managers on how to estimate and manage project costs.


Such workshops on subtraction of project costs typically begin by offering participants with an in-depth understanding of what actually pushes up the costs. It then graduates to aligning the project spending plans with the overall business strategy. Other areas of focus of such workshops are the optimum usage of project resources and tracking return on investment. 


The heavy base line costs in case of infrastructure projects accrue from machinery and equipment while in the case of IT projects it is system establishment costs. There is no way such costs can be avoided such areas of expenditure they are essential to stay in business. It is easy to see therefore that all one can do is grin and bear it. That said managers need to be judiciously discreet at the very outset in deciding on such investments since baseline costs constitute a major chunk of the project costs. Ergo, the emphasis of the workshops would naturally be on techniques of controlling baseline costs.


Unarguably the best way to avoid project pitfalls is to manage assets effectively and ensure practice of good resource management. But beyond that one must go beyond resource management and re-negotiate vendor contracts. It always helps to sit down with vendors to derive an understanding of the cost break-up and also to re-examine the service level agreements. Reigning baseline costs not just improves the project bottom-line but minimises the opportunity loss.


The big question as always is how does one go about estimating costs? It is a fact that most project overruns owe to poor project scoping. If the project costs estimate turns out to be guesstimate one could well dub it as off the mark.  There is a need for bottom-up estimation or a detailed pricing technique which involves calculating the cost estimates for various project elements and then summing it up into the total cost of the project.  Admittedly though such a method is laborious and consumes a lot of time it has found usage in bidding for projects where there is a clear understanding of the project scope.


Since it is not always possible to assimilate all data needed for bottom up project estimation project managers require to be coached on the rule of thumb while adopting the top-down approach. Instructions on the top-down approach must also include lessons on how to work-out an order of magnitude or ‘ballpark’ estimate. It must also contain analogous estimates based on previous project experience and parametric estimates based on statistical projections of historical data.   


The other issue that needs to be addressed is of a situation where there are economic constraints and the need to reconcile project costs within the budget. In such workshops managers are advised to first have a re-think on the project and it’s feasibility in view of the cost factor. There is a possibility that the managers might need to adjust the project scope in order to make the project viable. We need to have techniques that help in working out a project scope which fits into a pre-decided project costs envelope. A design-to-cost approach and working backwards from a fixed budget through an intense process of prioritizing the costs is assuredly the way to go.  


The stake holders need to aware of project costs risks. Such a knowledge provides for uncertainties and contingencies like changes in project scope at a future date, technical snags, material and labour cost  escalation, opportunity loss of unused assets and also ‘circumstances beyond control’. Project managers need to have an understanding of how to mitigate the project risks and factor in markups to minimise project costs


Every project is in a sense a battle and project managers would have won half of it if they could assess project costs correctly. The trick however lies in effectively implementing the project within the planned budget. However it does happen that the best planning, estimation and efforts could go awry. It’s imperative for the project team to convene for a meeting immediately after the completion of a project to discuss threadbare the right and the wrong that transpired during project implementation. The discussions could focus on issues like decline in productivity, possibilities of re-mobilisation, overtime costs, improper equipment scheduling, rentals on unused tools and equipments. It could even deal with errors of omission like failure to check invoices or errors in deliveries and accounting.  There could be questions galore asked like the steps to be taken when a project overshoots the budget owing to an additional request by clients not in the original scope of work or if the client fails to fulfill his part of agreed commitments. There is also a need for project managers to be familiar with the nuances of Field Orders and Change Orders.


Clearly the message emanating from such project cost control workshops is that when costs spiral it is time to go back to the basics. It is necessary for managers to work out a baseline plan with clearly defined project standards, milestones, costs forecast, procurement strategies and project success indicators. Further it is also paramount to constantly keep track of critical project resources such as people and equipment besides having periodical reviews and analysis during the execution phase. Effective project management dictates that the managers monitor the progress of the project with the original plan to see if the actual costs are in line with the projected trends and productivity forecasts. It is not unusual to see sometimes that the scope of the project itself changes leading to the reference baselines going for a toss. It is critical to ensure that the baseline plan is changed every time this happens. Project managers attending such workshops stand to learn the earned value technique of monitoring on-going projects. Earned Value Analysis (EVA) and cost management tools like Net Present Value, Internal Rate of Return, Payback Period and Cost Benefit Ratio are useful in planning and manage the project cash flow. The other key areas of focus of the workshop is Plotting the Actual Cost of Work Performed (ACWP), comparing it with the Budgeted Costs of Work Schedule (BCWS) and initiating timely corrective actions. The other thing to be learned is that the Estimate At Completion (EAC) is only constant in a moving project. With the national objective of getting projects on stream it makes sense for the companies faced with frequent profit killing cost shocks to coach their project managers on the art and science of project cost control. Admittedly a workshop may not fully protect a manager from the bumps he would have to face on the project. But it could certainly help him minimise the negatives of cost overruns.


Srinivasan Iyer, CEO, MPower Business Facilitators Ltd., is a Mumbai based business coach and strategic management consultant.


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