CPS Notes

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ANNACIVIL BLOG
CPS NOTES
COST CONRTROL MONITORING AND ACCOUNTING

Cost control involves processing of cost accounting reports received from various responsibility
centres or operating divisions, relating the cost incurred with standards, analysing the reasons for
variances, and presenting the results of monitoring to the project management for making
decisions for the future and not of the past.
In construction projects, generally there are two parties whose investments are involved-clients
and contractors.
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Client involvement starts with his decision to go a head with the project. His expenses continue
during design, execution and commissioning stages. After taking into consideration the contract
commitments, escalation and contingencies, he formulates his cost budget for the project.
He plans his cash flows and employs an individual or a small group to monitor costs, so as to
keep the costs within the budgeted limits and to meet the cash-flow requirement of the project.
Contractor executes contracted works and it is he who bears the cost of input resources and site
expenses include the cost of men, materials, machinery and capital. He also incurs expenditure on
interest on loans, statutory payments, insurance, depreciation and so on.
Cost control preliminaries
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1. Cost control approach:

It is to simplify and implement, without creating any interdepartmental and interpersonal conflicts.
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Maximisation of profits is generally the main motto of the contractors, the contractors cost control system
can be designed to control each stage of accounting operations that contribute to profit. These stages are:
Nature of Control
A. Sales income
B. Less direct cost
Sales control
Direct cost control
C. Gross margin (A-B)

D. Less variable overheads
Variable overheads control
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Stages in profit Computation
E. Contribution (C-D)
F. Less fixed overheads
Contribution control
Fixed overhead control
G. Operating profit (E-F)
Budgetary control
2. Control Estimates:
For cost control, it is necessary to have a master control estimate for establishing overall cost control.
It is prepared during planning stage itself. It is made of direct costs, indirect costs and funds allocated for
contingencies and escalation.

3. Cost Planning:
Cost breakdown levels can be divided as:
Level
0
1
2
Work-package costs
Cost control responsibility

Cost accountant
Cost accountant
Respective managers/
Contractors /functional heads
Cost centres
Scope
Total project cost
Sub-project cost
Task/logistics
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The costs at each level may be divided into the following cost elements:
a) Direct manpower costs-Salary, wages and other costs
b) Direct material at-site delivered costs
c) Direct equipment, plant and services cost.
d) Sub-contract costs
e) Indirect on-site costs- variable, fixed
f) Indirect external costs- head office overheads, management related and commercial fixed and
variable costs.
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4. Budgeting Costs:
For control and monitoring purposes, the original detailed cost estimate is typically converted into a
project budget.
Definition: The project budget is the well co-ordinated management approved financial plan of
operations, indicating the amounts required for achieving assigned targets, and the expected receipts
from sales or the value of work done.
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A project budget reflects the financial plan of the operations, divided into responsibility centres
with specific goals clearly outlined along with the costs expected to be incurred.
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The primary purpose of having a budget is to assign financial targets and resources to each
responsibility centres, to co-ordinate their activities, to form the basis for controlling programme,
and to make the participants cost consciousness instead of purposeless routine working. The base
of the budget is the project plan and its schedule of work.
In a construction project, the client and the contractor have separate budgets.
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The clients construction budget is primarily a capital budget designed to formulate time-phase
funds requirement and the sources from which these funds are to be provisioned. It also includes
the expenditure on procurement of land, consultant fee, contractors, payment etc.
The contractors budget is resources, cost and sales income oriented budget. It includes income
and expenditure statements, cash flow, balance sheet etc.
Importance of Project Budget:

1. It is essentially a planning document. It outlines the financial plan of the project.
2. It specifies the future financial course of action for steering the project.
3. It specifies a standard for measuring effectiveness and efficiency with which activities are to be
performed.

4. It is a financial commitment for actions, an instrument for allocation of responsibility, a means of
communication, an aid for co-ordination, a tool for motivation, an authority for implementation and a
device for controlling performance.
5. A project without a budget is like a missile without guidance system or a ship without navigational
instruments.
Problems in Forming the Project Budget:
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1. One particular problem in forming a project budget in terms of cost accounts is the inclusion of
contingency amounts [funds to cover incidental, unforeseen expenses]. These allowances are
included in project cost estimates to accommodate unforeseen events and the resulting costs.
However, in advance of the project completion, the source of contingency expenses is not known.
Realistically, a budget accounting item for contingency allowance should be established whenever
a contingency amount was included in final cost estimate.
2. A second problem in forming a project budget is the inclusion of inflation. Typically final cost
estimates are formed in terms of real rupees, and an item reflecting inflation cost is added on as a
percentage or lumpsum. This inflation allowance would then be allotted to individual cost items in
relation to the actual expected inflation over the period for which costs will be incurred.
Commonly Used budget monitoring parameters are the following:
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a) Budget Cost of Work Scheduled (BCWS): It represents a time phased schedule of the budget.
b) Budgeted Cost of Work Performed (BCWP): It shows the approved cost of the work performed on
data date.
c) Actual Cost for the Work Performed (ACWP): Cost incurred on accomplishing a work on data date.
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Cost variance (CV) = BCWP-ACWP
Schedule variance (SV) = BCWP-BCWS
Cost performance index (CPI) = BCWP/ACWP
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Schedule performance index (SPI) = BCWP/BCWS

BCWP-ACWP
Cost variance % =
x 100
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BCWP
= CV x 100 / BCWP
BCWP - BCWS
Schedule variance % =
x 100
BCWS
= SV x 100 / BCWS

In addition to cost amounts, information on material quantities and labour inputs within each job account
is also typically retained in the project budget. With this information, actual materials usage and labour
employed can be compared to the expected requirements.
Cost accounts may vary according to the project. These accounts record all the transactions associated
with project.
Examples of Project Cost accounts
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Clearing and Preparing Site

1. Substructure
i)
Excavation and Shoring
ii)
Piling
iii)
Concrete masonry
iv)
Mixing and placing
v)
Formwork
vi)
Reinforcing
2. Outside utilities (water, gas, sewer, etc.)
3. Superstructure
i)
Masonry
ii)
Structural steel
iii)
Wood framing, partitions, etc.
iv)
Exterior finishes (brickwork, terracotta, cutstone,
etc.
v)
Roofing, drains, gutters, flashing, etc.
vi)
Interior finish and trim
a) Finish flooring, stairs, doors, trim
b) Glass, windows, glazing
c) Marble, tile, terrazzo
d) Lathing and plastering
e) Soundproofing and insulation
f) Finish hardware
g) Painting and decorating
h) Waterproofing and insulation
i) Sprinklers and fire protection
vii)
Service work
a) Electrical work
b) Heating and ventilating
c) Plumbing and sewage
d) Air conditioning
e) Fire alarm, telephone, security, miscellaneous
4. Paving, curbs, walks
5. Installed equipment (elevators, revolving doors, mailchutes,
etc.)
6. Fencing

Example of Project budget for a Constructor:
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This budget is developed from a project to construct a wharf. The costs are divided into direct and indirect
expenses. Within direct costs, expenses are divided into material, subcontract, temporary work and
machinery costs.
Material cost
Subcontract
Temporary
Machinery
Total cost
(in crores)
work
work
cost
292,172
129,178
16,389
0
437,739
Steel piling
88,233
29,254
0
0
117,487
Tie-rod
130,281
60,873
0
0
191,154
Anchor wall
242,230
27,919
0
0
300,149
Backfill
42,880
22,307
13,171
0
78,358
Coping
0
111,650
0
1,750
111,650
Dredging
48,996
10,344
0
0
61,090
Fender
5,000
32,250
0
0
37,250
Other
849,800
423,775
29,560
1,750
1,304,885
Sub-total
Summary:
Total direct cost = 1,304,885
Indirect cost:
Common temporary work = 19,320
Common machinery = 80,934
Transportation = 15,550
Office operating costs = 294,458
Total indirect cost = 410,262
Total project cost = 1,715,147
5. Measurement of Cost Performance:
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Project earned value, depending upon the nature of the project, can be measured in one or more of the
three parameters:- i.e. cost, work hours and quantity of work done. Its progress is expressed in percentage:
Budgeted cost work performed
Project progress (%) =
X 100
Budgeted cost of total project
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6. Cost Reports:
The cost reports of construction/production centres should reflect a comparison of standard and
actual costs. In case of functional departments, cost comparison should be made between budgeted
and actual costs.
The project cost controller monitors the responsibility centre cost reports. He updates the project
budgeted costs, changes order, keeps track of variations in control estimates, and forecasts the
trends pertaining to the remaining project costs.
7. Management Role in Cost Control:

Cost control can be called effective if the management:
Implements efficient cost control procedures and systems.

Develops and updates the control estimates.
Analyses cost trends to discover potential cost problems and takes remedial measure to control
cost.
Encourages a cost conscience and time conscience attitude.
Continuously examines methods of execution with an object of total project cost reductions.
FORCASTING FOR ACTIVITY COST CONTROL
For the purpose of project management and control, it is not sufficient to consider only the past records of
costs and revenues incurred in a project. Good managers should focus upon future revenues, future costs
and technical problems.
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Cost analysis aims to predict future costs. These cost forecasts serve two main purposes:
1. To appraise the project management of the possible cost over-run or under-run for taking timely
corrective actions such as modifying cash flow and updating financial forecasts and project
profitability expectations.
2. To update key personnel on anticipated cost changes in their field of responsibility, so as to create
cost consciousness for exploring means for minimising wastage and reducing costs.
Job status report explicit estimates of ultimate cost in each category of expense are prepared, which
are used to identify the actual progress and status of an expense category.
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The forecast total cost, C f is
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Estimates might be made from simple linear extrapolations of the productivity or cost of the work to
date on each project item.
Cf = Ct / Pt
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Where, C t is the cost incurred to time t and P t is the proportion of activity completed at time t.
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Alternatively, the use of measured unit cost amounts can be used for forecasting the total cost. The
basic formula for forecasting cost from unit costs is,
Cf = W Ct
Where, C f = forecast total cost

W = total units of work
C t = average cost per unit of work experienced up to time t.
The unit cost equation may be replaced with the hourly productivity and the unit cost per hour (or
other appropriate time period), resulting in the equation:
Cf = W ht ut
Where the cost per work unit (C t ) is replaced by the time per unit h t , divided by the cost per unit of time,
ut .
More elaborate forecasting systems might recognise peculiar problems associated with work on
particular items and modify these simple proportional cost estimates.
For example, if productivity is improving as workers and managers become more familiar with the
project activities, the estimate of total costs for an item might be revised downward. In this case, the
estimating equation would become:
C f = C t + (W W t ) C t
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Where forecast total cost C f is the sum of cost incurred to date, C t and the cost resulting from the
remaining work (W W t ) multiplied by the expected cost per unit time period for the remainder of the
activity, C t .
Variance analysis reveals the extent and causes of variances. On the other hand, performance,
efficiency determines how efficiently the task was done and what will be its implications on the future
trends.
Cost performance index (CPI) = BCWP/ACWP
The future trends in productivity cost and time performance can be predicted as under:
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Schedule performance index (SPI) = BCWP/BCWS

Estimated Unit Rate
Task productivity Index =
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Actual Unit Rate
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An index of 1.0 or greater indicates a favourable performance and less than 1.0 implies an
unfavourable trend.
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Performance indices vary during execution of a project. Minor variations are normal, but the
significant changes in indices call for forecasting of the probable performance on completion.
These forecasts can be prepared by extrapolating the past data to produce the best fit curve, and
thereafter extending the same for predicting performance on completion as under:
a) Assuming the future trend at the originally planned rate, probable completion value.
= (ACWP BCWP) + planned BCWS on completion.
b) Assuming that the future rate of progress will continue at the present trend.

Planned BCWS on completion
Probable completion value =
Performance index or Trend
There can be situations where the originally specified time and cost objectives are revised.
For example, the original completion time of the project is extended, or agreed contract amount is
increased.
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In such cases forecasts corresponding to various situations can be worked out using methods given
above.
Illustration of Proportion Completion versus Expenditure of an Activity
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100%
Planned Expenditure
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80%
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60%
Percent
Completion
Forecast expenditure
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40%
20%
Actual Expenditure
0%
0%
20%
40%
60%
80%
100%
Percent of Budgeted Expenditure

FINANCIAL ACCOUNTING SYSTEMS AND COST ACCOUNTS
Cost accounts provide only one of the various components in a financial accounting system. Accounting
information is generally used for three distinct purposes:
1. Internal reporting to project managers for day-to-day planning, monitoring and control.
2. Internal reporting to managers for aiding strategic planning.
3. External reporting to owners, government, regulators and other outside parties.
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External reports are constrained to particular forms and procedures by contractual reporting
requirements or by generally accepted accounting practices. Preparation of such external reports is
called financial accounting.
In contrast, cost or managerial accounting is intended to aid internal managers in their
responsibilities of planning, monitoring and control.
Financial accounts of an organisation always contain project costs. In an organisation all the expenses
transactions are recorded in a general ledger.
The general ledger of accounts is the basis for management reports on particular project as well as
financial accounts for the entire organisation. Other components of a financial accounting system
includes:
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1. The accounts payable journal: This is intended to provide records or bills received from vendors,
material suppliers, subcontractors and other outside parties. Invoices of charges are recorded as
checks issued in payment. Charges to individual cost accounts are posted to general ledger.
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2. Accounts receivable journals: To provide opposite function to that of accounts payable. In this
journal billings to clients are recorded as well as receipts. Revenues received are posted to general
ledger.
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3. Job cost ledgers: Summarizes the costs associated with particular project arranged in the various cost
accounts used for the project budget.
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4. Inventory records: These are maintained to identify the amount of materials available at any time. In
traditional book keeping system, day to day transactions are first recorded in journals. With double
entry book keeping, each transaction is recorded as both a debit and credit to particular accounts in the
ledger.
For example: Payment of a suppliers bill represents a debit or increase to a project cost account and a
credit or reduction to companys cash account. Periodically, the transaction information is transferred to
ledger accounts. This process is called Posting and may be done instantaneously or daily in computerized
systems.
In receiving accounting information, the concepts of flows and stocks should be kept in mind. Daily
transactions reflect flows of rupees entering or leaving the organisation. Similarly, use or receipt of
particular materials represents flows from or to inventory.

An account balance represents the resulting cumulative amount of funds resulting from these daily
flows. Information on both flows (cash inflow and outflow) and stocks are needed to give an accurate
view of an organisations state.
In addition, forecasts of future changes are needed for effective management. Information from the
ledger is assembled for the organisations financial reports, including balance sheets and income
statements for each period.
These reports are the basic products of the financial accounting process and are often used to assess
the performance of an organisation.
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Methods of Accounting
1. Completed Contract method:

In this method income is only reported for completed projects. Work on project underway is only reported
on the balance sheet representing an asset if contract billings exceed costs or liability if cost exceeds
billings. When a project is completed, total net profit (or loss) is reported in the final period as income.
2. Percentage of Completion method:

The actual costs are reported on the income statement plus a proportion of all project revenues equal to
the proportion of work completed during the period. The proportion of work completed is computed as
the ratio of costs incurred to date and the total estimated cost of the project.
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If 20% of project is completed on a particular period at a direct cost of 1,80,000 and on a project with
expected revenues of 10,00,000.
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Then revenues earned = 1,000,000 x 0.2

= 200,000
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The profit for this period = 200,000 180,000

= 20,000 for this period.
Note that billings and actual receipts might be in excess or less than the calculated revenues of 200,000.
On the balance sheet of an organisation using the percentage of completion method, an asset is usually
reported to reflect billings and the estimated or calculated earnings in excess of actual billings.
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Example: Consider a 3 year project to construct a plant with the following cash flow for a contractor.
Year
1
2
3
Total
Contract expenses
700,000
180,000
320,000
12,00,000
Payment Received
900,000
250,000
150,000
13,00,000
Architect determines 60% of completed cost in first year and 75% in the second year.
Under the Percentage of Completion method, the net income in one year is 7,80,000 i.e. 60/100 of
13,00,000.
So profit = 80,000
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Under the Completed Contract method the entire profit of 100,000 (13,00,000 12,00,000) would be
reported in year 3.
1. The % of completion method of reporting period has the advantage of representing the actual
estimated earnings in each period. As a result, the income stream and resulting profits are less
susceptible to changes on the completion of a project.
But in completed contract method, the income stream and resulting profits are susceptible to
precipitate swings on completion of a project.
2. There are tax disadvantages from using the % of completion method since corporate taxes on
expected profits may become due during the project rather than being deferred until the project
completion.
3. % of completion has the disadvantage of relying upon estimates which can be manipulated to obscure
the actual position of a company.
4. % of completion accounting provides only rough estimate of the actual profit or status of a project.
Also, the completed contract method of accounting is entirely retrospective and provides no guidance
for management.
Net Profit on Completed Contracts ( Amounts in thousands)

1,436
356
- 738
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Job 1
Job 2
Job 3
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Calculating Net Profit:

Example: Suppose that a company began six jobs in a year, completing three jobs and having three jobs
still underway at the end of the year. Details of the six jobs are shown in table given below. What would
be the companys net profit?
i) Percentage-of-completion
ii) Completed contract method accounting conventions?
1,054
Job 4
Job 5
Job 6
Original contract price
4,200
3,800
5,630
400
600
-300
Total Cost to Date
3,600
1,710
620
Payments Received or Due to Date
3,520
1,830
340
500
2,300
5,000
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Total Net Profit on Completed Jobs

Status of jobs underway
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Contract Changes (Change orders, etc.)
Estimated Cost to Complete
As shown in the table, a net profit of 1,054,000 was earned on the three completed jobs. Under the
completed contract method, this total would be total profit. Under the percentage of completion
method, the years expected profit on the projects underway would be added to this amount.
For Job 4, the expected profits are calculated as follows:
Current contract price = original contract price + contract charges
= 4,200 + 400 = 4,600

Credit or Debit to date = Total costs to date Payments received or due to date
= 3,600 3,520 = - 80
Contract value of uncompleted work = Current contract price payments received or due
= 4,600 3,520 = 1,080
Credit or Debit to come = Contract value of uncompleted work Estimated cost to complete
= 1,080 500 = 580
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Estimated total project costs = Contract price Gross profit

= 4,600 500 = 4,100
Estimated final gross profit = Credit or debit to date + Credit or debit to come
= - 80 + 580 = 500
Estimated profit to date = Estimated final gross profit x Proportion of work complete
= 500 (3,600 / 4,100) = 439
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Control of Project Cash Flows:
Similar calculations for the other jobs underway indicate estimated profits to date of 166,000 for Job 5 ,
and -32,000 for Job 6. As a result, the net profit using percentage of completion method would be
1,627,000 for the year. Note that this figure would be altered in the event of multi-year projects in which
net profits on projects completed or underway in this year were claimed in earlier projects.
Cash flow is the movement of money into or out of a company.
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It ensures that sufficient cash is available to meet the demand.

It provides a reliable indicator to lending institutions that advances made can be paid according to
an agreed programme.
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It ensures that cash resources are fully utilised to the benefit of the owner and investor of the
company.
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Main points in the determination of cash flows are:

1. Payments (cash outflow): This is the aggregate of the payments which a contractor will make
over a period of time for the resources he uses in a project. Ex: labour, plant, materials etc;
2. Receipts (cash inflow): These are the receipts which a contractor will receive over a period for
the work he has completed.
3. Timing of Payment: The size of the deficiency can be estimated and the time period over which
this deficiency applies can be assessed.

Use of S- Curve:
It is used to forecast the cash requirements of a project. The cumulative expenditure for a project
normally takes the shape of letters. By plotting the cumulative expenditure against cumulative project
duration, it is possible to calculate project cash requirements.
The s-curve shape arises during early contract stage, because of lesser number of activities and hence, the
expenditure curve is relatively flat.
Planned Expenditure
80%
Percent
Completion
Actual Expenditure
Revised
Estimate
of Future
Expenditure
60%
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100%
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40%
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20%
0%
20%
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0%
40%
60%
80%
100%
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Percent of Budgeted Expenditure
As the other activities commence, expenditure increases and the curve develops into steeper middle
portion. Towards the end of the project, many activities will be completed and there will be rundown of
construction work, resulting in a flattened curve.
expenditure
1/3 duration
1/3 duration
1/3 duration
Cumulative
Expenditure
expenditure
Duration
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expenditure
1/4 th of the expenditure represents the activity build up period of 1/3 rd the contract duration and a further
quarter occupies rundown period of 1/3 rd contract duration. Half of the cumulative expenditure is gained
over the centre are third of s curve.
Cash flow status report:
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1. Costs: This is a summary of charges as reflected by the job cost accounts, including expenditures and
estimated costs.
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2. Billings: This row summarizes the state of cash flow with respect to the owner of the facility; this row
would not be included for the reports to owners. The amount of allowable billing is specified under
the terms of contract between an owner and an engineering, architect or constructor. In this case, total
billings have exceeded the estimated project completion proportion.
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3. Payables: The payables row summarizes the amount owed by the contractor to material suppliers,
labour, sub-contractors. The total payables is equal to the total project expenses shown in the first row
of costs.
4. Receivables: This row summarizes the cash flow of receipts from the owner. Note that the actual
receipts from the owner may differ from the amounts billed due to delayed payments or retainage on
the part of the owner. The net-billed equals the gross billed less retention by the owner.
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5. Cash Position: This row summarizes the cash position of the project as if all expenses and receipts
for the project were combined in a single account.
An Example of a Cash Flow Status Report

Cost
Billing
Payables
Receivables
Cash
Position
Charges
Contract
Paid
Net bill
Paid
Estimated
Gross bill
Open
Received
Unpaid
%Complete Projected
% Billed
Profit
Retention
Labour
Retention
Open
Net Cash balance
Charge
Total

Job status reported provides a primary tool for project cost control. Different reports with varying
amounts of detail and item reports would be prepared for different individuals involved in a project.
Reports to upper management would be summaries, reports to particular staff individuals would
emphasize their responsibilities (purchasing, payroll, etc.) and detailed reports would be provided to
the individual project managers.
These schedule and cost reports would have to be tempered by the actual accomplishments and
problems occurring in the field.
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Ex: If work already completed is of sub-standard quality, these reports would not reveal such problem.
Even though the reports indicated a project on time and on budget, the possibility of re-work or
inadequate facility performance due to quality problems would quickly reverse the rosy situation.
Schedule Control
In addition to cost control, project managers must also give attention to monitoring schedule.
Construction typically involves a deadline for work completion, so contractual agreement will force
attention to schedules.
Delays in construction represent additional costs due to late facility occupancy or other factors.
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In cost control, costs incurred are compared to budgeted costs, in the same way, in schedule control,
actual activity durations may be compared to expected durations.
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In this process of forecasting, the time to complete particular activities may be required.
Df = W ht
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Where, D f is the forecast duration

W is the amount of work
h t is the observed productivity to time t.
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It is important to devise efficient and cost effective methods for gathering information on actual
project accomplishments. Generally, observations of work completed are made by inspectors and
project t managers and then work completed is estimated.
Once estimates of work completed and time expanded on particular activities is available, deviations
from the original duration estimate can be estimated.

100 %
B
80 %
Revised estimate of
Future progress
60 %
20 %
0%
0%
20 %
40 %
60 %
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40 %
80 %
100 %
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Fig. Shows scheduled project progress versus actual progress on a project. This fig is constructed by
summing up the % of each activity, which is completed at different points in time. This summation
can be weighted by the magnitude of effect associated with each activity.
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From the fig. the project was a head of the original schedule for a period including point A, but is now
late at point B by an amount equal to the horizontal distance between the planned progress and actual
progress observed to date.
Scheduled adherence and the current status of a project can also be represented on geometrical models
of a facility.
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For example, an animation of the construction sequence can be shown on a computer screen, with
different colours or other coding scheme indicating the type of activity underway on each component
of the facility.
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In evaluating schedule progress, it is important to bear in mind that some activities possess float or
scheduling leeway, whereas delays in activities on the critical path will cause project delays.
In particular, the delay in planned progress at time t may be soaked up in activities float or may cause
project delay.
As a result, it is preferable to update the project schedule to get an accurate portrayal of the schedule
adherence.
After applying a scheduling algorithm, a new project schedule can be obtained.
Improving the Scheduling Process

Despite considerable attention by researchers and practitioners, the process of construction, planning
and scheduling still presents problem and opportunities for improvement.
Most of the project scheduling is performed with critical path scheduling method, project cash flow
analysis and resource constrained scheduling. Many commercial software programs are available to
perform these tasks.
The most important innovations in construction scheduling are likely to appear in the areas of data
storage, ease of use, data representation, communication and diagnostic or interpretation aids.
Integration of scheduling beneficial innovation; many scheduling systems do not provide such
integration of information.
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With regard to ease of use, the introduction of interactive scheduling systems, graphical output
devices and automated data acquired should produce a very different environment than has existed.
In the past, scheduling was performed as a batch operation with output contained in lengthy table of
numbers. The lower costs associated with computer systems as well as improved software make user
friendly environments a real possibility for field operations on large projects.
Finally, information representation is an area which needs substantial improvements. A network
model of project activities is an extremely useful device to represent a project but activity interrelationships cannot be represented in network models.
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What is needed is a much more flexible and complete representation of project information.
RELATING COST AND SCHEDULE INFORMATION
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Actual project involves a complex inter-relationship between time and cost. Additional resources
applied to a project activity might result in a shorter duration but higher costs.
The project manager can easily recognise the relation between time and cost in projects. But it is
difficult to find effective project control systems which include both elements.
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Project costs and schedules are recorded and reported in separate application programs. Project
manager must then perform the tedious task of relating the two sets of information.
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The primary difficulty in integrating schedule and cost information is the level of details required for
the effective integration. A single project activity involves numerous cost account categories.
Ex: An activity for the preparation of a foundation would involve cement, workers, concrete forms,
reinforcement, transportation of materials and other resources. Even a more disaggregated activity
definition such as erection of foundation forms would involve numerous resources such as forms,
nails, carpenters, labour and material transportation.
Different cost accounts would normally be used to record these various resources. Similarly,
numerous activities might involve expenses associated with particular cost accounts.
Ex: a particular material such as standard piping might be used in numerous schedule activities.
To integrate cost and schedule information the charges for specific activities and specific cost
accounts must be the basis of analysis.

A method of relating time and cost information is to define individual work elements representing
the resources in a particular project activity. Work elements represent an element in a twodimensional matrix of activities and cost accounts.
A numbering or identifying system for work elements would include both the relevant cost
account and the associated activity. In some cases, it might also be desirable to identify work
elements by the responsible organisation or individual.
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In this case, a three-dimensional representation of work elements required with the third
dimension corresponding to responsible individuals.
Illustration of a Cost Account and Project activity Matrix:
Project
activity group
204.1
204.2
I st floor
Cost amount for super structure
III rd floor
204.6
204.7
X
X
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V th floor
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IV th floor
204.5
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204.4
II nd floor
204.3
DIRECT COST CONTROL

It involves the evaluation and analysis of the following variances:
a)
b)
c)
d)
Direct cost variance

Direct materials variance
Direct labour cost variance
Other direct expenses variance.

Main Cost Variance Breakdown:
Nature of Cost Variances
Production cost
Variances
Work done
Price
Variance
Variable
Overheads
Variance
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Work done
Quantity
Variance
Administration
Cost Variances
Sales Value
Variances
Variable Cost Variance
Fixed cost Variance
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Prod. Overhead
Variances
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Variable Overhead
Variances
Indirect materials
Variances
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Indirect Labour
Variances
Material Cost
Variances
Productivity
Variance
Rate
Variance
Usage
Variance
Adm. Overhead
Variances
Direct cost Variances
Indirect Other Cost

Variances
Other Direct Expenditure

Variances
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Labour Cost
Variances
Fixed
Overheads
Variance
Equipment cost
Variance
price
Variance
Other Direct
Variance
INDIRECT COST BEHAVIOUR

An estimate at the time of costing by computing all the indirect costs in detail or evaluating by using
predetermined company norms. The estimator will add these indirect costs to the direct costs for
calculating the final product cost. But this is not adequate for planning, budgeting and control costs.
In order to analyse the cost behaviour a planner or the cost accountant further splits up each item of
indirect costs into three broad categories i.e.; variable costs, fixed cost and semi-variable costs.
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a) Variable costs: It tends to vary directly with the volume of production, i.e. work done or output.
No production means no cost. Cost rises as the volume of production increases. These costs changes
at a constant rate (assumed) to changes in the volume of production as shown below.
Variable cost
Cost
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Volume of output
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Examples of indirect variable costs are telephone running expenses, camp messing expenses and office
stationary expenses.
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b) Fixed costs: It do not show any applicable fluctuations with changes in production levels. These
costs are either one-time costs like the camp construction cost or periodic costs such as
supervisors salary for a period of six months or are monthly receiving expenses like monthly rent
for project office and monthly depreciation for project construction equipment.
Fixed cost
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Cost
Volume of output

c) Semi-variable costs: These are partly fixed and partly variable in nature. Examples of these are
telephone expenses which consists of fixed installation expenses and variable operating expenses
which vary with the volume of work or production activities.
Variable cost component
Cost
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Volume of Output
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Fixed Cost component

12. Cost Control, Monitoring and Accounting
12.1 The Cost Control Problem
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During the execution of a project, procedures for project control and record
keeping become indispensable tools to managers and other participants in the
construction process. These tools serve the dual purpose of recording the
financial transactions that occur as well as giving managers an indication of the
progress and problems associated with a project. The problems of project
control are aptly summed up in an old definition of a project as "any collection
of vaguely related activities that are ninety percent complete, over budget and
late." The task of project control systems is to give a fair indication of the
existence and the extent of such problems.
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In this chapter, we consider the problems associated with resource utilization,

accounting, monitoring and control during a project. In this discussion, we
emphasize the project management uses of accounting information.
Interpretation of project accounts is generally not straightforward until a project
is completed, and then it is too late to influence project management. Even after
completion of a project, the accounting results may be confusing. Hence,
managers need to know how to interpret accounting information for the purpose
of project management. In the process of considering management problems,
however, we shall discuss some of the common accounting systems and
conventions, although our purpose is not to provide a comprehensive survey of
accounting procedures.
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The limited objective of project control deserves emphasis. Project control

procedures are primarily intended to identify deviations from the project plan
rather than to suggest possible areas for cost savings. This characteristic reflects
the advanced stage at which project control becomes important. The time at
which major cost savings can be achieved is during planning and design for the
project. During the actual construction, changes are likely to delay the project
and lead to inordinate cost increases. As a result, the focus of project control is
on fulfilling the original design plans or indicating deviations from these plans,
rather than on searching for significant improvements and cost savings. It is
only when a rescue operation is required that major changes will normally occur
in the construction plan.
Finally, the issues associated with integration of information will require some
discussion. Project management activities and functional concerns are
intimately linked, yet the techniques used in many instances do not facilitate
comprehensive or integrated consideration of project activities. For example,
schedule information and cost accounts are usually kept separately. As a result,
project managers themselves must synthesize a comprehensive view from the

different reports on the project plus their own field observations. In particular,
managers are often forced to infer the cost impacts of schedule changes, rather than
being provided with aids for this process. Communication or integration of various
types of information can serve a number of useful purposes, although it does
require special attention in the establishment of project control procedures.
12.2 The Project Budget
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For cost control on a project, the construction plan and the associated cash flow
estimates can provide the baseline reference for subsequent project monitoring and
control. For schedules, progress on individual activities and the achievement of
milestone completions can be compared with the project schedule to monitor the
progress of activities. Contract and job specifications provide the criteria by which
to assess and assure the required quality of construction. The final or detailed cost
estimate provides a baseline for the assessment of financial performance during the
project. To the extent that costs are within the detailed cost estimate, then the
project is thought to be under financial control. Overruns in particular cost
categories signal the possibility of problems and give an indication of exactly what
problems are being encountered. Expense oriented construction planning and
control focuses upon the categories included in the final cost estimation. This focus
is particular relevant for projects with few activities and considerable repetition
such as grading and paving roadways.
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For control and monitoring purposes, the original detailed cost estimate is typically
converted to a project budget, and the project budget is used subsequently as a
guide for management. Specific items in the detailed cost estimate become job cost
elements. Expenses incurred during the course of a project are recorded in specific
job cost accounts to be compared with the original cost estimates in each category.
Thus, individual job cost accounts generally represent the basic unit for cost
control. Alternatively, job cost accounts may be disaggregated or divided into work
elements which are related both to particular scheduled activities and to particular
cost accounts. Work element divisions will be described in Section 12.8.
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In addition to cost amounts, information on material quantities and labour inputs

within each job account is also typically retained in the project budget. With this
information, actual materials usage and labour employed can be compared to the
expected requirements. As a result, cost overruns or savings on particular items can
be identified as due to changes in unit prices, labour productivity or in the amount
of material consumed.
The number of cost accounts associated with a particular project can vary
considerably. For constructors, on the order of four hundred separate cost accounts
might be used on a small project. These accounts record all the transactions
associated with a project. Thus, separate accounts might exist for different types of
materials, equipment use, payroll, project office, etc. Both physical and non-
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physical resources are represented, including overhead items such as computer use
or interest charges. Table 12-1 summarizes a typical set of cost accounts that might
be used in building construction. Note that this set of accounts is organized
hierarchically, with seven major divisions (accounts 201 to 207) and numerous
sub-divisions under each division. This hierarchical structure facilitates
aggregation of costs into pre-defined categories; for example, costs associated with
the superstructure (account 204) would be the sum of the underlying subdivisions
(i.e. 204.1, 204.2, etc.) or finer levels of detail (204.61, 204.62, etc.). The subdivision accounts in Table 12-1 could be further divided into personnel, material
and other resource costs for the purpose of financial accounting, as described in
Section 12.4.
202
202.1
202.2
202.3
202.31
202.32
202.33
Substructure
Excavation and Shoring
Piling
Concrete Masonry
Mixing and Placing
Formwork
Reinforcing
203
Outside Utilities (water, gas, sewer, etc.)
204
204.1
204.2
204.3
204.4
204.5
204.6
204.61
204.62
204.63
204.64
204.65
204.66
204.67
204.68
204.69
204.7
204.71
204.72
204.73
204.74
204.72
Superstructure
Masonry Construction
Structural Steel
Wood Framing, Partitions, etc.
Exterior Finishes (brickwork, terra cotta, cut stone, etc.)
Roofing, Drains, Gutters, Flashing, etc.
Interior Finish and Trim
Finish Flooring, Stairs, Doors, Trim
Glass, Windows, Glazing
Marble, Tile, Terrazzo
Lathing and Plastering
Soundproofing and Insulation
Finish Hardware
Painting and Decorating
Waterproofing
Sprinklers and Fire Protection
Service Work
Electrical Work
Heating and Ventilating
Plumbing and Sewage
Air Conditioning
Fire Alarm, Telephone, Security, Miscellaneous
205
Paving, Curbs, Walks
206
Installed Equipment (elevators, revolving doors, mail chutes, etc.)
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201
TABLE 12-1 Illustrative Set of Project Cost Accounts

Clearing and Preparing Site
207
Fencing
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In developing or implementing a system of cost accounts, an appropriate

numbering or coding system is essential to facilitate communication of information
and proper aggregation of cost information. Particular cost accounts are used to
indicate the expenditures associated with specific projects and to indicate the
expenditures on particular items throughout an organization. These are examples of
different perspectives on the same information, in which the same information may
be summarized in different ways for specific purposes. Thus, more than one
aggregation of the cost information and more than one application program can use
a particular cost account. Separate identifiers of the type of cost account and the
specific project must be provided for project cost accounts or for financial
transactions. As a result, a standard set of cost codes such as the
MASTERFORMAT codes may be adopted to identify cost accounts along with
project identifiers and extensions to indicate organization or job specific needs.
Similarly the use of databases or, at a minimum, inter-communicating applications
programs facilitate access to cost information, as described in Chapter 14.
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Converting a final cost estimate into a project budget compatible with an

organization's cost accounts is not always a straightforward task. As described in
Chapter 5, cost estimates are generally disaggregated into
appropriate functional or resource based project categories. For example, labour
and material quantities might be included for each of several physical components
of a project. For cost accounting purposes, labour and material quantities are
aggregated by type no matter for which physical component they are employed.
For example, particular types of workers or materials might be used on numerous
different physical components of a facility. Moreover, the categories of cost
accounts established within an organization may bear little resemblance to the
quantities included in a final cost estimate. This is particularly true when final cost
estimates are prepared in accordance with an external reporting requirement rather
than in view of the existing cost accounts within an organization.
One particular problem in forming a project budget in terms of cost accounts is the
treatment of contingency amounts. These allowances are included in project cost
estimates to accommodate unforeseen events and the resulting costs. However, in
advance of project completion, the source of contingency expenses is not known.
Realistically, a budget accounting item for contingency allowance should be
established whenever a contingency amount was included in the final cost
estimate.
A second problem in forming a project budget is the treatment of inflation.
Typically, final cost estimates are formed in terms of real dollars and an item

reflecting inflation costs is added on as a percentage or lump sum. This inflation
allowance would then be allocated to individual cost items in relation to the actual
expected inflation over the period for which costs will be incurred.
Example 12-1: Project Budget for a Design Office
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An example of a small project budget is shown in Table 12-2. This budget might
be used by a design firm for a specific design project. While this budget might
represent all the work for this firm on the project, numerous other organizations
would be involved with their own budgets. In Table 12-2, a summary budget is
shown as well as a detailed listing of costs for individuals in the Engineering
Division. For the purpose of consistency with cost accounts and managerial
control, labour costs are aggregated into three groups: the engineering,
architectural and environmental divisions. The detailed budget shown in Table 122 applies only to the engineering division labour; other detailed budgets amounts
for categories such as supplies and the other work divisions would also be
prepared. Note that the salary costs associated with individuals are aggregated to
obtain the total labour costs in the engineering group for the project. To perform
this aggregation, some means of identifying individuals within organizational
groups is required. Accompanying a budget of this nature, some estimate of the
actual man-hours of labour required by project task would also be prepared.
Finally, this budget might be used for internal purposes alone. In submitting
financial bills and reports to the client, overhead and contingency amounts might
be combined with the direct labour costs to establish an aggregate billing rate per
hour. In this case, the overhead, contingency and profit would represent allocated
costs based on the direct labour costs.
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TABLE 12-2 Example of a Small

Project Budget for a Design Firm
Budget
Personnel
Summary
Architectural
Division
$ 67,251.00
Engineering
45,372.00
Environmental
28,235.00
Division
$140,858.00
Total
Other Direct
Expenses
Travel
Supplies
Communication
Computer
Services
Total
2,400.00
1,500.00
600.00
1,200.00
$ 5,700.00
$ 175,869.60
$ 95,700.00
Overhead
$ 418,127.60
Contingency and
Profit
Total
Total
$ 11,562.00
21,365.00
12,654.00
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Senior Engineer
Associate
Engineer
Engineer
Technician
Engineering
Personnel
Detail
$ 45,372.00
Example 12-2: Project Budget for a Constructor
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Table 12-3 illustrates a summary budget for a constructor. This budget is

developed from a project to construct a wharf. As with the example design office
budget above, costs are divided into direct and indirect expenses. Within direct
costs, expenses are divided into material, subcontract, temporary work and
machinery costs. This budget indicates aggregate amounts for the various
categories. Cost details associated with particular cost accounts would supplement
and support the aggregate budget shown in Table 12-3. A profit and a contingency
amount might be added to the basic budget of $1,715,147 shown in Table 12-3 for
completeness.
TABLE 12-3 An Example of a Project Budget for a Wharf Project (Amounts in Thousands
of Dollars)
Material
Subcontract
Temporary
Machinery
Cost
Work
Work
Cost
Total Cost
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Steel Piling
Tie-rod
AnchorWall
Backfill
Coping
Dredging
Fender
Other
Sub-total
$292,172
88,233
130,281
242,230
42,880
0
48,996
5,000
$849,800
$129,178
29,254
60,873
27,919
22,307
111,650
10,344
32,250
$423,775
$16,389
0
0
0
13,171
0
0
0
$29,560
$0
$437,739
0
117,487
0
191,154
0
300,149
0
78,358
0
111,650
1,750
61,090
0
37,250
$1,750 $1,304,885
Summary
Total of direct cost
$1,304,885
Indirect Cost
Common Temporary Work
Common Machinery
Transportation
Office Operating Costs
Total of Indirect Cost
Total Project Cost
12.3 Forecasting for Activity Cost Control
19,320
80,934
15,550
294,458
410,262.
$1,715,147
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For the purpose of project management and control, it is not sufficient to consider
only the past record of costs and revenues incurred in a project. Good managers
should focus upon future revenues, future costs and technical problems. For this
purpose, traditional financial accounting schemes are not adequate to reflect the
dynamic nature of a project. Accounts typically focus on recording routine costs
and past expenditures associated with activities. Generally, past expenditures
represent sunk costs that cannot be altered in the future and may or may not be
relevant in the future. For example, after the completion of some activity, it may be
discovered that some quality flaw renders the work useless. Unfortunately, the
resources expended on the flawed construction will generally be sunk and cannot
be recovered for re-construction (although it may be possible to change the burden
of who pays for these resources by financial withholding or charges; owners will
typically attempt to have constructors or designers pay for changes due to quality
flaws). Since financial accounts are historical in nature, some means of forecasting
or projecting the future course of a project is essential for management control. In
this section, some methods for cost control and simple forecasts are described.
Budgeted Cost
The budgeted cost is derived from the detailed cost estimate prepared at the
start of the project. Examples of project budgets were presented in Section
12.2. The factors of cost would be referenced by cost account and by a prose
description.
Estimated total cost
The estimated or forecast total cost in each category is the current best
estimate of costs based on progress and any changes since the budget was
formed. Estimated total costs are the sum of cost to date, commitments and
exposure. Methods for estimating total costs are described below.
Cost Committed and Cost Exposure!! Estimated cost to completion in
each category in divided into firm commitments and estimated additional
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An example of forecasting used to assess the project status is shown in Table 12-4.
In this example, costs are reported in five categories, representing the sum of all
the various cost accounts associated with each category:
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cost or exposure. Commitments may represent material orders or

subcontracts for which firm dollar amounts have been committed.
Cost to Date
The actual cost incurred to date is recorded in column 6 and can be derived
from the financial record keeping accounts.
Over or (Under)
A final column in Table 12-4 indicates the amount over or under the budget
for each category. This column is an indicator of the extent of variance from
the project budget; items with unusually large overruns would represent a
particular managerial concern. Note that variance is used in the terminology
of project control to indicate a difference between budgeted and actual
expenditures. The term is defined and used quite differently in statistics or
mathematical analysis. In Table 12-4, labour costs are running higher than
expected, whereas subcontracts are less than expected.
The current status of the project is a forecast budget overrun of $5,950. with 23
percent of the budgeted project costs incurred to date.
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$99,406
88,499
198,458
37,543
72,693
496,509
$102,342
88,499
196,323
37,543
81,432
506,139
$49,596
42,506
83,352
23,623
49,356
248,433
--45,993
97,832
----143,825
$52,746
--15,139
13,920
32,076
113,881
Over or
(Under)
$2,936
0
(2,135)
0
8,739
5,950
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Labour
Material
Subcontracts
Equipment
Other
Total
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TABLE 12-4 Illustration of a Job Status Report

Budgeted
Estimated
Cost
Cost
Cost To
Cost
Total Cost
Committed Exposure
Date
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For project control, managers would focus particular attention on items indicating
substantial deviation from budgeted amounts. In particular, the cost overruns in the
labour and in the "other expense category would be worthy of attention by a
project manager in Table 12-4. A next step would be to look in greater detail at the
various components of these categories. Overruns in cost might be due to lower
than expected productivity, higher than expected wage rates, higher than expected
material costs, or other factors. Even further, low productivity might be caused by
inadequate training, lack of required resources such as equipment or tools, or
inordinate amounts of re-work to correct quality problems. Review of a job status
report is only the first step in project control.
The job status report illustrated in Table 12-4 employs explicit estimates of
ultimate cost in each category of expense. These estimates are used to identify the
actual progress and status of an expense category. Estimates might be made from

simple linear extrapolations of the productivity or cost of the work to date on each
project item. Algebraically, a linear estimation formula is generally one of two
forms. Using a linear extrapolation of costs, the forecast total cost, C f , is:
(12.1)
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where C t is the cost incurred to time t and p t is the proportion of the activity
completed at time t. For example, an activity which is 50 percent complete with a
cost of $40,000 would be estimated to have a total cost of $40,000/0.5 = $80,000.
More elaborate methods of forecasting costs would disaggregate costs into
different categories, with the total cost the sum of the forecast costs in each
category.
Alternatively, the use of measured unit cost amounts can be used for forecasting
total cost. The basic formula for forecasting cost from unit costs is:
(12.2)
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where C f is the forecast total cost, W is the total units of work, and c t is the
average cost per unit of work experienced up to time t. If the average unit cost is
$50 per unit of work on a particular activity and 1,600 units of work exist, then the
expected cost is (1,600)(50) = $80,000 for completion.
(12.3)
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The unit cost in Equation (12.2) may be replaced with the hourly productivity and
the unit cost per hour (or other appropriate time period), resulting in the equation:
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where the cost per work unit (c t ) is replaced by the time per unit, h t , divided by the
cost per unit of time, u t .
More elaborate forecasting systems might recognize peculiar problems associated
with work on particular items and modify these simple proportional cost estimates.
For example, if productivity is improving as workers and managers become more
familiar with the project activities, the estimate of total costs for an item might be
revised downward. In this case, the estimating equation would become:
(12.4)

where forecast total cost, C f , is the sum of cost incurred to date, C t , and the cost
resulting from the remaining work (W - W t ) multiplied by the expected cost per
unit time period for the remainder of the activity, c t .
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As a numerical example, suppose that the average unit cost has been $50 per unit
of work, but the most recent figure during a project is $45 per unit of work. If the
project manager was assured that the improved productivity could be maintained
for the remainder of the project (consisting of 800 units of work out of a total of
1600 units of work), the cost estimate would be (50)(800) + (45)(800) = $76,000
for completion of the activity. Note that this forecast uses the actual average
productivity achieved on the first 800 units and uses a forecast of productivity for
the remaining work. Historical changes in productivity might also be used to
represent this type of non-linear changes in work productivity on particular
activities over time.
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In addition to changes in productivities, other components of the estimating

formula can be adjusted or more detailed estimates substituted. For example, the
change in unit prices due to new labour contracts or material supplier's prices
might be reflected in estimating future expenditures. In essence, the same problems
encountered in preparing the detailed cost estimate are faced in the process of
preparing exposure estimates, although the number and extent of uncertainties in
the project environment decline as work progresses. The only exception to this rule
is the danger of quality problems in completed work which would require reconstruction.
Units of Work Completed

For easily measured quantities the actual proportion of completed work
amounts can be measured. For example, the linear feet of piping installed
can be compared to the required amount of piping to estimate the percentage
of piping work completed.
Incremental Milestones
Particular activities can be sub-divided or "decomposed" into a series of
milestones, and the milestones can be used to indicate the percentage of
work complete based on historical averages. For example, the work effort
involved with installation of standard piping might be divided into four
milestones:
o Spool in place: 20% of work and 20% of cumulative work.
o Ends welded: 40% of work and 60% of cumulative work.
o Hangars and Trim Complete: 30% of work and 90% of cumulative
work.
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Each of the estimating methods described above require current information on the
state of work accomplishment for particular activities. There are several possible
methods to develop such estimates, including:
Hydro tested and Complete: 10% of work and 100% of cumulative

work.
Thus, a pipe section for which the ends have been welded would be reported
as 60% complete.
Opinion
Subjective judgments of the percentage complete can be prepared by
inspectors, supervisors or project managers themselves. Clearly, this
estimated technique can be biased by optimism, pessimism or inaccurate
observations. Knowledgeable estimators and adequate field observations are
required to obtain sufficient accuracy with this method.
Cost Ratio
The cost incurred to date can also be used to estimate the work progress. For
example, if an activity was budgeted to cost $20,000 and the cost incurred at
a particular date was $10,000, then the estimated percentage complete under
the cost ratio method would be 10,000/20,000 = 0.5 or fifty percent. This
method provides no independent information on the actual percentage
complete or any possible errors in the activity budget: the cost forecast will
always be the budgeted amount. Consequently, managers must use the
estimated costs to complete an activity derived from the cost ratio method
with extreme caution.
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Systematic application of these different estimating methods to the various project

activities enables calculation of the percentage complete or the productivity
estimates used in preparing job status reports.
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In some cases, automated data acquisition for work accomplishments might be

instituted. For example, transponders might be moved to the new work limits after
each day's activity and the new locations automatically computed and compared
with project plans. These measurements of actual progress should be stored in a
central database and then processed for updating the project schedule. The use of
database management systems in this fashion is described in Chapter 14.
Example 12-3: Estimated Total Cost to Complete an Activity
Suppose that we wish to estimate the total cost to complete piping construction
activities on a project. The piping construction involves 1,000 linear feet of piping
which has been divided into 50 sections for management convenience. At this
time, 400 linear feet of piping has been installed at a cost of $40,000 and 500 manhours of labour. The original budget estimate was $90,000 with a productivity of
one foot per man-hour, a unit cost of $60 per man hour and a total material cost of
$ 30,000. Firm commitments of material delivery for the $30,000 estimated cost
have been received.
The first task is to estimate the proportion of work completed. Two estimates are
readily available. First, 400 linear feet of pipe is in place out of a total of 1000
linear feet, so the proportion of work completed is 400/1000 = 0.4 or 40%. This is
the "units of work completed" estimation method. Second, the cost ratio method
would estimate the work complete as the cost-to-date divided by the cost estimate
or $40,000/$ 90,000 = 0.44 or 44%. Third, the "incremental milestones" method
would be applied by examining each pipe section and estimating a percentage
complete and then aggregating to determine the total percentage complete. For
example, suppose the following quantities of piping fell into four categories of
completeness:
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complete (100%)
380 ft
hangars and trim complete (90%) 20 ft
5 ft
ends welded (60%)
0 ft
spool in place (20%)
Then using the incremental milestones shown above, the estimate of completed
work would be 380 + (20)(0.9) + (5)(0.6) + 0 = 401 ft and the proportion complete
would be 401 ft/1,000 ft = 0.401 or 40% after rounding.
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Once an estimate of work completed is available, then the estimated cost to

complete the activity can be calculated. First, a simple linear extrapolation of cost
results in an estimate of $40,000/0.4 = $100,000. for the piping construction using
the 40% estimate of work completed. This estimate projects a cost overrun of
100,000 - 90,000 = $10,000.
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Second, a linear extrapolation of productivity results in an estimate of (1000

ft.)(500 hrs/400 ft.)($60/hr) + 30,000 = $105,000. for completion of the piping
construction. This estimate suggests a variance of 105,000 - 90,000 = $15,000
above the activity estimate. In making this estimate, labour and material costs
entered separately, whereas the two were implicitly combined in the simple linear
cost forecast above. The source of the variance can also be identified in this
calculation: compared to the original estimate, the labour productivity is 1.25 hours
per foot or 25% higher than the original estimate.
Example 12-4: Estimated Total Cost for Completion
The forecasting procedures described above assumed linear extrapolations of
future costs, based either on the complete experience on the activity or the recent
experience. For activities with good historical records, it can be the case that a
typically non-linear profile of cost expenditures and completion proportions can be
estimated. Figure 12-1 illustrates one possible non-linear relationships derived
from experience in some particular activity. The progress on a new job can be
compared to this historical record. For example, point A in Figure 12-1 suggests a
higher expenditure than is normal for the completion proportion. This point
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represents 40% of work completed with an expenditure of 60% of the budget.

Since the historical record suggests only 50% of the budget should be expended at
time of 40% completion, a 60 - 50 = 10% overrun in cost is expected even if work
efficiency can be increased to historical averages. If comparable cost overruns
continue to accumulate, then the cost-to-complete will be even higher.
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Figure 12-1 Illustration of Proportion Completion versus Expenditure for an

Activity
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12.4 Financial Accounting Systems and Cost Accounts

The cost accounts described in the previous sections provide only one of the
various components in a financial accounting system. Before further discussing the
use of cost accounts in project control, the relationship of project and financial
accounting deserves mention. Accounting information is generally used for three
distinct purposes:
Internal reporting to project managers for day-to-day planning, monitoring

and control.
Internal reporting to managers for aiding strategic planning.
External reporting to owners, government, regulators and other outside
parties.

External reports are constrained to particular forms and procedures by contractual
reporting requirements or by generally accepted accounting practices. Preparation
of such external reports is referred to as financial accounting. In
contrast, cost or managerial accounting is intended to aid internal managers in
their responsibilities of planning, monitoring and control.
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The accounts payable journal is intended to provide records of bills

received from vendors, material suppliers, subcontractors and other outside
parties. Invoices of charges are recorded in this system as are checks issued
in payment. Charges to individual cost accounts are relayed or posted to the
General Ledger.
Accounts receivable journals provide the opposite function to that of
accounts payable. In this journal, billings to clients are recorded as well as
receipts. Revenues received are relayed to the general ledger.
Job cost ledgers summarize the charges associated with particular projects,
arranged in the various cost accounts used for the project budget.
Inventory records are maintained to identify the amount of materials
available at any time.
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Project costs are always included in the system of financial accounts associated
with an organization. At the heart of this system, all expense transactions are
recorded in a general ledger. The general ledger of accounts forms the basis for
management reports on particular projects as well as the financial accounts for an
entire organization. Other components of a financial accounting system include:
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In traditional bookkeeping systems, day to day transactions are first recorded in

journals. With double-entry bookkeeping, each transaction is recorded as both a
debit and a credit to particular accounts in the ledger. For example, payment of a
supplier's bill represents a debit or increase to a project cost account and a credit or
reduction to the company's cash account. Periodically, the transaction information
is summarized and transferred to ledger accounts. This process is called posting,
and may be done instantaneously or daily in computerized systems.
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In reviewing accounting information, the concepts of flows and stocks should be

kept in mind. Daily transactions typically reflect flows of dollar amounts entering
or leaving the organization. Similarly, use or receipt of particular materials
represent flows from or to inventory. An account balance represents the stock or
cumulative amount of funds resulting from these daily flows. Information on both
flows and stocks are needed to give an accurate view of an organization's state. In
addition, forecasts of future changes are needed for effective management.
Information from the general ledger is assembled for the organization's financial
reports, including balance sheets and income statements for each period. These
reports are the basic products of the financial accounting process and are often
used to assess the performance of an organization. Table12-5 shows a typical

income statement for a small construction firm, indicating a net profit of $ 330,000
after taxes. This statement summarizes the flows of transactions within a year.
Table 12-6 shows the comparable balance sheet, indicated a net increase in
retained earnings equal to the net profit. The balance sheet reflects the effects of
income flows during the year on the overall worth of the organization.
TABLE 12-5 Illustration of an Accounting Statement of Income

Income Statement
for the year ended December 31, 19xx
$7,200,000
Direct project costs on contracts

Depreciation of equipment
Estimating
Administrative and other expenses
Subtotal of cost and expenses
700,000
150,000
550,000
220,000
330,000
100,000
230,000
650,000
$880,000.
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Operating Income
Interest Expense, net
Income before taxes
Income tax
Net income after tax
Cash dividends
Retained earnings, current year
Retention at beginning of year
Retained earnings at end of year
5,500,000
200,000
150,000
650,000
6,500,000
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Gross project revenues
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TABLE 12-6 Illustration of an Accounting Balance Sheet

Balance Sheet
December 31, 19xx
Assets
Amount
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Cash
$150,000
Payments Receivable
750,000
Work in progress, not claimed
700,000
Work in progress, retention
200,000
Equipment at cost less accumulated depreciation 1,400,000
Total assets
$3,200,000
Liabilities and Equity

Liabilities
Accounts payable
Other items payable (taxes, wages, etc.)
Long term debts
Subtotal
Shareholders' funds
$950,000
50,000
500,000
1,500,000
40,000 shares of common stock

(Including paid-in capital)
Retained Earnings
Subtotal
Total Liabilities and Equity
820,000
880,000
1,700,000
$3,200,000
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In the context of private construction firms, particular problems arise in the

treatment of uncompleted contracts in financial reports. Under the "completedcontract" method, income is only reported for completed projects. Work on
projects underway is only reported on the balance sheet, representing an asset if
contract billings exceed costs or a liability if costs exceed billings. When a project
is completed, the total net profit (or loss) is reported in the final period as income.
Under the "percentage-of-completion" method, actual costs are reported on the
income statement plus a proportion of all project revenues (or billings) equal to the
proportion of work completed during the period. The proportion of work
completed is computed as the ratio of costs incurred to date and the total estimated
cost of the project. Thus, if twenty percent of a project was completed in a
particular period at a direct cost of $180,000 and on a project with expected
revenues of $1,000,000, then the contract revenues earned would be calculated as
$1,000,000(0.2) = $200,000. This figure represents a profit and contribution to
overhead of $200,000 - $180,000 = $20,000 for the period. Note that billings and
actual receipts might be in excess or less than the calculated revenues of $200,000.
On the balance sheet of an organization using the percentage-of-completion
method, an asset is usually reported to reflect billings and the estimated or
calculated earnings in excess of actual billings.
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As another example of the difference in the "percentage-of-completion" and the

"completed-contract" methods, consider a three year project to construct a plant
with the following cash flow for a contractor:
Year Contract Expenses Payments Received
1
2
3
Total
$700,000
180,000
320,000
$1,200,000
$900,000
250,000
150,000
$1,300,000
The supervising architect determines that 60% of the facility is complete in year 1
and 75% in year 2. Under the "percentage-of-completion" method, the net income
in year 1 is $780,000 (60% of $1,300,000) less the $700,000 in expenses or

$80,000. Under the "completed-contract" method, the entire profit of $100,000
would be reported in year 3.
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The "percentage-of-completion" method of reporting period earnings has the

advantage of representing the actual estimated earnings in each period. As a result,
the income stream and resulting profits are less susceptible to precipitate swings on
the completion of a project as can occur with the "completed contract method" of
calculating income. However, the "percentage-of-completion" has the disadvantage
of relying upon estimates which can be manipulated to obscure the actual position
of a company or which are difficult to reproduce by outside observers. There are
also subtleties such as the deferral of all calculated income from a project until a
minimum threshold of the project is completed. As a result, interpretation of the
income statement and balance sheet of a private organization is not always
straightforward. Finally, there are tax disadvantages from using the "percentage-ofcompletion" method since corporate taxes on expected profits may become due
during the project rather than being deferred until the project completion. As an
example of tax implications of the two reporting methods, a study of forty-seven
construction firms conducted by the General Accounting Office found that $280
million in taxes were deferred from 1980 to 1984 through use of the "completedcontract" method.
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It should be apparent that the "percentage-of-completion" accounting provides only

a rough estimate of the actual profit or status of a project. Also, the "completed
contract" method of accounting is entirely retrospective and provides no guidance
for management. This is only one example of the types of allocations that are
introduced to correspond to generally accepted accounting practices, yet may not
further the cause of good project management. Another common example is the
use of equipment depreciation schedules to allocate equipment purchase costs.
Allocations of costs or revenues to particular periods within a project may cause
severe changes in particular indicators, but have no real meaning for good
management or profit over the entire course of a project. As Johnson and Kaplan
argue:
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Today's management accounting information, driven by the procedures and cycle

of the organization's financial reporting system, is too late, too aggregated and too
distorted to be relevant for managers' planning and control decisions....
Management accounting reports are of little help to operating managers as they
attempt to reduce costs and improve productivity. Frequently, the reports decrease
productivity because they require operating managers to spend time attempting to
understand and explain reported variances that have little to do with the economic
and technological reality of their operations...
The management accounting system also fails to provide accurate product costs.
Cost are distributed to products by simplistic and arbitrary measures, usually direct

labour based, that do not represent the demands made by each product on the firm's
resources.
As a result, complementary procedures to those used in traditional financial

accounting are required to accomplish effective project control, as described in the
preceding and following sections. While financial statements provide consistent
and essential information on the condition of an entire organization, they need
considerable interpretation and supplementation to be useful for project
management.
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Example 12-5: Calculating net profit
As an example of the calculation of net profit, suppose that a company began six
jobs in a year, completing three jobs and having three jobs still underway at the
end of the year. Details of the six jobs are shown in Table 12-7. What would be the
company's net profit under, first, the "percentage-of-completion" and, second, the
"completed contract method" accounting conventions?
TABLE 12-7 Example of Financial Records of Projects

Net Profit on Completed Contracts (Amounts in thousands of dollars)
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Job 1
Job 2
Job 3
Total Net Profit on Completed Jobs
$1,436
356
- 738
$1,054
Job 4
Original Contract Price

Contract Changes (Change Orders, etc.)
Total Cost to Date
Payments Received or Due to Date
Estimated Cost to Complete
$4,200 $3,800 $5,630

400
600
- 300
3,600 1,710
620
3,520 1,830
340
500 2,300 5,000
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Status of Jobs Underway
Job 5
Job 6
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As shown in Table 12-7, a net profit of $1,054,000 was earned on the three
completed jobs. Under the "completed contract" method, this total would be total
profit. Under the percentage-of completion method, the year's expected profit on
the projects underway would be added to this amount. For job 4, the expected
profits are calculated as follows:
Current contract price = Original contract price + Contract Changes
= 4,200 + 400 + 4,600
Credit or debit to date = Total costs to date - Payments received or due to date
= 3,600 - 3,520 = - 80
Contract value of uncompleted = Current contract price - Payments received or due
work = 4,600 - 3,520 = 1,080
Credit or debit to come = Contract value of uncompleted work - Estimated Cost to
Complete
= 1,080 - 500 = 580
Estimated final gross profit = Credit or debit to date + Credit or debit to come
= - 80. + 580. = 500
Estimated total project costs = Contract price - Gross profit
= 4,600 - 500 = 4,100
Estimated Profit to date = Estimated final gross profit x Proportion of work
complete
= 500. (3600/4100)) = 439
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Similar calculations for the other jobs underway indicate estimated profits to date
of $166,000 for Job 5 and -$32,000 for Job 6. As a result, the net profit using the
"percentage-of-completion" method would be $1,627,000 for the year. Note that
this figure would be altered in the event of multi-year projects in which net profits
on projects completed or underway in this year were claimed in earlier periods.
12.5 Control of Project Cash Flows
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Section 12.3 described the development of information for the control of project
costs with respect to the various functional activities appearing in the project
budget. Project managers also are involved with assessment of the overall status of
the project, including the status of activities, financing, payments and receipts.
These various items comprise the project and financing cash flows described in
earlier chapters. These components include costs incurred (as described above),
billings and receipts for billings to owners (for contractors), payable amounts to
suppliers and contractors, financing plan cash flows (for bonds or other financial
instruments), etc.
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As an example of cash flow control, consider the report shown in Table 12-8. In
this case, costs are not divided into functional categories as in Table 12-4, such as
labour, material, or equipment. Table 12-8 represents a summary of the project
status as viewed from different components of the accounting system. Thus, the
aggregation of different kinds of cost exposure or cost commitment shown in Table
12-0 has not been performed. The elements in Table 12-8 include:
Costs
This is a summary of charges as reflected by the job cost accounts, including
expenditures and estimated costs. This row provides an aggregate summary
of the detailed activity cost information described in the previous section.
For this example, the total costs as of July 2 (7/02) were $ 8,754,516, and
the original cost estimate was $65,863,092, so the approximate percentage
complete was 8,754,516/65,863,092 or 13.292%. However, the project
manager now projects a cost of $66,545,263 for the project, representing an
increase of $682,171 over the original estimate. This new estimate would
reflect the actual percentage of work completed as well as other effects such
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as changes in unit prices for labour or materials. Needless to say, this

increase in expected costs is not a welcome change to the project manager.
Billings
This row summarizes the state of cash flows with respect to the owner of the
facility; this row would not be included for reports to owners. The contract
amount was $67,511,602, and a total of $9,276,621 or 13.741% of the
contract has been billed. The amount of allowable billing is specified under
the terms of the contract between an owner and an engineering, architect, or
constructor. In this case, total billings have exceeded the estimated project
completion proportion. The final column includes the currently projected net
earnings of $966,339. This figure is calculated as the contract amount less
projected costs: 67,511,602 - 66,545,263 = $966,339. Note that this profit
figure does not reflect the time value of money or discounting.
Payables
The Payables row summarizes the amount owed by the contractor to
material suppliers, labour or sub-contractors. At the time of this report,
$6,719,103 had been paid to subcontractors, material suppliers, and others.
Invoices of $1,300,089 have accumulated but have not yet been paid. A
retention of $391,671 has been imposed on subcontractors, and $343,653 in
direct labour expenses have been occurred. The total of payables is equal to
the total project expenses shown in the first row of costs.
Receivables
This row summarizes the cash flow of receipts from the owner. Note that the
actual receipts from the owner may differ from the amounts billed due to
delayed payments or retain age on the part of the owner. The net-billed
equals the gross billed less retention by the owner. In this case, gross billed
is $9,276,621 (as shown in the billings row), the net billed is $8,761,673 and
the retention is $514,948. Unfortunately, only $7,209,344 has been received
from the owner, so the open receivable amount is a (substantial!) $2,067,277
due from the owner.
Cash Position
This row summarizes the cash position of the project as if all expenses and
receipts for the project were combined in a single account. The actual
expenditures have been $7,062,756 (calculated as the total costs of
$8,754,516 less subcontractor retentions of $391,671 and unpaid bills of
$1,300,089) and $ 7,209,344 has been received from the owner. As a result,
a net cash balance of $146,588 exists which can be used in an interest
earning bank account or to finance deficits on other projects.
Each of the rows shown in Table 12-8 would be derived from different sets of
financial accounts. Additional reports could be prepared on the financing cash
flows for bonds or interest charges in an overdraft account.
TABLE 12-8 An Example of a Cash Flow Status Report
Costs
7/02
Charges Estimated % Complete Projected Change

8,754,516 65,863,092 13.292 66,545,263 682,171
Billings
7/01
Contract Gross Bill

67,511,602 9,276,621
% Billed
13.741
Profit
966,339
Payables
7/01
Paid
Open
6,719,103 1,300,089
Retention
391,671
Labour
343,653
Receivable
7/02
Net Bill Received

8,761,673 7,209,344
Retention
514,948
Open
2,067,277
Cash Position
Paid
Received
7,062,756 7,209,344
Position
146,588
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Total
8,754,516
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The overall status of the project requires synthesizing the different pieces of
information summarized in Table 12-8. Each of the different accounting systems
contributing to this table provides a different view of the status of the project. In
this example, the budget information indicates that costs are higher than expected,
which could be troubling. However, a profit is still expected for the project. A
substantial amount of money is due from the owner, and this could turn out to be a
problem if the owner continues to lag in payment. Finally, the positive cash
position for the project is highly desirable since financing charges can be avoided.
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The job status reports illustrated in this and the previous sections provide a primary
tool for project cost control. Different reports with varying amounts of detail and
item reports would be prepared for different individuals involved in a project.
Reports to upper management would be summaries, reports to particular staff
individuals would emphasize their responsibilities (e.g. purchasing, payroll, etc.),
and detailed reports would be provided to the individual project managers.
Coupled with scheduling reports described in Chapter 10, these reports provide a
snapshot view of how a project is doing. Of course, these schedule and cost reports
would have to be tempered by the actual accomplishments and problems occurring
in the field. For example, if work already completed is of sub-standard quality,
these reports would not reveal such a problem. Even though the reports indicated a
project on time and on budget, the possibility of re-work or inadequate facility
performance due to quality problems would quickly reverse that rosy situation.
12.6 Schedule Control

In addition to cost control, project managers must also give considerable attention
to monitoring schedules. Construction typically involves a deadline for work
completion, so contractual agreements will force attention to schedules. More
generally, delays in construction represent additional costs due to late facility
occupancy or other factors. Just as costs incurred are compared to budgeted costs,

actual activity durations may be compared to expected durations. In this process,
forecasting the time to complete particular activities may be required.
The methods used for forecasting completion times of activities are directly
analogous to those used for cost forecasting. For example, a typical estimating
formula might be:
(12.5)
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where D f is the forecast duration, W is the amount of work, and h t is the observed
productivity to time t. As with cost control, it is important to devise efficient and
cost effective methods for gathering information on actual project
accomplishments. Generally, observations of work completed are made by
inspectors and project managers and then work completed is estimated as described
in Section 12.3. Once estimates of work complete and time expended on particular
activities is available, deviations from the original duration estimate can be
estimated. The calculations for making duration estimates are quite similar to those
used in making cost estimates in Section 12.3.
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For example, Figure 12-2 shows the originally scheduled project progress versus
the actual progress on a project. This figure is constructed by summing up the
percentage of each activity which is complete at different points in time; this
summation can be weighted by the magnitude of effort associated with each
activity. In Figure 12-2, the project was ahead of the original schedule for a period
including point A, but is now late at point B by an amount equal to the horizontal
distance between the planned progress and the actual progress observed to date.
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Figure 12-2 Illustration of Planned versus Actual Progress over Time on a Project
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Schedule adherence and the current status of a project can also be represented on
geometric models of a facility. For example, an animation of the construction
sequence can be shown on a computer screen, with different colours or other
coding scheme indicating the type of activity underway on each component of the
facility. Deviations from the planned schedule can also be portrayed by colour
coding. The result is a mechanism to both indicate work in progress and schedule
adherence specific to individual components in the facility.
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In evaluating schedule progress, it is important to bear in mind that some activities

possess float or scheduling leeway, whereas delays in activities on the critical path
will cause project delays. In particular, the delay in planned progress at time t may
be soaked up in activities' float (thereby causing no overall delay in the project
completion) or may cause a project delay. As a result of this ambiguity, it is
preferable to update the project schedule to devise an accurate portrayal of the
schedule adherence. After applying a scheduling algorithm, a new project schedule
can be obtained. For cash flow planning purposes, a graph or report similar to that
shown in Figure 12-3 can be constructed to compare actual expenditures to
planned expenditures at any time. This process of re-scheduling to indicate the
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schedule adherence is only one of many instances in which schedule and budget
updating may be appropriate, as discussed in the next section.
Figure 12-3 Illustration of Planned versus Actual Expenditures on a Project
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12.7 Schedule and Budget Updates
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Scheduling and project planning is an activity that continues throughout the

lifetime of a project. As changes or discrepancies between the plan and the
realization occur, the project schedule and cost estimates should be modified and
new schedules devised. Too often, the schedule is devised once by a planner in the
central office, and then revisions or modifications are done incompletely or only
sporadically. The result is the lack of effective project monitoring and the
possibility of eventual chaos on the project site.
On "fast track" projects, initial construction activities are begun even before the
facility design is finalized. In this case, special attention must be placed on the
coordinated scheduling of design and construction activities. Even in projects for
which the design is finalized before construction begins, change
orders representing changes in the "final" design are often issued to incorporate
changes desired by the owner.
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Periodic updating of future activity durations and budgets is especially important to

avoid excessive optimism in projects experiencing problems. If one type of activity
experiences delays on a project, then related activities are also likely to be delayed
unless managerial changes are made. Construction projects normally involve
numerous activities which are closely related due to the use of similar materials,
equipment, workers or site characteristics. Expected cost changes should also be
propagated throughout a project plan. In essence, duration and cost estimates for
future activities should be revised in light of the actual experience on the job.
Without this updating, project schedules slip more and more as time progresses. To
perform this type of updating, project managers need access to original estimates
and estimating assumptions.
Unfortunately, most project cost control and scheduling systems do not provide
many aids for such updating. What is required is a means of identifying
discrepancies, diagnosing the cause, forecasting the effect, and propagating this
effect to all related activities. While these steps can be undertaken manually,
computers aids to support interactive updating or even automatic updating would
be helpful.
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Beyond the direct updating of activity durations and cost estimates, project
managers should have mechanisms available for evaluating any type of schedule
change. Updating activity duration estimations, changing scheduled start times,
modifying the estimates of resources required for each activity, and even changing
the project network logic (by inserting new activities or other changes) should all
be easily accomplished. In effect, scheduling aids should be directly available to
project managers. Fortunately, local computers are commonly available on site for
this purpose.
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Example 12-6: Schedule Updates in a Small Project
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As an example of the type of changes that might be required, consider the nine
activity project described in Section 10.3 and appearing in Figure 12-4. Also,
suppose that the project is four days underway, with the current activity schedule
and progress as shown in Figure 12-5. A few problems or changes that might be
encountered include the following:
1. An underground waterline that was previously unknown was ruptured
during the fifth day of the project. An extra day was required to
replace the ruptured section, and another day will be required for
clean-up. What is the impact on the project duration?
o To analyze this change with the critical path scheduling
procedure, the manager has the options of (1) changing the
expected duration of activity C, General Excavation, to the
new expected duration of 10 days or (2) splitting activity C
into two tasks (corresponding to the work done prior to the
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waterline break and that to be done after) and adding a new

activity representing repair and clean-up from the waterline
break. The second approach has the advantage that any delays
to other activities (such as activities D and E) could also be
indicated by precedence constraints.
o Assuming that no other activities are affected, the manager
decides to increase the expected duration of activity C to 10
days. Since activity C is on the critical path, the project
duration also increases by 2 days. Applying the critical path
scheduling procedure would confirm this change and also give
a new set of earliest and latest starting times for the various
activities.
2. After 8 days on the project, the owner asks that a new drain be
installed in addition to the sewer line scheduled for activity G. The
project manager determines that a new activity could be added to
install the drain in parallel with Activity G and requiring 2 days.
What is the effect on the schedule?
o Inserting a new activity in the project network between nodes 3
and 4 violates the activity-on-branch convention that only one
activity can be defined between any two nodes. Hence, a new
node and a dummy activity must be inserted in addition to the
drain installation activity. As a result, the nodes must be renumbered and the critical path schedule developed again.
Performing these operations reveals that no change in the
project duration would occur and the new activity has a total
float of 1 day.
o To avoid the labour associated with modifying the network and
re-numbering nodes, suppose that the project manager simply
re-defined activity G as installation of sewer and drain lines
requiring 4 days. In this case, activity G would appear on the
critical path and the project duration would increase. Adding
an additional crew so that the two installations could proceed
in parallel might reduce the duration of activity G back to 2
days and thereby avoid the increase in the project duration.
3. At day 12 of the project, the excavated trenches collapse during
Activity E. An additional 5 days will be required for this activity.
What is the effect on the project schedule? What changes should be
made to insure meeting the completion deadline?
o Activity E has a total float of only 1 day. With the change in
this activity's duration, it will lie on the critical path and the
project duration will increase.
o Analysis of possible time savings in subsequent activities is
now required, using the procedures described in Section 10.9.
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Figure 12-4 A Nine Activity Example Project

Figure 12-5 Current Schedule for an Example Project Presented as a Bar Chart
As can be imagined, it is not at all uncommon to encounter changes during the

course of a project that require modification of durations, changes in the network
logic of precedence relationships, or additions and deletions of activities.
Consequently, the scheduling process should be readily available as the project is
underway.
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12.8 Relating Cost and Schedule Information
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The previous sections focused upon the identification of the budgetary and
schedule status of projects. Actual projects involve a complex inter-relationship
between time and cost. As projects proceed, delays influence costs and budgetary
problems may in turn require adjustments to activity schedules. Trade-offs between
time and costs were discussed in Section 10.9 in the context of project planning in
which additional resources applied to a project activity might result in a shorter
duration but higher costs. Unanticipated events might result in increases in both
time and cost to complete an activity. For example, excavation problems may
easily lead to much lower than anticipated productivity on activities requiring
digging.
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While project managers implicitly recognize the inter-play between time and cost
on projects, it is rare to find effective project control systems which include both
elements. Usually, project costs and schedules are recorded and reported by
separate application programs. Project managers must then perform the tedious
task of relating the two sets of information.
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The difficulty of integrating schedule and cost information stems primarily from
the level of detail required for effective integration. Usually, a single project
activity will involve numerous cost account categories. For example, an activity for
the preparation of a foundation would involve labourers, cement workers, concrete
forms, concrete, reinforcement, transportation of materials and other resources.
Even a more disaggregated activity definition such as erection of foundation forms
would involve numerous resources such as forms, nails, carpenters, labourers, and
material transportation. Again, different cost accounts would normally be used to
record these various resources. Similarly, numerous activities might involve
expenses associated with particular cost accounts. For example, a particular
material such as standard piping might be used in numerous different schedule
activities. To integrate cost and schedule information, the disaggregated charges
for specific activities and specific cost accounts must be the basis of analysis.
A straightforward means of relating time and cost information is to define
individual work elements representing the resources in a particular cost category
associated with a particular project activity. Work elements would represent an

element in a two-dimensional matrix of activities and cost accounts as illustrated in
Figure 12-6. A numbering or identifying system for work elements would include
both the relevant cost account and the associated activity. In some cases, it might
also be desirable to identify work elements by the responsible organization or
individual. In this case, a three dimensional representation of work elements is
required, with the third dimension corresponding to responsible individuals. More
generally, modern computerized databases can accommodate a flexible structure of
data representation to support aggregation with respect to numerous different
perspectives; this type of system will be discussed in Chapter 14.
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With this organization of information, a number of management reports or views

could be generated. In particular, the costs associated with specific activities could
be obtained as the sum of the work elements appearing in any row in Figure 12-6.
These costs could be used to evaluate alternate technologies to accomplish
particular activities or to derive the expected project cash flow over time as the
schedule changes. From a management perspective, problems developing from
particular activities could be rapidly identified since costs would be accumulated at
such a disaggregated level. As a result, project control becomes at once more
precise and detailed.
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Figure 12-6 Illustration of a Cost Account and Project Activity Matrix
Unfortunately, the development and maintenance of a work element database can

represent a large data collection and organization effort. As noted earlier, four
hundred separate cost accounts and four hundred activities would not be unusual
for a construction project. The result would be up to 400x400 = 160,000 separate
work elements. Of course, not all activities involve each cost account. However,
even a density of two percent (so that each activity would have eight cost accounts
and each account would have eight associated activities on the average) would

involve nearly thirteen thousand work elements. Initially preparing this database
represents a considerable burden, but it is also the case that project bookkeepers
must record project events within each of these various work elements.
Implementations of the "work element" project control systems have typically
foundered on the burden of data collection, storage and book-keeping.
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Until data collection is better automated, the use of work elements to control
activities in large projects is likely to be difficult to implement. However, certain
segments of project activities can profit tremendously from this type of
organization. In particular, material requirements can be tracked in this fashion.
Materials involve only a subset of all cost accounts and project activities, so the
burden of data collection and control is much smaller than for an entire system.
Moreover, the benefits from integration of schedule and cost information are
particularly noticeable in materials control since delivery schedules are directly
affected and bulk order discounts might be identified. Consequently, materials
control systems can reasonably encompass a "work element" accounting system.
CI
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In the absence of a work element accounting system, costs associated with

particular activities are usually estimated by summing expenses in all cost accounts
directly related to an activity plus a proportion of expenses in cost accounts used
jointly by two or more activities. The basis of cost allocation would typically be
the level of effort or resource required by the different activities. For example,
costs associated with supervision might be allocated to different concreting
activities on the basis of the amount of work (measured in cubic yards of concrete)
in the different activities. With these allocations, cost estimates for particular work
activities can be obtained.
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12.10 Problems
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1. Suppose that the expected expenditure of funds in a particular category was

expected to behave in a piecewise linear fashion over the course of the
project. In particular, the following points have been established from
historical records for the percentage of completion versus the expected
expenditure (as a percentage of the budget):
Percentage of Completion Expected Expenditure

0%
20%
40%
60%
80%
100%
0%
10%
25%
55%
90%
100%
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a. Graph the relationship between percentage complete and expected

expenditure.
b. Develop a formula or set of formulas for forecasting the ultimate
expenditure on this activity given the percentage of completion.
Assume that any over or under expenditure will continue to grow
proportionately during the course of the project.
c. Using your formula, what is the expected expenditure as a
percentage of the activity budget if:
I. 15% of funds have been expended and 15% of the activity is
complete.
ii. 30% of funds have been expended and 30% of the activity is
complete.
iii. 80% of funds have been expended and 80% of the activity is
complete.
2. Repeat Problem 1 parts (b) and (c) assuming that any over or under
expenditure will not continue to grow during the course of the project.
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VI
3. Suppose that you have been asked to take over as project manager on a
small project involving installation of 5,000 linear feet (LF) of metal
ductwork in a building. The job was originally estimated to take ten weeks,
and you are assuming your duties after three weeks on the project. The
original estimate assumed that each linear foot of ductwork would cost $10,
representing $6 in labour costs and $4 in material cost. The expected
production rate was 500 linear feet of ductwork per week. Appearing below
is the data concerning this project available from your firm's job control
information system:
Weekly Unit Costs ($/Lf) Quantity Placed (Lf)
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Week Labour Materials Total

1
2
3
12.00
8.57
6.67
4.00
4.00
4.00
16.00
12.57
10.67
Total Cost
Week
To Date
Week To Date
250
350
450
250
600
1,050
4,000 4,000
4,400 8,400
4,800 13,200
a. Based on an extrapolation using the average productivity and cost

for all three weeks, forecast the completion time, cost and variance
from original estimates.
b. Suppose that you assume that the productivity achieved in week 3
would continue for the remainder of the project. How would this

affect your forecasts in (a)? Prepare new forecasts based on this
assumption.
4. What criticisms could you make of the job status report in the previous
problem from the viewpoint of good project management?
Resource
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5. Suppose that the following estimate was made for excavation of 120,000
cubic yards on a site:
Quantity
Cost
Machines 1,200 hours $60,000

Labour 6,000 hours 150,000
75,000
Trucks 2,400 hours
Total
$285,000
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After 95,000 cubic yards of excavation was completed, the following

expenditures had been recorded:
Quantity
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Resource
Cost
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Machines 1,063 hours $47,835

Labour 7,138 hours 142,527
Trucks 1,500 hours
46,875
Total
$237,237
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a. Calculate estimated and experienced productivity (cubic yards per

hour) and unit cost (cost per cubic yard) for each resource.
b. Based on straight line extrapolation, do you see any problem with
this activity? If so, can you suggest a reason for the problem based on
your findings in (a)?
6. Suppose the following costs and units of work completed were recorded on
an activity:
Monthly
Number of
Month Expenditure Work Units Completed
1
$1,200
30
2
3
4
5
6
$1,250
$1,260
$1,280
$1,290
$1,280
32
38
42
42
42
Answer the following questions:
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a. For each month, determine the cumulative cost, the cumulative

work completed, the average cumulative cost per unit of work, and
the monthly cost per unit of work.
b. For each month, prepare a forecast of the eventual cost-tocomplete the activity based on the proportion of work completed.
c. For each month, prepare a forecast of the eventual cost-to-complete
the activity based on the average productivity experienced on the
activity.
d. For each month, prepare a forecast of the eventual cost-tocomplete the activity based on the productivity experienced in the
previous month.
e. Which forecasting method (b, c or d) is preferable for this activity?
Why?
CI
7. Repeat Problem 6 for the following expenditure pattern:
Monthly
Number of
Month Expenditure Work Units Completed
$1,200
$1,250
$1,260
$1,280
$1,290
$1,300
30
35
45
48
52
54
AN
NA
1
2
3
4
5
6
8. Why is it difficult to integrate scheduling and cost accounting information in

project records?
9. Prepare a schedule progress report on planned versus actual expenditure on

a project (similar to that in Figure 12-5) for the project described in Example
12-6.
10. Suppose that the following ten activities were agreed upon in a contract
between an owner and an engineer.
Original Work Plan Information

----B
C
B
--E, F
E, F
B
E, F
Original Contract Information
$64
64
128
12.8
$140.8
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Total Direct Cost

Overhead
Total Direct and Overhead
Profit
Total Contract Amount
7
9
8
4
1
7
6
5
10
7
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2
5
5
2
3
8
4
4
11
2
A
B
C
D
E
F
G
H
I
J
Activity Duration (months) Predecessors Estimated Cost ($ thousands)
First Year Cash Flow

Expenditures
Receipts
$56,000
$60,800
AN
NA
The mark-up on the activities' costs included 100% overhead and a profit of
10% on all costs (including overhead). This job was suspended for one year
after completion of the first four activities, and the owner paid a total of
$60,800 to the engineer. Now the owner wishes to re-commence the job.
However, general inflation has increased costs by ten percent in the
intervening year. The engineer's discount rate is 15 percent per year (in
current year dollars). For simplicity, you may assume that all cash
transactions occur at the end of the year in making discounting calculations
in answering the following questions:
a. How long will be remaining six activities require?
b. Suppose that the owner agrees to make a lump sum payment of the
remaining original contract at the completion of the project. Would
the engineer still make a profit on the job? If so, how much?
c. Given that the engineer would receive a lump sum payment at the
end of the project, what amount should he request in order to earn his

desired ten percent profit on all costs?
d. What is the net future value of the entire project at the end,
assuming that the lump sum payment you calculated in (c) is
obtained?
11. Based on your knowledge of coding systems such as MASTERFORMAT

and estimating techniques, outline the procedures that might be
implemented to accomplish:
AN
NA
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a. automated updating of duration and cost estimates of activities in light of

experience on earlier, similar activities.
b. interactive computer based aids to help a project manager to accomplish
the same task.
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NA
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VI
The Basics of Cost

Analysis
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NA
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Contents of this Module

Section 1 - Cost Analysis
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Section 2 Defining Costs
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Section 3 Source Selections

Section 4 - Cost Data Requirements
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Section 5 Field Pricing Support
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Section 6 - Cost Allowability

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Section 1 - Cost Analysis
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Definition
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Definition of Cost Analysis
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NA
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The review and evaluation of the separate

cost elements and profit in an offerors or
contractors proposal (including cost or
pricing data or information other than cost
or pricing data), and the application of
judgment to determine how well the
proposed costs represent what the cost of
the contract should be, assuming reasonable
economy and efficiency.
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Price and Cost Analysis

Compared
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Price Analysis is the process of examining and evaluating

a proposed price without evaluating its separate cost
elements and proposed profit.
Cost Analysis
CI
Determines whether the price is fair and reasonable.

Evaluates the separate cost elements, profit, and facilities capital
cost of money (if proposed).
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Used to evaluate/determine any or all of the following:
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cost and/or price reasonableness

cost realism
most probable cost and/or price
It is the more costly method in terms of time and manpower.
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Cost Analysis: When to apply it.

It is performed if certified cost or pricing data are required.
AN
NA
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It may be used to evaluate information other than cost or

pricing data, e.g., non-certified cost data.
Normally, it is not needed if adequate price competition exists.
In this case, it still may be used if the price is determined to be
unreasonable or you are considering a cost realism
evaluation .
Cost analysis is one of the approaches that should be used
when a cost realism evaluation is required.
When you perform a cost analysis, you should also include a
price analysis to verify price reasonableness.
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NA
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Section 2
Defining Costs
Performing a Cost Analysis
Examples: Proposed Price by
Major Cost Element
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Contract Price = Cost + Profit
direct material
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travel
vendor
tooling
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engineering
manufacturing
field service
ILS
odc
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direct cost
direct labor
profit
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cost
Contract Price
raw material
purchased parts
standard commercial
items
subcontracts
indirect cost
burden (O/H)
engineering
manufacturing
field service
ILS
material
handling
G&A FCCM (COM)

engineering
manufacturing
field service
ILS
material
handling
G&A
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Total Contract Cost
the sum of the direct & indirect

costs allocable to the contract,
incurred or to be incurred, less any
allocable
credits,
plus
any
applicable cost of money (Cost
Accounting Standard 414).
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NA
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is
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Direct Costs (FAR 31.202)
Definition: Direct costs are identifiable to a final

cost objective (a particular contract).
Examples: direct material and direct labor.
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All costs identified specifically with a contract are

direct costs for that contract and shall not be
charged to another contract directly, or indirectly.
No cost shall be charged to a contract as a direct
cost, if other costs incurred for the same purpose
in like circumstances have been charged as an
indirect cost.
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Indirect Costs
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Definition: Indirect costs are not directly

identifiable with a final cost objective (e.g. a
particular contract), but identified with two or more
final cost objectives.
The distribution of indirect costs to various
contracts should roughly be based on the benefits
received on each contract.
No cost shall be charged to a contract as an indirect
cost if other costs incurred for the same purpose in
like circumstances have been charged as a direct
cost to that contract or any other contract.
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Alternative Direct Cost

Treatment
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For practicality, any direct cost of minor

dollar amount may be treated as an indirect
cost if this treatment:
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Is consistently applied across all contracts,

and
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Produces substantially the same results as

treating the cost as a direct cost
13
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Proposal Major Cost Elements
CI
Direct Material Cost
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Labor Categories
Labor Rates
Labor Hours
Indirect Costs
The Actual Materials
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Raw material
Purchased parts and/or
assemblies
Subcontracts
Miscellaneous material
Discounts, Scrap, Inventory
Shrinkage, & Freight-in
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Material Handling
Fringe Benefits
Overhead (or burden)
G&A Expenses
Direct Labor Cost
Other Direct Costs

Nonrecurring costs
Subcontracts
Travel
Profit or Fee
Cost of Money
Escalation
14
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Cost Analysis: First Step

Pre-solicitation involvement by the price/cost analyst
(FSO) and engineer (ESO) is recommended
Price/cost input
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Section B set-up, Price/Cost Evaluation Template, Section L

price/cost data requirements, and Section M price/cost evaluation
factors
SOW/PWS
CI
Engineering and price/cost input
NA
Read the solicitation, section B, and SOW/PWS

What is being purchased?
Not as easy as looking at the Section B CLINs and/or SLINs
AN
What are the solicitation requirements for the contractor and the
government?
15
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Cost Analysis: Second Step

Read the contractors proposal price/cost narrative
It will discuss the contractors proposal structure,

assumptions, rationale, etc.
VI
The length and quality will vary

An important source of proposal information
CI
Study/know the proposal set-up

Check the math:
AN
NA
Is the arithmetic correct? The Section B unit prices multiplied by

the quantities result in the total amounts?
Do the amounts foot? Do they add-up and/or calculate
correctly?
Do the numbers track? Can the figures be traced among the
support schedules?
16
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Cost Analysis: Third Step

What is the basis of the proposed cost?
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How did you come up with this number?

What is your rationale?
What are your assumptions?
What are the calculations you used?
CI
NA
The contractors responses provide the

answer to the question:
AN
Why is this price and/or cost reasonable?

17
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Cost Estimating
Methods Used
by the Contractor
An offeror may use any generally accepted estimating

methods that are equitable and consistently applied in
similar situations.
AN
NA
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Common methods:
Round Table: Experts get together and make
judgments on projected costs
Comparison: Adjustments are made to a past or current
item to derive the cost
Parametric: Projections are based on formulas, or cost
estimating relationships
Detailed: A thorough review is made, with detailed
information comprising the estimate
18
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Basic Cost Element Breakdown
Rate
NA
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Proposed Price By Cost Element

Item/Service:
RFP:
CLIN:
SLIN:
Date/Time:
4/21/2006 13:43
File Name:
Base Period
Hours
Cost Element:
Material:
Direct Material
Scrap/Discount/Miscellaneous
Material Handling
Total Material
Direct Labor:
Labor Category 1
5
Labor Category 2
6
Total
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Fringe Benefits
Overhead
Other Direct Costs (ODC's)
Subcontracts
Travel
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Total ODC's
Subtotal
G&A Expenses
Total Costs
Profit
1%
2%
5.00
2.00
3.36
3%
4%
Base
Amount
100
101
37
38
100
1
2
103
25
12
37
1
2
100
50
5%
193
1%
202
150
193
10
202
2
Unit Price
Quantity
204
2
Total Price
409
19
Hours
5
6
11
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Total ODC's
Subtotal
G&A Expenses
Total Costs
Profit
Rate Base Amount
1%
2%
Cost Element:
Material:
Direct Material
Scrap/Discount/Miscellaneous
Material Handling
Total Material
Direct Labor:
Labor Category 1
Labor Category 2
Total
Fringe Benefits
Overhead
Other Direct Costs (ODC's):
Subcontracts
Travel
Transportation
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Basic Cost Element Breakdown
5.00
2.00
3.36
3%
4%
100
101
37
38
25
12
37
1
2
100
150
50
5%
193
1%
202
Unit Price
Quantity
Total Price
100
1
2
103
300
193
10
202
2
204
2
409
20
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Example: Loaded Labor Rate

Cost Element Breakdown
(3)
(4)
(5)
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(2)
(6)
(3)*(4)
Rates:
(8)
(9)
Composite
L Rate Esc
0.40
0.30
0.20
0.10
NA
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100%
(10)
(11)
(12)
(13)
(14)
(15)
(5)*(6) (5)+(6) (7)*(8) (7)+(8) (8)*(9) (8)+(9) (11)*(12) (11)+(12) (13)*(14) (13)+(14)
1.00%
Base
Labor Category
WGT Lbr Rate
CLIN/SLIN
Automotive Mechanic
40% 1.00
Metal Body Repairman
20% 2.00
Elec Tech/Mechanic
30% 3.00
Fuel/Elec Sys Mechanic 10% 4.00
0001AA Composite
(7)
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(1)
Loaded Labor Rate Calculation Template

Item/Service:
RFP:
CLIN:
SLIN:
Date/Time: 2/28/2006 11:08
File Name:
2.00%
Adj
LR
FB
3.00%
ST
O/H
4.00%
ST
1.00 0.01 1.01 0.02 1.03 0.03 1.06
1%
(16)
(17)
(15)*(16)
Est
Est
Labor Total
Hours Price
G&A
TC
Profit
LLR
0.04
1.10
0.01
1.11 100 111.46
21
2001
2002
Direct Material
Handling
Shrinkage
Shop Supplies
Scrap
90
5
2003
Total
90
5
108
6
2
3
3
3
100
120
25
4
30
4
35
4
100
120
140
360
10
5
215
20
15
5
10
5
235
20
15
5
10
5
275
20
15
5
30
15
725
60
45
15
255
275
315
22 845
2
3
100
320
Total Matl
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Material
DOWNLOADED
FRoM
http://annacivil.tk
SAMPLE
COST
BREAKDOWN
Labor Rate
Labor Hours
NA
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Labor O/H
ODC
S/T
G&A
Profit/Fee
COM
CI
Total Labor
Total Price
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Labor

6. Time-Cost Trade-Off analysis
6.1.
Introduction
It is common for people to want to shorten project duration. It may be the project is behind schedule
or the scheduled project deadline has been moved forward. By knowing the critical path, the project
manager and his or her team can use several duration compression techniques to shorten the project
schedule.
Crashing is a technique for making cost and schedule time trade-offs to obtain the greatest amount
of time compression for the least incremental cost. This technique is also known as time cost tradeoffs.
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Crashing is a process for reducing the duration of critical path activities by allocating more
resources to those activities or by changing their scope. In this case some (or all) of the activities
can be speeded up (crashed) by increasing the amount of money spent on them.
If the minimum time for an activity is used, the activity is said to be totally crashed. If somewhere
between the normal time and minimum time is used then the activity is said to be partially crashed.
If the relationship between the time spent on an activity and its cost is linear then the problem as to
which activities to partially crash, totally crash or not crash at all can be formulated as one in linear
programming.
VI
The objective is to minimise the total cost of completing the project by the specified date. Of
course, if the desired finish date is too short, the problem may be infeasible.
6.2.
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CPM was initially set up to address the time cost trade-off dilemma often presented to project
managers, where there is a complex relationship between project time-to-complete and cost-tocomplete.
Estimating Cost and Duration
AN
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Consider the following:

Rent increases with time.
Running costs water, electricity and gas would increase with time.
If the projects duration is reduced, employee labour rate will increase if the workers have to
work overtime.
Contract labour on a fixed rate is not affected by time, but their productivity may reduce if they
work long hours.
Fixed price contracts may not be affected by time.
If you shorten the duration of a project, some costs will reduce (plant hire), while others will
increase (overtime). On large complex projects you need a model like CPM to work out the overall
effect of these types of changes.
Accountants, for various reasons, classify costs in two general categories: direst cost also known as
variable cost, and indirect cost, sometimes referred to as fixed cost.
DIRECT COSTS
Some of the examples of Direct Costs are materials, equipment, labour wages, overtime
premium, subcontractors, freight, sales tax.

2
They vary directly with your volume of output.
They generally increase as the duration of a project is shortened.
INDIRECT COSTS
Some of the examples of indirect costs are insurance, start-up, security, marketing, goodwill,
supervision, overheads, interest charges, contractual penalties, clerical costs.
They generally decrease as the duration of a project is shortened.
They are fixed periodic costs.
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The Critical Path Method is a deterministic scheduling technique in which each activity has two sets
of times. The first is the normal time that we used in our scheduling so far. The other time is the
crash time, which is the shortest time required to complete an activity. Associated with each time
are the normal coast and the crash cost respectively. Usually we can shorten an activitys duration
by adding more resources hence the crash cost is higher than the normal cost.
Normal Duration, Normal Cost
VI
Determine the most cost-effective plan for the project. That is the plan you would come up with if
you were going to bid against competitors for the same project or resources (and indeed most
projects are competing, at one level or another).
CI
We should always follow three simple steps.
1. Determine the most cost-effective technical approach. (determine which method will allow you
to complete any given activity while spending the least amount of money)
NA
2. Make an estimate of how long the most cost-efficient method will take to complete. (this is
meant to give you an advantage if you are bidding for the work. You must be careful not to
underestimate durations. Engineers, especially those without a lot of experience, are notoriously
optimistic when estimating time, and will often think effort rather than duration. Ignore any
AN
external special conditions at this point, such as bad weather or sick leave. Assume that things
will go as planned.
3. Selectively adjust your estimate for any activity that is subject to common problems. (If you
know that while pouring concrete you have a 20% chance of rain, you then adjust the duration
of the pour accordingly. If pouring would take 10 days without interruption, then adjust it to 12
days. Likewise, there is a certain probability that, while your software developers are writing
programs, the network will go down at some point. At this stage, you are anticipating common
problems. These are occurrences that do not necessarily require additional resources, but they

3
will add to the duration of the activity. Be sure to adjust only those activities subject to common
problems. Leave all the other estimates alone.
Now in terms of normal duration, activity crashing is the compression of activity duration beyond
the most efficient combination of resources (normal duration), while maintaining quality
using overtime
doubling up resources, more men on the job!
lot splitting
subcontracting portions
using faster resources, air freight, bigger machines,
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requirements. Examples are
overtime premium
subcontractor's profit
coordination effort
multiple setups
more expensive resources
other...
CI
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Costs of Crashing Activities:
EXAMPLE 1
Consider the following situation in a project of relocating an office complex. It was found that the
NA
duration for erecting the movable partitions and their attachments varied as the number of workers
assigned was increased from 2 to 8 workers. Table 1 below shows the resulting durations and costs
in man-hours.
AN
Table 1: Duration and Cost for erecting the movable partitions and their attachments
Number of Personnel assigned
Duration (hours)
25
14
10
Direct Cost (person-hours)

4
OPTIMUM DURATION
Figure 1: Total cost curve as a function of direct and indirect costs
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Cost
($)
Duration of the project
Unless planned at the Optimum Duration level, further crashing of activities adds to their total cost
(overtime, special shipping, etc), which may defeat the reason you got the bid in the first place:
cost. Crashing activities also adds to your teams stress level, which increases the chance of failure.
When having to crash activities to meet an external deadline, it is an opportunity to reach for the
VI
Optimum Duration and actually reduce total cost as you reduce duration.
Simulating all the costs will give you the overall effect of time changes on project costs. This
CI
technique can also be used for project acceleration where you need to know the trade-off between
the cost of accelerating a project to meet certain milestones compared with the penalties of failing to
NA
achieve them.
EXAMPLE 2
Suppose you wish to have a ditch dug in your backyard. The high school kid next door will do it in
AN
a five days for $50, or you can hire a ditch-witch for $160 and do it in an afternoon. The indirect
costs associated with keeping the lawn torn up is $10 per day.
(a) Find the normal cost and the normal duration.
(b) Find the fully crashed point
(c) If the kid next door would take a $20 bonus to finish in 3 days determine the new total cost
for hiring him.
(d) Is the new total cost in part (c) an acceptable alternative?

5
6.3.
Schedule Compression
Two main last resort techniques are known as crashing, which looks at cost-schedule trade-offs, and
fast tracking, which looks at the possibility of performing activities in parallel that would normally
be done in sequence.
Fast tracking involves doing project tasks at the same time rather than in sequence. Fast tracking
requires, by necessity, that the task dependencies allow such parallel work.
What else can be done to shorten the critical path?
See if some activities might be further broken down to allow fast-tracking. If dependencies
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between activities originally did not allow fast-tracking, breaking up these activities might open
new possibilities to accomplish tasks in parallel. Maybe some activities do not have to be
completely finished before a successor activity can be started. Thinking creatively about the
different activities on the critical path can help to possibly take them off the critical path, which
helps to shorten the overall project schedule.
Check the duration estimates of the critical activities in Microsoft Project a simple double
click on the task duration will open a Task Information dialog box. Often, duration estimates are
VI
based on rules of thumb or include fudge factors. Breaking down the critical activities to a more
detailed breakdown might adjust the durations upward. Although this does not help to shorten
can also be beneficial.
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the critical path, it can save you from any surprises during the execution of the project, which
An additional tool for project schedule development is simulation. Simulation is the process of
NA
calculating project and activity durations using different assumptions, constraints, and resource
allocations. Two commonly used types of simulation are Monte Carlo simulation and what-if
analyses. Monte Carlo simulations are probabilistic analyses used to calculate a distribution of
likely results (in our case likely project or task durations). What-if-analysis take advantage of logic
AN
networks by simulating various scenarios, such as what if a major component for a system is
delayed. Both these techniques allow additional insight into the duration of projects and project
activities.
6.4.
Performing Time-Cost Trade-Off
It is based on the following assumptions:

1. Each activity has two pairs of duration and cost estimates: normal and crash. The normal time is
the estimated length of time required to perform the activity under normal conditions, according
to the plan (In PERT it is the expected time estimated using the three time used, [(a + 4m +b)/6]
and under the assumption of resource loadings that are normal. The normal cost is the estimated

6
cost to complete the activity in the normal time. The crash cost is the estimated cost to complete
the activity in the crash time.
2. An activitys duration can be incrementally accelerated from its normal time to its crash time by
applying more resources assigning more people, working overtime, using more equipment,
and so on. Increased costs will be associated with expediting the activity.
3. An activity cannot be completed in less than its crash time, no matter how many additional
resources are applied. For example, activity A cannot be completed in less than 5 weeks, no
matter how many more resources are used or how much money is spent.
4. The resource necessary to reduce an activitys estimated duration from its normal time to its
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crash time will be available when needed.
5. Each activity has its own cost per time period for accelerating the activitys duration from its
normal time to its crash time. Within the range between an activitys normal and crash points, if
the relationship between time and cost is linear this acceleration cost per time period is
calculated as shown in lecture handout 1: (Such a linearity assumption enables us to use linear
programming to determine just which activities should be crashed and by how much.
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EXAMPLE 3
Consider the simple project in Figure 2 and answer the following questions.
CI
Figure 2: Network with Normal and Crash Times and Their Costs
Activity: Normal estimate (weeks, $)
Crash estimate (weeks, $)
NA
A:N = 7, $50,000
C = 5, $62,000
C: N = 10, $40,000
C = 9, $45,000
AN
(a) Find the critical path.

(b) What is the total project cost?
B: N = 9, $80,000
C = 6, $110,000
D: N=8, $30,000
C = 6, $42,000
(c) How long would the project take if all the activities were performed in their minimum possible
time (crash time)? What would be the total cost?
(d) Calculate the cost-per-week rate to accelerate for each activity.
(e) Using the time-cost trade-off method, reduce the project duration as much as possible. What is
the new total cost?

7
Table 2 displays the incremental acceleration in total project completion and the associated
incremental increase in total project cost. It indicates that reducing the total project duration by 1
week would increase the total project cost by $5,000. To reduce it by 2 weeks would cost $11,000,
and to reduce it by 3 weeks would cost $23,000.
Table 2: Time-Cost Trade-Off
CD, AB (15)
Extra Cost ($)

5,000
6,000
6,000
6,000
223,000
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Activities to Crash (1 week)

C (C now is at minimum time)
D (only activity to crash)
D (D now at minimum time)
A
C and D at its fully crashed time
$200,000
Total Cost($)
205,000
211,000
Step
1
2
3
CD (18 weeks)
CP (weeks)
CD (18)
CD (17)
CD, AB (16)
(f) Compare this new total cost as a result of Time-Cost Trade-Off to the total crash cost
determined in (c)? If the new project deadline is 15 weeks, is it necessary to perform all the
activities in their minimum possible time (crash time)? Why or why not?
6.5.
VI
If all four activities were crashed, the total cost of the project would be $259,000, but it would still
not be completed any earlier than 15 weeks. Using the time-cost trade-off method, we were able to
reduce the project duration from 18 weeks to 15 weeks at an additional cost of $23,000 by
selectively crashing the critical activities with the lowest acceleration cost per time period.
Crashing all the activities would have resulted in a waste of $36,000 because no reduction in total
project duration beyond 15 weeks could be achieved.
Criteria for Selecting Activities to Crash
CI
There are several characteristics that mark or highlight an activity that exists on the Critical Path as
a better candidate for crashing.
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1. Must be on the Critical Path.

Crashing noncritical activities that already have slack only buys more slack and doesnt shorten
the project duration. Only critical path activities drive the project and crashing them will shorten
the project duration.
2. Precedes multiple activities.
When an activity bottlenecks numerous succeeding activities, it is a great candidate to shorten.
Once this activity is shortened, it allows the multiple activities to begin.
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3. Long duration.
An activity that has a long duration offers more potential time gain from crashing it.
4. Lower cost per period gained.
Activities that cost less to crash are preferred. These include those requiring lower paid, lower
skilled workers or other resources that are otherwise sitting idle.
5. Early in the project (the Sunshine Rule).
If you fail in crashing the activity and it takes longer than planned, it is still early in the project.
Thus you still have recovery time. Also, typically demand on resources early in the project is
lower than other times, and they should be readily available.
6. Labour-intensive.
When an activity is low skill labour intensive, it is easy to add people to help complete the
project early. When an activity requires high skills to complete, it may be hard to find qualified
individuals who are capable of completing the task.

8
7. Subject to common problems
Try to pick activities that are subject to higher probability of common problems. Shortening the
duration lowers the exposure time and lessens the chances of having a problem.
6.6.
The Least Cost Plan for the all crash time schedule
EXAMPLE 4
The following data were obtained from a study of the times required to thoroughly examine a
chemical plant:
(a) Find the all-normal schedule and cost.
6, 2
2
10, 5
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5, 3
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Code: Normal time, Crash time
Normal Schedule
Time (weeks)
Cost ($000)
5
4
5
3
10
4
7
4
6
3
11
6
6
3
5
2
4
2
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Crash Schedule
Time (weeks)
Cost ($000)
3
6
1
5
5
7
2
6
2
5
5
9
4
6
1
4
1
5
Activity
1-2
1-3
2-4
3-4
2-6
4-6
4-5
6-7
5-7
5, 1
11, 5
7, 2
NA
5, 1
6, 4
4, 1
The Critical path is 1-2-4-6-7 and the minimum duration for the project is 31 weeks. The cost is
$31,000.
AN
(b) Find the all crash schedule and cost.

(c) Find the total extra cost required to accelerate all activities from all normal (part (a)) to all crash
(part (b)).
(d) Find the least cost plan for the all-crash time schedule. Start from the all crash problem in part
(b).
(e) Perform crashing of activities to reduce the project duration to its possible minimum.
(f) Does the result from part (e) agree with your result in part (d)?

9
Normal duration (wks)
Fully crashed duration (wks)
Activity
Acceleration cost per week ($)
Max weeks to crash
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Path
$53,000
Crashing cost
Expansion
Saving ($)
New total cost ($)
NA
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path (weeks)
12467
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EXAMPLE 5 (NON LINEAR ACCEERATION COST)
The network for shooting a TV commercial as shown in the table has a fixed cost of $90 per day,
but shortening the project duration can save money. Find the least cost schedule.
Activity
Normal Time
Crash Time
Cost Increase ($) (1st, 2nd, 3rd day)
1-2
30, 50, 70
2-3
40, 45, 65
1-3
12
10
60, 60
2-4
11
35, 60
3-4

10
2
7, 4
1, 9
9, 6
12, 10
3, 3
1-2-3-4: 19 days
1-2-4: 18 days
3
Critical path is 1-2-3-4 and the duration is 19days.
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1-3-4: 15 days
Table 3: Time-Cost Trade-Off for Shooting a TV Commercial
1-2-3-4 (14)
1-2-4 (14)
1-3-4 (14)
1-2-3-4 (13)
1-2-4 (13)
1-3-4 (13)
AN
Cost Change($)
30 90 = -60
2-3 (40)
40 90 = -50
1,600
VI
Activities to crash by 1 day

1-2 (30)
$1,710
Total Cost($)
1,650
50 90 = -40
1,560
1-2 (70)
2-3 (45), 2-4 (35)
70 90 = -20
1,540
2-3 (45)
2-4 (35)
1-3 (60)
45+35+60-90=50
1,590
2-3 (65)
2-4 (60)
1-3 (60)
Fully crashed
65+60+60-90=95
1,685
CI
1-2 (50)
2-3 (45), 2-4 (35)
NA
1-2-3-4 (19 days)

Step CP (days)
1
1-2-3-4 (19)
1-2-4 (18)
1-3-4 (15)
2
1-2-3-4 (18)
1-2-4 (17)
1-3-4 (15)
3
1-2-3-4 (17)
1-2-4 (17)
1-3-4 (15)
4
1-2-3-4 (16)
1-2-4 (16)
1-3-4 (15)
5
1-2-3-4 (15)
1-2-4 (15)
1-3-4 (15)
NA
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VI
The Cost Control Problem

The Project Budget
Forecasting for Activity Cost Control
Financial Accounting Systems and Cost Accounts
Control of Project Cash Flows
Schedule Control
Schedule and Budget Updates
Relating Cost and Schedule Information
AN
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XII- COST CONTROL, MONITORING

& ACCOUNTING
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12.1 The Cost Control Problem
AN
NA
CI
VI
During the execution of a project, procedures for project control

and record keeping become indispensable tools to managers
and other participants in the construction process. These tools
serve the dual purpose of recording the financial transactions
that occur as well as giving managers an indication of the
progress and problems associated with a project. The problems
of project control are aptly summed up in an old definition of a
project as "any collection of vaguely related activities that are
ninety percent complete, over budget and late." The task of
project control systems is to give a fair indication of the
existence and the extent of such problems.
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NA
CI
VI
For schedules, progress on individual activities and the

achievement of milestone completions can be compared with
the project schedule to monitor the progress of activities.
Contract and job specifications provide the criteria by which to
assess and assure the required quality of construction. The final
or detailed cost estimate provides a baseline for the assessment
of financial performance during the project. To the extent that
costs are within the detailed cost estimate, then the project is
thought to be under financial control.
AN
For control and monitoring purposes, the original detailed cost

estimate is typically converted to a project budget, and the
project budget is used subsequently as a guide for
management.
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AN
NA
CI
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Information on material quantities and labor inputs within each

job account is also typically retained in the project budget. With
this information, actual materials usage and labor employed can
be compared to the expected requirements. As a result, cost
overruns or savings on particular items can be identified as due
to changes in unit prices, labor productivity or in the amount of
material consumed.
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12.3 Forecasting for Activity Cost

Control
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For the purpose of project management and control, it is not

sufficient to consider only the past record of costs and revenues
incurred in a project. Good managers should focus upon future
revenues, future costs and technical problems
AN
NA
CI
For this purpose, traditional financial accounting schemes are

not adequate to reflect the dynamic nature of a project.
Accounts typically focus on recording routine costs and past
expenditures associated with activities.
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Control
Some methods for cost control and simple forecasts are described
VI
Budgeted Cost
The budgeted cost is derived from the detailed cost estimate
prepared at the start of the project.
NA
CI
Estimated total cost

The estimated or forecast total cost in each category is the
current best estimate of costs based on progress and any
changes since the budget was formed.
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Cost Committed and Cost Exposure!! Estimated cost to

completion in each category in divided into firm commitments
and estimated additional cost or exposure. Commitments may
represent material orders or subcontracts for which firm dollar
amounts have been committed.
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Control
Some methods for cost control and simple forecasts are described
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Cost to Date
The actual cost incurred to date can be derived from the
financial record keeping accounts.
AN
NA
CI
Over or (Under)
Indicates the amount over or under the budget for each
category. This cost is an indicator of the extent of variance from
the project budget; items with unusually large overruns would
represent a particular managerial concern.
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12.4 Financial Accounting Systems &

Cost Accounts
Accounting information is generally used for three distinct
purposes:
VI
Internal reporting to project managers for day-to-day planning, monitoring

and control.
Internal reporting to managers for aiding strategic planning.
CI
External reporting to owners, government, regulators and other outside

parties
AN
NA
External reports are constrained to particular forms and

procedures by contractual reporting requirements or by
generally accepted accounting practices. Preparation of such
external reports is referred to as financial accounting. In
contrast, cost or managerial accounting is intended to aid
internal managers in their responsibilities of planning,
monitoring and control.
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12.4 Financial Accounting Systems &

Cost Accounts
Project costs are always included in the system of financial

accounts associated with an organization.Other components of
a financial accounting system include:
CI
VI
The accounts payable journal is intended to provide records of bills

received from vendors, material suppliers, subcontractors and other outside
parties. Invoices of charges are recorded in this system as are checks
issued in payment. Charges to individual cost accounts are relayed or
posted to the General Ledger.
NA
Accounts receivable journals provide the opposite function to that of

accounts payable. In this journal, billings to clients are recorded as well as
receipts. Revenues received are relayed to the general ledger.
AN
Job cost ledgers summarize the charges associated with particular

projects, arranged in the various cost accounts used for the project budget.
Inventory records are maintained to identify the amount of materials
available at any time.
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12.5 Control of Project Cash Flows
VI
The development of information for the control of project costs

with respect to the various functional activities appearing in the
project budget. Project managers also are involved with
assessment of the overall status of the project, including the
status of activities, financing, payments and receipts.
CI
These components include
costs incurred (as described above),
NA
billings and receipts for billings to owners (for contractors),

payable amounts to suppliers and contractors,
AN
financing plan cash flows (for bonds or other financial instruments),

etc.
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12.6 Schedule Control
AN
NA
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VI
In addition to cost control, project managers must also give

considerable attention to monitoring schedules. Construction
typically involves a deadline for work completion, so contractual
agreements will force attention to schedules. More generally,
delays in construction represent additional costs due to late
facility occupancy or other factors. Just as costs incurred are
compared to budgeted costs, actual activity durations may be
compared to expected durations. In this process, forecasting the
time to complete particular activities may be required.
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12.7 Schedule and Budget Uptades
VI
Scheduling and project planning is an activity that continues

throughout the lifetime of a project. As changes or
discrepancies between the plan and the realization occur, the
project schedule and cost estimates should be modified and
new schedules devised.
AN
NA
CI
On "fast track" projects, initial construction activities are begun

even before the facility design is finalized. In this case, special
attention must be placed on the coordinated scheduling of
design and construction activities. Even in projects for which the
design is finalized before construction begins, change orders
representing changes in the "final" design are often issued to
incorporate changes desired by the owner.
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12.8 Realting Cost and Scheduling

Information
CI
VI
While project managers implicitly recognize the inter-play

between time and cost on projects, it is rare to find effective
project control systems which include both elements. Usually,
project costs and schedules are recorded and reported by
separate application programs. Project managers must then
perform the tedious task of relating the two sets of information.
NA
The difficulty of integrating schedule and cost information stems

primarily from the level of detail required for effective
integration. Usually, a single project activity will involve
numerous cost account categories.
AN
For example, an activity for the preparation of a foundation would

involve laborers, cement workers, concrete forms, concrete,
reinforcement, transportation of materials and other resources.
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12.8 Realting Cost and Scheduling

Information
CI
VI
Even a more disaggregated activity definition such as erection

of foundation forms would involve numerous resources such as
forms, nails, carpenters, laborers, and material transportation.
Again, different cost accounts would normally be used to record
these various resources. Similarly, numerous activities might
involve expenses associated with particular cost accounts.
AN
NA
For example, a particular material such as standard piping might be

used in numerous different schedule activities. To integrate cost
and schedule information, the disaggregated charges for specific
activities and specific cost accounts must be the basis of analysis.
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NA
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VI
Cost Management
AN
Erin Bognar
Deputy Director, Planning and Integration
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Traditional Cost Management vs.

Earned Value Cost Management
There is an important and fundamental difference between the

data available for analysis in a:
Traditional Cost Management environment
Earned Value Cost Management environment
AN
NA
CI
VI
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Traditional Cost Management

70
60
50
VI
40
30
20
NA
10
CI
The graph shows

the relationship of
the budget
(planned) versus
what was actually
spent.
Time Now
AN
Budget
Actuals
10
15
20
25
30
35
40
45
50
55
60
10
20
30
40
50
60
80
40
CI
20
60
VI
In EVMS there are three

data sources:
Budget
Actuals
Earned Value
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Earned Value Cost Management
BCWS
10
15
20
25
30
35
40
45
50
55
60
BCWP
15
25
30
35
45
ACWP
10
20
30
40
50
60
AN
NA
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In Summary
Traditional Cost Management provides:
How much money and time a particular job is likely to require prior to
starting and once started
How much money was spent at any given time.
VI
What work has been accomplished to date for the funds expended
(what you got for what you spent)
AN
NA
CI
EVM Cost Management adds:
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What is Cost Management?
Includes the processes required to ensure that the project is completed with the
approved budget
AN
NA
CI
VI
PMBOK Guide 2004
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What are the Cost Management Processes?

PROJECT COST
MANAGEMENT
VI
.2 Tools and Techniques

.1 Cost aggregation
.2 Reserve analysis
.3 Parametric estimating
.4 Funding limit reconciliation
NA

.1 Analogous estimating
.2 Determine resource cost rates
.3 Bottom-up estimating
.4 Parametric estimating
.5 Project management software
.6 Vendor bid analysis
.7 Reserve analysis
.8 Cost of quality
7.2 Cost Budgeting

.1 Inputs
.1 Project scope statement
.2 Work breakdown structure
.3 WBS dictionary
.4 Activity cost estimates
.5 Activity cost estimate detail
.6 Project Schedule
.7 Resource Calendars
.8 Contract
.9 Cost Management Plan
CI
7.1 Cost Estimating

.1 Inputs
.1 Enterpirse environmental factors
.2 Organizational process assets
.3 Project scope statement
.4 Work breakdown structure
.5 WBS dictionary
.6 Project management plan
-Schedule management plan
-Staffing management plan
-Risk register
AN
.3 Outputs
.1 Activity cost estimates
.2 Activity cost estimate detail
.3 Requested changes
.4 Cost management plan (updates)
.3 Outputs
.1 Cost baseline
.2 Project funding requirements
.3 Cost management plan (updates)
7.3 Cost Control
.1 Inputs
.1 Cost baseline
.2 Project funding requirements
.3 Performance reports
.4 Work performance information
.5 Approved change requests
.6 Project management plan

.1 Cost change control system
.2 Performance measurement analysis
.3 Forecasting
.4 Project performance reviews
.5 Project management software
.6 Variance management
.3 Outputs
.1 Cost estimate (updates)
.2 Cost baseline (updates)
.3 Performance measurements
.4 Forecasted completion
.6 Recommended corrective actions
.7 Organizational process assets (updates)
.8 Project management plan (updates)
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Project Phases/Process Group Map
Project Management Process Groups
Executing
Planning
Initiating
VI
Knowledge
Areas
Cost
Management
Cost Estimating
Monitoring
&
Controlling
Closing
Cost Control
Vs..
AN
NA
CI
Cost Budgeting
Resource
Rates
Expert
Opinion
Historical
Information
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WBS and level of cost collection

should consider not only the natural
division of work but also consider
future use of cost information
VI
Resource
Req.
CI
Chart of
Accounts
What will you do with the cost

information when the job is done?
NA
Activity
Durations
AN
Work
Breakdown
Structure
Develop Cost Estimates

(Parametric, Analogous, Bottoms-up, Etc.)
Implementation of Cost Management Processes
future proposals
comparative cost analysis - best

method of performance
Resource
Rates
Expert
Opinion
Historical
Information
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Resource
Req.
Strive for consistency between the

Estimating and Accounting chart of
accounts
What level of cost detail is necessary
and sufficient?
CI
Chart of
Accounts
NA
Activity
Durations
AN
Work
Breakdown
Structure

10
Resource
Rates
Expert
Opinion
Historical
Information
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Est'd
Cost
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Description
1.04.04 Foundation
$10k
1.04.02 Framing
$18k
CI
Resource
Req.
Document Cost Baseline
Chart of
Accounts
WBS
No.
1.04.03 Roof
$12k
1.04.04 Sheathing and Barrier
$2k
1.04.05 Insulation
$4k
1.04.06 Doors and Windows
$10k
1.04.07 Brick Veneer
$20k
NA
Activity
Durations
Allocate Cost to
Work Activities
(Budget)
AN
Work
Breakdown
Structure

Total
$76k
Construction Week
10 11 12 13 14 15 16 17 18 19
9
6
2
2
2
6
13
12
11
Resource
Rates
Expert
Opinion
Historical
Information
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Develop a going-in strategy
VI
Management of
Cost Variances
Cost Change
Control
Performance
Measurement
CI
Resource
Req.
Chart of
Accounts
Develop
Cost Management
Plan
NA
Activity
Durations
Allocate Cost to
Work Activities
(Budget)
AN
Work
Breakdown
Structure

or plan on not just how to

control overruns but how to
reduce costs:
Incentives
Competitive
Procurements
Methods Improvements
Questioning Attitudes
Technology
Deployment
Value Engineering
Trade-off Analysis
12
Should PM/CM activities be modified milestones versus level of effort?
CI
VI
Consider potential work suspension and resumption risks
Consider learning curves
less experience (early in contract) - higher cost/unit

more experience (later in contract) - lower cost/unit
improvement comes with practice
NA
Contract payment schedules are often tied to your WBS structure

and chosen earned value techniques
AN
BL
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Are any performance measurement techniques placing

you at risk?
13
S V%
CV%
CV
SP
I
TC
PI
VA
CV
EVMS Metrics & Analysis
SV
SP
I
CP
I
TCPI
VA
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CP
I
SV
CV
%
EAC
ACWP
VAC
AN
BAC
BCWP
NA
BCWS
CI
VI
CPI
SP
I
SV
TC
PI
V AC
SV
SV
CV
CV
%
What Metrics Do You Use for Cost Analysis?
14
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Change is inevitable, success is optional
CI
VI
-Yogi Berra
AN
NA
so Plan for Success
Evaluate cost uncertainty and your risk events upfront
Accurately record changes

to the baseline
Identifying Deviations
CI
Monitor cost and schedule

performance for deviations
NA
Establish a reserve and develop risk mitigation plans
VI
Bring expected costs within

acceptable limits
AN
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What is your plan for controlling internal change?
Time Now
BAC
Projected Cost
Underrun at
Completion
(VAC)
EAC (Projected
ACWP at
Completion)
COSTS ($)
SV
BCWS
BCWP
CV
Projected
Delay in
Project
Completion
ACWP
0 TIME
Time
Now
Scheduled Projected
Completion Completion
To date SV in
units of time
16
BL
O
What is your plan for controlling external change?

Monitor correspondence/field direction
Monitor cost and schedule performance for variances
VI
Isolate change impacts (scope, schedule, and cost)

Inform stakeholders of changes
Document changes
Schedule
Performance reports
Field notes/logs
NA
Scope
After the smoke clears, it is

not necessarily
what was
As-Planned
said and Schedule/
done by either
Cost Estimate
Work party that determines the
Performance
Breakdownoutcome; it is what the Reporting
Variance Reports
Structure
As-Built
documents
say was Daily Logs
Schedule/
Change Notices
said
or done.
Actual
Costs
AN
Agree to a Not-to-Exceed Value
CI
Timely negotiations
17
Expert
Opinion
Historical
Information
BL
O
VI
Re-Plan
Manage
Work Orders
Manage
Procurements
Manage
Disbursements
Performance
Measurement
Reports
Analysis/
Corrective
Action
Lessons-Learned
Physical Progress Reports
Resource
Rates
Management of
Cost Variances
Cost Change
Control
Performance
Measurement
CI
Resource
Req.
Chart of
Accounts
Develop
Cost Management
Plan
NA
Activity
Durations
Allocate Cost to
Work Activities
(Budget)
AN
Work
Breakdown
Structure

Recap of Cost Management Processes
Change
Control
18
CI
VI
BL
O
Chapter 7:
Project Cost Management
AN
NA
Information Technology Project Management,

Fourth Edition
BL
O
Learning Objectives
Understand the
management.
of
project
cost
importance
CI
VI
Explain basic project cost management principles,

concepts, and terms.
AN
NA
Discuss different types of cost estimates and methods

for preparing them.
Information Technology Project Management, Fourth Edition
BL
O
Learning Objectives
VI
Understand the processes involved in cost budgeting

and preparing a cost estimate and budget for an
information technology project.
NA
CI
Understand the benefits of earned value management

and project portfolio management to assist in cost
control.
AN
Describe how project management software can assist

in project cost management.
What is Cost and Project Cost

Management?
BL
O
VI
Cost is a resource sacrificed or foregone to achieve a

specific objective, or something given up in exchange.
CI
Costs are usually measured in monetary units, such as

dollars.
AN
NA
Project cost management includes the processes

required to ensure that the project is completed within
an approved budget.
BL
O
Project Cost Management Processes
Cost estimating: Developing an approximation or

estimate of the costs of the resources needed to
complete a project.
NA
CI
VI
Cost budgeting: Allocating the overall cost estimate

to individual work items to establish a baseline for
measuring performance.
AN
Cost control: Controlling changes to the project

budget.
BL
O
Basic Principles of Cost Management
VI
Most members of an executive board have a better

understanding and are more interested in financial terms
than IT terms, so IT project managers must speak their
language.
CI
Profits are revenues minus expenses.
NA
Life cycle costing considers the total cost of ownership,

or development plus support costs, for a project.
AN
Cash flow analysis determines the estimated annual

costs and benefits for a project and the resulting annual
cash flow.
BL
O
AN
NA
CI
VI
Tangible costs or benefits are those costs or benefits that an

organization can easily measure in dollars.
Intangible costs or benefits are costs or benefits that are
difficult to measure in monetary terms.
Direct costs are costs that can be directly related to producing
the products and services of the project.
Indirect costs are costs that are not directly related to the
products or services of the project, but are indirectly related to
performing the project.
Sunk cost is money that has been spent in the past; when
deciding what projects to invest in or continue, you should not
include sunk costs.
BL
O
CI
VI
Learning curve theory states that when many items are

produced repetitively, the unit cost of those items decreases
in a regular pattern as more units are produced.
Reserves are dollars included in a cost estimate to mitigate
cost risk by allowing for future situations that are difficult
to predict.
AN
NA
Contingency reserves allow for future situations that may be

partially planned for (sometimes called known unknowns)
and are included in the project cost baseline.
Management reserves allow for future situations that are
unpredictable (sometimes called unknown unknowns).
BL
O
Cost Estimating
VI
Project managers must take cost estimates seriously if

they want to complete projects within budget
constraints.
AN
NA
CI
Its important to know the types of cost estimates, how

to prepare cost estimates, and typical problems
associated with IT cost estimates.
AN
NA
CI
VI
BL
O
Table 7-2. Types of Cost Estimates
10
BL
O
Cost Management Plan
VI
A cost management plan is a document that describes

how the organization will manage cost variances on the
project.
AN
NA
CI
A large percentage of total project costs are often labor

costs, so project managers must develop and track
estimates for labor.
11
Cost Estimation Tools and Techniques
BL
O
Basic tools and techniques for cost estimates:
AN
NA
CI
VI
Analogous or top-down estimates: Use the actual cost of

a previous, similar project as the basis for estimating the
cost of the current project.
Bottom-up estimates: Involve estimating individual work
items or activities and summing them to get a project
total.
Parametric modeling: Uses project characteristics
(parameters) in a mathematical model to estimate project
costs.
Computerized tools: Tools, such as spreadsheets and
project management software, that can make working with
different cost estimates and cost estimation tools easier.
12
BL
O
Typical Problems with IT

Cost Estimates
Developing an estimate for a large software project is a

complex task that requires a significant amount of effort.
CI
VI
People who develop estimates often do not have much

experience.
NA
Human beings are biased toward underestimation.
AN
Management might ask for an estimate, but really desire

a bid to win a major contract or get internal funding.
13
BL
O
Sample Cost Estimate
AN
NA
CI
VI
Before creating an estimate, know what it will be used

for, gather as much information about the project as
possible, and clarify the ground rules and assumptions
for the estimate.
If possible, estimate costs by major WBS categories.
Create a cost model to make it easy to change and
document the estimate.
14
BL
O
Cost Budgeting
Cost budgeting involves allocating the project cost

estimate to individual work items over time.
CI
VI
The WBS is a required input for the cost budgeting

process because it defines the work items.
NA
Important goal is to produce a cost baseline:
AN
A time-phased budget that project managers use to

measure and monitor cost performance.
15
Project cost control includes:
BL
O
Cost Control
Monitoring cost performance.
CI
VI
Ensuring that only appropriate project changes are included

in a revised cost baseline.
NA
Informing project stakeholders of authorized changes to the

project that will affect costs.
AN
Many organizations around the globe have problems with

cost control.
16
Earned Value Management Terms
AN
NA
CI
VI
BL
O
The planned value (PV), formerly called the budgeted cost of

work scheduled (BCWS), also called the budget, is that portion of
the approved total cost estimate planned to be spent on an activity
during a given period.
Actual cost (AC), formerly called actual cost of work performed
(ACWP), is the total of direct and indirect costs incurred in
accomplishing work on an activity during a given period.
The earned value (EV), formerly called the budgeted cost of
work performed (BCWP), is an estimate of the value of the
physical work actually completed.
EV is based on the original planned costs for the project or
activity and the rate at which the team is completing work on the
project or activity to date.
17
Rate of Performance
BL
O
Rate of performance (RP) is the ratio of actual work

completed to the percentage of work planned to have been
completed at any given time during the life of the project or
activity.
AN
NA
CI
VI
For example, suppose the server installation was halfway

completed by the end of week 1. The rate of performance
would be 50 percent (50/100) because by the end of week
1, the planned schedule reflects that the task should be 100
percent complete and only 50 percent of that work has been
completed.
18
BL
O
Rules of Thumb for Earned

Value Numbers
VI
Negative numbers for cost and schedule variance

indicate problems in those areas.
CI
A CPI or SPI that is less than 100 percent indicates

problems.
AN
NA
Problems mean the project is costing more than

planned (over budget) or taking longer than planned
(behind schedule).
19
AN
NA
CI
VI
BL
O

Figure 7-4.
Earned Value Calculations for a
One-Year Project After Five Months
20
AN
NA
CI
VI
BL
O

Figure 7-5.
Earned Value Chart for
Project after Five Months
If the EV
line is
below the
AC or PV
line, there
are
problems
in those
areas.
21
BL
O
Many organizations collect and control an entire suite

of projects or investments as one set of interrelated
activities in a portfolio.
Project portfolio management has five levels:
Project Portfolio Management
AN
NA
CI
VI
1. Put all your projects in one database.

2. Prioritize the projects in your database.
3. Divide your projects into two or three budgets based on
type of investment.
4. Automate the repository.
5. Apply modern portfolio theory, including risk-return
tools that map project risk on a curve.
22
BL
O
Chapter Summary
VI
Project cost management is traditionally a weak area in

IT projects, and project managers must work to
improve their ability to deliver projects within
approved budgets.
CI
Main processes include:
NA
Cost estimating
AN
Cost budgeting
Cost control
23
Project Management Planning

Introduction
Planning is the Seed for Success
Without a project plan, project success will be difficult. Team members would have limited understanding
of expectations, activities may not be properly defined, and resource requirements may not be understood.
BL
O
This section provides an overview of planning and focuses on the project plan elements.
Responsibilities
The responsibilities for project planning are summarized below:
Project Managers are responsible for developing the project plan for a specific project. It is
an activity, which requires training, focus and appropriate management and communication
skills.
State organizations are responsible for developing internal procedures to ensure that the
planning process is completed consistently with the state organizations business plan. IT
projects must be well thought out, support the key stakeholder goals, and include processes
that allow the project to be tracked and controlled until completion.
State organizations are also responsible for assigning the Project Manager and ensuring
that there are adequate resources assigned to managing a project. Direct project
management costs should not be rolled into overhead costs. Management is a full time job
for most projects.
Terminology
CI
VI
NA
As with all the sections of this methodology, a full glossary of terms is provided in Appendix A: Glossary;
however, a sub-set of terms relative to this section includes:
Activity is a task or series of tasks performed over a defined period of time.
Budget refers to an estimate of funds and/or resources planned to cover a program or project.
AN
Configuration Management are processes including procedures and tools to control project
deliverable(s) in terms of release and revision. A system of procedures that monitors emerging
project scope against the scope baseline. Requires documentation and management approval on any
change to the baseline.
Project Plan is a management summary document that gives the essentials of a specific project in
terms of its objectives, justification, and how the objectives are to be achieved. It describes how major
activities of the project management function are to be accomplished, and describes methods of
overall project control. The project plan evolves through successive stages of the planning process.
Quality is a composite of attributes (including performance features and characteristics) of the
product and process required to satisfy the need for which the project is undertaken.
Resource is something that lies ready for use or that can be drawn upon for aid or to take care of a
need.
Resource Planning is the identification of resource components required to complete the project.
Project Management Best Practices
Release: 2.0
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Introduction
Requirements is a description of product functions that collectively will satisfy the overall business
goal.
Risk is any factor that potentially can jeopardize the successful completion of a project.
Risk Management is the art and science of identifying, analyzing, and responding to risk factors
throughout the life of a project.
BL
O
Stakeholders are individuals or organizational entities whose stake in the project is sufficient for
them to play a role in affecting the outcome of the project.
AN
NA
CI
VI
Work Breakdown Structure is a division of tasks that define, organize, and display the work to be
accomplished to achieve the specified product or services.
Release: 2.0
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Planning Process & Project Plan
What is Project Planning?
Project planning defines the project activities and describes how the activities will be accomplished. The
purpose of project planning is to define each task, estimate the time and resources required, and provide a
framework for management review and control. The project planning activities and goals include defining:
The specific work to be performed
Estimates to be documented for tracking, and controlling the project
Commitments that are planned, and agreed to by stakeholders
Project assumptions and constraints
The size of the project in terms of dollars and resources
Project schedule
Project risks
BL
O
The Planning Process
VI
Repetition of these major activities is necessary to establish the project plan. Typically, several iterations
of the planning process are required.
CI
The planning processes discussed in this document are conducted to ensure successful completion of
project deliverables. The planning process includes a group of techniques that provides the detailed list of
activities that are to be completed, and how the work will get done, by whom, when, and for how much. In
summary, the project plan provides the specifics of:
WHAT (Objective, scope, and statement of work)
NA
HOW (Approach, work breakdown structures)
WHO (Project organization and resource schedule)
WHEN (Schedule and milestones)
WHERE (Facilities required)
AN
WHAT-IF (Contingency Plans is the event of Risk Events)
Release: 2.0
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Overview of Planning Process
BL
O
Project Summary
Project Charter
Project Structure
Phase/Act/Task
Del
Estim
Schedule
Resource Plan
CI
Diagram Network
VI
Phase/Act/Task
Deliverables
Approval
AN
NA
DOC
ATP
Importance of the Project Plan

A project plan is a formal, written document that is used to prepare for, manage and control a project.
The project plan forms the basis for all management efforts associated with a project. It is a document
that is also expected to change over time. The information associated with the plan evolves as the project
moves through its various stages and is to be updated as new information unfolds about the project in the
Execution Phase.
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The planning process consists of the following basic tasks:
Steps in the Planning Process

Define the problem, the goal(s), the objectives and the success factors for this specific
project
Develop the Project Schedule
BL
O
Define the tasks to be performed
Establish the general sequence and create the WBS

Define the organization used to execute project
Estimate task duration
Estimate resources for each task
Identify all deliverables associated with project
Define critical path
VI
Document task relationships
Identify precise and measurable milestones
Establish start and end dates for each task
CI
Define and create the schedule
Define a budget for performing the tasks.
Identify the known risks and suggested approaches to prevent or mitigate.
Define the process used for ensuring quality.
Define the process used for configuration management and project requirements.
NA
Overview of Project Scheduling
AN
Following the definition of project activities, the activities are associated with time to create a project
schedule. The project schedule provides a graphical representation of predicted tasks, milestones,
dependencies, resource requirements, task duration, and deadlines. The projects schedule interrelates all
tasks on a common time scale. The project schedule should be detailed enough to show each WBS task
to be performed, the title of the persons responsible for completing the task, the start and end date of each
task, and the expected duration of the task.
Like the development of each of the project plan components, developing a schedule is an iterative
process. Milestones may suggest additional tasks, tasks may require additional resources, and task
completion may be measured by additional milestones. For large, complex projects, detailed subschedules may be required to show an adequate level of detail.
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AN
NA
CI
VI
BL
O
During the life of the project, actual progress is frequently compared with the original schedule. This allows
for evaluation of development activities. The accuracy of the planning process can also be assessed. This
assessment can be used to improve the planning process.
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Activity Definition and Sequencing
Develop Project Tasks
One of the most important parts of the project planning process is the definition of project activities.
Activity sequencing involves dividing the project into smaller, more manageable components or tasks and
then specifying the order of completion. The list of activities is called a Work Breakdown Structure (WBS).
The goal is to integrate the WBS, the schedule, and the budget into a written plan.
BL
O
The WBS reflects all activities such as project management, requirements definition, design,
implementation, transition management, testing, training or installation. The project manager is
responsible for defining all level tasks associated with a project and then further decomposing them as
planning continues.
An activities list is typically shown in one of two ways. It can be shown as an outline or it can be
graphically presented. Two samples of WBS are shown below. These samples are not complete, but are
provided for examples of format only.
MANAGEMENT
1.1
Finalize Project Plan

1.1.1 Review Project Plan with Project Team
1.1.2 Update Project Plan to create baseline
Track Project
1.2.1 Prepare status reports
1.2.2 Collect/analyze project metrics
Perform Quality Activities
1.3.1 Finalize QA Plan
1.3.2 Conduct Reviews
1.3.3 Conduct Audits
1.3.4 Review and Act on Recommendations
Perform Configuration Management
1.4.1 Finalize CM Plan
1.4.2 Develop Project Library
1.4.3 Manage Change Board
1.4.4 Maintain Configuration Items
Report Status
1.5.1 Schedule and conduct Status Meetings
1.5.2 Meet with Executive Management
1.5.3 Prepare Staff evaluations
Conduct Close-Out Activities
1.6.1 Finalize User Sign-off
1.6.2 Conduct Lessons Learned
1.6.3 Document PIER
1.6.4 Archive Records
1.6.5 Celebrate Success
1.4
VI
AN
1.5
CI
1.3
NA
1.2
1.0
1.6
2.0
DESIGN
2.1
Prepare Preliminary Design

2.1.1 Develop Enterprise Architecture
2.1.2 Prepare Data Flow Diagrams
Release: 2.0
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3.0
DEVELOPMENT/INTEGRATION
3.1
Procure Software Packages

3.1.1 Procure Database
3.1.2 Procure User Interface Building Tool
3.3.3 Procure Operating System
Develop Software
3.2.1 Develop Server Application
3.2.2 Develop User Interface
3.2.3 Develop XYZ Interface
Procure Hardware
3.3.1 Procure Server
3.3.2 Procure Workstations
Perform Integration Testing
Convert Data
3.5.1 Develop Conversion Plan
3.5.2 Convert Data
Develop User Manuals
Transition Management
3.3
3.6
3.7
5.0
Plan Acceptance Test

Conduct Acceptance Test
Develop Test Report
INSTALLATION
Develop Installation Plan

Site Preparation
Install at Locations
5.3.1 Headquarters
5.3.2 Site 1
AN
5.1
5.2
5.3
ACCEPTANCE TESTING
NA
4.0
CI
VI
3.4
3.5
4.1
4.2
4.3
BL
O
3.2
2.3
2.4
2.1.3 Prepare Logical Data Model

Develop Design Specifications
2.2.1 Prepare Physical Data Model
2.2.2 Prepare Data Dictionary
Document Design Specifications
Review Design
2.2
Release: 2.0
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Sometimes, instead of depicting the WBS as an outline, it is shown graphically, as below:
Management
Development/
Integration
Design
Prepare Preliminary
Design
Plan Project
Develop Enterprise
Architecture
Develop Project Plan

Update Project Plan
Prepare Data Flow

Diagrams
Acceptance
Testing
Procure Software
Packages
Procure Databases
Procure User Interface
Building Tool
Procure Operating
System
Prepare Logical Data

Model
Track Project
Develop Software
Collect/analyze
project metrics
Prepare Physical
Data Model
Prepare Data
Dictionary
Document Design
Prepare QA Plan
Conduct Reviews
Develop Design
Specification
Perform CM
Prepare CM Plan
Conduct Acceptance
Test
Site Preparation
Develop Test Report
Install at Locations
Develop Server
Application
Headquarters
Develop User
Interface
Site One
Develop XYZ
Interface
Procure Hardware
Procure Server
Procure Workstations
CI
Conduct Audits
Review Act on
Recommendations
Develop Installation
Plan
VI
Perform Quality
Activities
Installation
Plan Acceptance
Test
Prepare Detailed
Design
Prepare status report
BL
O
Sample
Work Breakdown
Structure (WBS)
WBS
Review Design
Develop Project Library

Manage Change Board
NA
Maintain Configuration Items
Report Status
Perform Integration
Testing
Convert Data
Develop Conversation
Plan
Convert Data
Schedule & Conduct Status Meetings

Meet with Executive Management
Prepare Staff Evaluations
Close-Out Activities
Develop User Manual
Transition
Management
AN
Finalize User Sign-Off
Conduct Lessons Learned

Document PIER
Archive Records
Celebrate Success
WBS tasks are developed by asking, What tasks need to be done to accomplish the project objectives?
As levels of the WBS become lower, the scope, complexity, and cost of each subtask become smaller.
The lowest level tasks, or work packages, are independent, manageable units that are planned, budgeted,
scheduled, and controlled on their own.
As efforts of similar scope and type are planned, the basic WBS tasks remain somewhat similar, but each
project requires a specific set of tasks that address the uniqueness of the project's requirements. Certain
Release: 2.0
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top level elements, such as project management, are included in the WBS of every project, regardless of
its type, size, or complexity. Other items, like installation, may not apply to every project.
There is no simple formula to define how detailed a work breakdown needs to look. There are, however,
some helpful guidelines for completion:
Break down the work until accurate estimates of cost and resources needed to
perform the task are provided.
Ensure that clearly defined starting and ending events are defined for the task. This
may correspond to the production of a deliverable or the occurrence of an event.
Verify that the lowest level tasks can be performed within a reasonable period of
time. If the time period to complete a task is too long, an accurate project status in
the implementation phase may not be possible. An industry standard rule of thumb
is to make work packages that can be completed in timeframes of two elapsed
weeks.
Verify that people who work on the project are all assigned a WBS task. Have a
firm rule: if the task is not on the WBS, it is not worked on.
BL
O
VI
The WBS evolves over the course of planning. It is highly probable that it will evolve as the scheduling,
estimation, and resource allocation portions of the plan are completed.
CI
The WBS has multiple uses. It is both a task list for planning and a structure for providing report status
during the implementation phase. As individual low level tasks are completed, the project progress is
assessed. It also serves as a useful management communication tool by which results can be compared
with expectations.
NA
One of the difficult parts of talking about projects generically, is the wide range of such projects. Typically,
in a small project, there is a single project development phase. In large or complex systems, however,
there are often multiple phases, which are then grouped into projects, and these can be grouped into a
program.
Sometimes these phases or projects are driven by the need to achieve certain levels of functionality prior
to the availability of the complete solution. Other times, the projects are defined to partition the
development effort and to reduce the risks associated with larger project efforts.
AN
For large systems, the decomposition of the system into smaller components needs to be done early in the
initiating process. The rationale for the decomposition must be known; otherwise, different results derived
from different reasons for the system decomposition may occur. For example, if a project is defined simply
to accommodate user needs, the project may cross multiple functional areas of a system. If, on the other
hand, a system is divided into phases simply to reduce risk, a functional division might occur where the
projects represent completion of entire functional areas of the system. The way in which the projects are
handled differs widely.
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Define Task Relationships
If a project is broken down into phases, be sure that the WBS reflects this.
BL
O
Then, break the WBS down by deliverable. The WBS denotes a hierarchy of task relationships. Subtask
completion eventually rolls up into task completion, which ultimately results in deliverable completion,
phase completion and project completion. If the tasks are not organized efficiently, it becomes difficult to
schedule and allocate resources to the tasks.
Defining Deliverables
Deliverables associated with the project are shown in the WBS and are reflected in the Work Product
Identification (WPI) portion of the Project Plan. A sample of a WPI template is shown below. All
deliverables are listed in the order of planned development. As the schedule is created, the due date is
filled in. The responsibility for the deliverable is assigned as it is known (typically when the organization
chart is defined). The date delivered is a field that is filled in as deliveries are made.
VI
Over the course of the project, a comparison of the due date and the date delivered provides one metric
for how well deliverable dates are met by the project team.
Work Product Identification

Due
Date
4/1/96
Date
Delivered
Author/
POC
G. Brown
8/1/96
G. Brown
8/1/96
11/1/96
A. Jones
B. White
12/1/96
1/30/97
L. Brass
A. Jones
AN
NA
CI
Product
Name
Requirement
Specification
Design
Specification
Test Plan
Implementation
Plan
Source Code
Test Report
While the deliverables list is a compilation of information identified in the WBS and the project schedule, it
is useful to maintain a separate list since delivering deliverables on schedule is so important. Separate
tracking of deliverables can help keep a project on track. It also serves as a useful communication tool for
defining the status of the project.
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Development of a Project Schedule
BL
O
The following PERT chart is designed to clearly show the relationships between the tasks. It is an
extremely valuable planning tool if the sequence of events is quite complex. However, using the PERT
chart makes it difficult to show progress and to communicate with the Steering Committee at a high level.
The chart should be used only when the audience needs a detailed understanding of the task
relationships.
AN
NA
CI
VI
Sample PERT Chart
Release: 2.0
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BL
O
Typically, a GANTT chart (or bar graph) is adequate. These schedules are two-dimensional
representations that show the tasks and the timeframe for completion. Since task interrelationships are not
easily shown on a GANTT chart, it is considered a weak planning tool for very complex information
technology projects. However, the GANTT chart is very common for reporting status and for defining the
schedule. A sample GANTT follows.
Sample GANTT Chart
Task Name
Plan Network Infrastructure
Duration
40 d
Determine Current Environment
9d
J
Work
1/3 1/10 1/17 1/24 1/31
40 d
Establish General Req's
20 d
20 d
Create Conceptual Diagram of Network
11 d
11 d
55 d
41.5 d
1d
1d
Install LAN in Admin
Get Bids on Wiring and Equipment
Order Wiring, Hub, PCs, Servers, etc.
Install Wiring
Receive and Store Equipment
Install Equipment
11
Setup and Install Network Software
12
13
1d
22 d
22 d
2d
0.5 d
1d
1d
1d
4d
Setup Individual Workstations for Network

Access
Train Users
3d
12 d
58 d
123 d
2d
10 d
4d
10 d
Define Training Requirements
15
Develop Training Plan
16
Develop Training Materials
20 d
40 d
Conduct Training Sessions
3d
63 d
17
NA
14
3/7
M
3/14 3/21 3/28
A
4/4 4/11 4/18 4/25 5/2
5/9
M
5/16
2/11
0%
2/26
0%
2/12
0%
2/15
0%
CI
9
10
1d
0%
F
2/14 2/21 2/28
VI
1/14
9d
2/7
ID
1
3/17
0%
3/19
0%
4/1
0%
4/26
0%
0%
4/29
2/15
0%
2/19
0%
3/19
0%
5/4
AN
Define Precise and Measurable Milestones

Key events are often denoted by milestones. These events typically have no duration. For example,
deliverables often are represented as milestones, while the effort to produce the deliverable is referred to
as a task.
While milestones are unique to each project, some example project milestones are shown below:
Requirements Approval
Phase Review Approval
Prototype Approval
Design Reviews Complete
Code Reviews Complete
Unit Test Complete
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Integration Test Complete

Acceptance Test Complete
System Acceptance by User
Order Hardware
Hardware Shipment
Hardware Arrives
Documentation Delivery
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Milestones can occur at the end of almost any work package in the WBS. Major project milestones should
and included in the project plan and schedule.
For contracted work, milestones are often used as a point in the project where interim payments might be
made. If this approach is used, mutual agreement is necessary on the content of each milestone and the
cost associated with that milestone.
Steps to Creating a Project Schedule
VI
Activity sequencing involves dividing the project into smaller, more manageable components (activities)
and then specifying the order of completion. The Activity List form is a valuable tool for initially creating
the WBS, and then by completing the remaining columns, a Project Schedule can be completed.
CI
Activity List (Sample)

Work Breakdown Structure
Provide an activity list (work breakdown structure) that describes each task required by the project
Activity Name Description
Design System Architecture
10
80
9/1/XX
Develop System Development
20
160
10/1/XX
2.1
Code Sub-routine
10
80
2.2
Integrate Sub-routine
10
80
Testing System
10
80
11/6/XX
NA
Activity #
Roles
Elapsed
Days
Work
Hours
Start Date
Installation State Rollout
35
320
12/15/XX
4.1
Pilot Installation
10
120
12/15/XX
4.2
Statewide Installation
20
200
Dependency
X-Ref
Detailed Design
1FS
Software Code
Completed Accept.
Test of Doc.
1/15/XX
4.1 FS + 5 day lag
Provide User Support
30
300
12/30/XX
4. FS
Provide User Training
10
80
12/15/XX
4.1 SS
Transfer System to Operations
16
1/30/XX
4.2 FS + 5 day lag
AN
Milestone
Installation
Certificate
Training Certificate
Legend
FS = The specific task must finish prior to starting the identified task.
SS = Two identified task start at the same time, but are not linked to finish at the same time.
FF = Two identified task finish at the same time, but are not linked to start at the same time.
Blank = Task has no dependency
Lag = Additional days can be added for reserve to ensure project stays on schedule.
X-ref = To your Assumptions
Activity # = the reference number of the activity, task and subtask

Activity Name Description = A short description of the activity or task
Roles = Roles or positions assigned to the task
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Section 3 - Page 14

Elapsed Days = Calendar working days of the task from beginning to end; duration
Work Hours = Person hours associated with the tasks; used to calculate task cost
Start Date = Planned start date of the task
Dependency = The type of relationship this task has with other tasks in the project
Milestone = A key event in the project related to the completion of this specific task
Xref = A place to reference to an assumption that further explains this task, its hour, duration, etc.
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Estimate Task Duration
Estimating task duration is one of the most challenging aspects of project planning. It is also a key to later
cost estimation. This is a process that occurs throughout the planning process.
With defined task durations, the team knows what to expect and what is expected of them. Task duration
is frequently underestimated. Inaccurate estimates can result in an increase in the "frenzy level" of a
project. The frenzy escalates as sponsors scramble for more money, and/or the technical staff scrambles
to complete a project in an unrealistic timeframe. Often, the end result is cutting corners, excessive
overtime, and a dissatisfied user.
VI
The estimation process is complex because activity duration is affected by numerous variables that must
be dealt with concurrently in the planning phase. Some of these variables include staff availability, the skill
level of the person assigned to the task, unexpected events, efficiency of work time, and mistakes and
misunderstandings during the development of the project plan.
CI
When estimating the duration of a task, reality is a major factor. The knowledgeable scheduler takes into
account absenteeism, meetings, discussions, and interaction among the staff. No one is 100% productive
every hour of the workday. If a scheduled task assumes 100% productivity, the schedule rapidly falls
apart. A successful schedule builds these types of factors into the duration estimate.
NA
There are several techniques that support task duration estimation. The most common technique is based
on the historical experience of a similar scope of work previously performed. Collected and archived
historical project data are used successfully by many organizations to achieve quality performance on
project deliveries. The database of Post Implementation Evaluation Reports maintained by the agency
and OIT should have a wide range of project schedules plans and standards to review in developing your
project schedule.
AN
Historical records greatly support both the duration and the cost estimations that are so important in this
phase. Data based on current staff skills are far more valuable than generalized industry estimates. If
historical data does not exist, seek the advice of experts and others who have completed similar tasks.
When historical data or experts are not available, use a technique of getting estimates from multiple
sources, comparing results and estimating the duration based on the multiple inputs. The nature of this
method is predicated on finding good sources for providing the estimates.
Remember to always base your estimates on some easy-to-understand quantifiable parameters, for
example:
Documents to be prepared: number of pages assumed in the document times minutes per page
Proposals: number of proposals to be evaluated times average number of pages times person
hours per page
Release: 2.0
Section 3 - Page 15

Requirements: number of functional specifications, or number of technical specifications times

person hours per requirement to generate and review
Tests: number of user tests, string tests, stress tests, times person hours per test
Training: number of people to be trained times hours of training plus preparation and coordination
Meetings: number of meetings times people involved times length of meetings. Be sure and
include travel time and preparation time.
Configuration Management: estimated hours per week to include all time for change control
board, documenting changes, issues and versions, completing analysis, and updating all
associated files. Can range from .5 to 5% of total budget.
Quality Assurance: number of reviews times person hours of review time. Include all involved
personnel in your estimates.
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Estimating using these techniques will improve the accuracy of the estimates and improve the
communications between the planning team, the Steering Committee and the stakeholders.
VI
Define Priorities
CI
Clearly defining the task priorities helps to resolve any scheduling and/or resource conflicts.
Understanding the priorities and relationships of the tasks assists in resolving difficult scheduling conflicts.
Define the Critical Path
AN
NA
The critical path is the longest path through a project. It determines the earliest possible completion of the
work. The critical path is carefully managed because if critical path tasks slip, the entire project is delayed.
In order to manage the project, the project manager determines the critical path and remains aware of its
importance throughout the implementation of the plan.
The successful scheduler considers availability of both labor and non-labor resources. Equipment
availability on a long lead item often drives the critical path of a schedule. If installation equipment is
required, for example, and the equipment cannot be delivered for six months, the installation phase is held
up for that period of time.
Document Task Relationship

After the WBS has been created, the tasks of each major section should be ordered into their logical
sequence. Then, if tasks are dependent on each other, the task dependencies should be indicated. That
is, if one task must be completed before another, then the first is a predecessor to the second, and the
second task is a successor to the first. This relationship would be a Finish-to-Start relationship, i.e., the
first task must finish before the second task can begin.
Other task relationships include:
Start-to-Finish: this task must start before the previous one can finish. A lead time can be added
to indicate that this task must start x days before the previous task finishes.
Release: 2.0
Section 3 - Page 16

Start-to-Start: this task must start at the same time as the other task plus or minus lead time.
Finish-to-Finish: this task must finish at the same time as the other task plus or minus lead time.
Document Assumptions
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Documentation of the assumptions made in developing the project schedule are critical to the later
success of the project. Without clear documentation of these assumptions, later changes to the schedule
are very difficult and risky.
If, for example, a schedule was shortened because it was assumed that a highly skilled person would be
performing the work, that assumption should be documented. Then, if a less skilled person is actually
assigned to perform the task, the project manager can recognize the risk and make necessary changes
and decisions. Without documentation of the assumption, the schedule could be later placed at serious
risk without the project manager realizing it.
Review the Results
VI
The development of a schedule requires input from more than one person. No one possesses all the
knowledge or understanding of all the factors that affect schedules in every aspect of a project. Schedule
review also prompts buy-in to the schedule.
AN
NA
CI
Once an initial cut at the schedule is ready, a team should perform a review. Determine if there is a
common understanding of what has to be done. Get their independent estimates as to how long it will take
to do the job. Where there are significant differences between the current schedule and new estimates,
review and revise the schedule estimates.
Release: 2.0
Section 3 - Page 17

Budgeting
Overview of Project Budgeting
Paralleling the development of the schedule is the development of a detailed project budget. This budget
should include all internal and external costs including contractors, hardware, software, travel and other
related expenses. The steps associated with budgeting are highly dependent on the estimated length of
tasks and the resources assigned to the project.
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Budget estimates are refined in the planning process until they are baselined at project start-up. Budgeting
serves as a control mechanism where actual costs can be compared to the budgeted costs. The budget is
often the most important parameter in the execution of the project. When a schedule begins to slip, cost is
proportionally affected. When project costs begin to escalate, revisit the project plan to determine whether
scope, budget, or schedule needs adjusting.
Identify Cost Factors
VI
To develop the budget, the applicable cost factors associated with the project tasks are identified. The
development of costs for each task should be simple and direct and consist of labor (internal and external),
material, and other costs. Cost of performing a task is directly related to the personnel assigned to the
task, the duration of the task, the cost of any non-labor items required by the task, and any allocated
indirect cost.
CI
Generally budget estimates and associated assumptions are obtained from experts. Experts may be
internal or external. This provides the expertise required to make the estimate and provides buy-in and
accountability during the actual performance of the task.
Determining work hours is the single most difficult part of deriving a cost estimate. The costs should factor
in vacation time, sick leave, breaks, meetings, and other day-to-day activities. Not including these factors
jeopardizes both scheduling and cost estimates.
NA
In calculating the cost of labor, be certain to burden the costs appropriately for your organization.
Burdened cost typically refers to the overhead and general expenses associated with an employee. These
costs are beyond strict salary expenses (e.g., office space, benefits, etc.).
AN
Non-labor charges include such items as material costs, reproduction, travel, and cost of capital (if leasing
equipment), computer center charges, and equipment costs.
Project Estimate Summary Worksheet

For large systems, a project management tool is typically preferred for cost estimation. A Project Estimate
Summary worksheet is another simple tool for costing and can be useful if completed prior to entering
information into a tool.
Costs are assigned to the lowest level WBS work package task. These costs are then combined to
determine a sub-task cost. In turn, these are combined to determine the overall task cost, which can be
summed to find the total project cost. This is an example of bottoms-up estimating, since we are
estimating at the bottom and then rolling up the totals.
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Section 3 - Page 18

Budgeting
Instructions for the Project Estimate Summary Worksheet
Task Number
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The number corresponds to the activity number reflected on the activity list and schedule. The numbering
sequence is an outline format. Few projects require lower than three levels of sub-tasking. Each task
structure should include deliverables and milestones.
Project Tasks
Task
1.1
Sub-Task
1.1.1
Work Package or second level of subtask
1.1.1.1
Third level
1.
VI
Task and Activity Name

The projects task and activity name is a brief description. This task description should remain consistent
throughout the project plan.
CI
Project Tasks
Project Design
1.1
Develop Functional Specifications
1.2
Develop System Architecture
1.3
Develop Preliminary Design

Specification
NA
1.
AN
The remainder of the columns pertain to cost and hour details relative to a specific activity. The cost
categories include: labor, material, travel and other.
Always start your cost analysis at the lowest level and total the lowest level tasks to the next level. All
x.x.x would be added together to determine the value of x.x and all x.x level tasks would be totaled for
x level. Finally, all x level totals would be totaled to get project total.
The project may require more than one line to complete the budget when multiple salary rates are used to
determine labor cost for an activity. Labor cost is derived by multiplying labor hours by the labor rate.
The project manager may either use an aggregate rate or specific multiple rates. For example, committee
meetings could have a standard hourly rate which includes the rate for each attendee. The costs for each
task should be totaled and put in Total per Task.
Release: 2.0
Section 3 - Page 19

Budgeting
AN
NA
CI
VI
BL
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The following is a sample of a Section of a Project Estimate Worksheet.
At the end of the form is a line for risk totals. Risk allowances are added to the project in terms of
Schedule (adding more time) and Cost (adding additional cost to estimates). A project manager can do
this in two ways: adding time and/or cost at the activity level; or adding time and/or cost at the end of the
project. This information should come from your Risk Analysis Worksheet, which will be discussed in
subsequent sections.
Release: 2.0
Section 3 - Page 20

Budgeting
Project Estimate Summary Worksheet Sample

Prepared by:
Customer:
H.A.T.
MDOT
Date: 9-9-1999
Project:
WBS
Labor
Hour
Project Task
:
Define Requirements
624
5.1
Define Functional Requirements
528
5.1.1
Conduct JAD Sessions
5.1.1.1
Schedule Sessions
5.1.1.2
Prepare for Sessions
5.1.1.3
Facilitate Meetings
5.1.1.4
Attend and Participate
5.1.1.5
5.1.2
Labor
Rate
Labor
Cost
24200
Material
Cost
Travel
Cost
300
20040
5.0
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MGT System
12000
Total per
Task
2500
27000
2500
22540
2000
14000
30
240
240
24
40
960
960
24
40
960
960
240
38
9120
Document JAD Meetings
24
30
720
Prepare JAD Document
208
NA
CI
VI
320
Other
Cost
8040
2000
11120
720
500
8540
Prepare Documents for Review
80
40
3200
3200
5.1.2.2
Schedule Review Meetings and

Distribute Document
30
240
240
5.1.2.3
Review the Documents
80
38
3040
39*
1560
1560
3824
3824
AN
5.1.2.1
500
3540
5.1.2.4
Meet to Gain Sign-off
40
5.2
Define Technical Requirements
88
5.2.1
Review Missouri Architecture

Guidelines
16
42
672
672
5.2.2
Review Current System

Architecture
16
42
672
672
5.2.3
Review Agency IT Plan
16
42
672
672
5.2.4
Document Interface Points
42
336
336
Release: 2.0
Section 3 - Page 21

Budgeting
Labor
Hour
Project Task
Labor
Rate
Labor
Cost
Document the Technical

Requirements for New Application
16
42
672
5.2.6
Review the Technical

Requirements
16
50
800
5.3
Prepare Consolidated
Requirements Documents
:
:
42
336
Other
Cost
Total per
Task
672
300
800
636
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VI
Other:
Travel
Cost
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5.2.5
Material
Cost
WBS
Sub-Totals:
Risk (Reserve) From Risk Analysis

Worksheet
76,120
698,526
NA
TOTAL (scheduled)
622,406
Comments: (List assumptions for costs as appropriate.)
AN
* Blended Meeting Rate
Release: 2.0
Section 3 - Page 22

Budgeting
Document Assumptions
As with developing a project schedule, documenting assumptions made while developing the project
budget is critical to the success of the project. Without clear documentation of these assumptions, tracking
to the budget is very difficult.
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If, for example, a budget assumed that the material would be acquired at one price rate and only
substantially higher cost material was available to perform the task, there would be a budget problem. If
the assumption is not documented, the project manager may inadvertently increase project cost and may
jeopardize chances for the projects success.
Review the Cost Estimates
Development of project budgets typically requires more than one person. Rarely, if ever does a single
individual have the knowledge and understanding of all the factors affecting every aspect of a project.
VI
Upon completion of a draft budget, interview the team and other experts and determine if the work
descriptions, schedule and associated budgets are complete and reasonable. Get independent estimates.
Where there are significant differences, determine the reasons and either redefine the work packages,
schedule, and budgets or review and reiterate the estimates. The total labor days per phase should be
checked against the rule of thumb that suggests the following distribution of development project effort and
cost:
CI
40% for planning and design

20% for development
40% for testing
NA
It is helpful to get buy-in on the budget from the people who will actually perform the work. Participation
results in having a stake in the project's success and fosters accountability.
Estimated Cost at Completion Report
AN
A sample of one type of budget report, which would become part of the Project Plan, is the EAC or
Estimated Cost at Completion. It reflects the anticipated cost and hours of the planned project.
WBS
No.
Activity Description
Estimated Cost at Completion Summary

Analysis in Hours
Budget
Hours
Actual Hours
Analysis in Dollars
Est. to
Complete
Est. @ Variance (+
Complete
= More)
Budget $
Actual $
Est. to
Est. @
Variance
Complete Complete
(+ =
More)
1.0
Define Requirements
430
430
430
17,780
17,780
17,780
2.0
Prepare RFP
572
572
572
22,880
22,880
22,880
3.0
Issue RFP and Evaluate

Vendors
433
433
433
17,320
17,320
17,320
72
72
2,880
4.0
Close-Out
TOTAL
1,507
72
2,880
1,507
60,860
2,880
60,860
The Estimated Cost at Completion Summary is also used as a status reporting document to the Steering
Committee and will be further discussed in Section 5.
Release: 2.0
Section 3 - Page 23

Configuration Management
For our purposes, Configuration Management includes the processes, procedures and tools to control
project deliverable(s) in terms of release and revision; to monitor project scope against the baseline; and
manage approval on any change to the baseline, e.g. product and project scope. It also includes the
following other concepts and definitions:
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Control item is a project element that is considered a unit for the purpose of configuration management.
This includes such things as software modules, versions of software systems, the project design
document, the project plans, and so forth. A control item, sometimes referred to as a control element, is
anything under the control of the Configuration Manager.
Change control is the process of controlling, documenting, and storing the changes to control items. This
includes proposing the change, evaluating it, approving or rejecting it, scheduling it, and tracking it.
Version control is a process used to control the release and installation of versions. This includes
recording and saving each release and documenting the differences between the releases. Version control
applies to developed software, off-the-shelf software systems and any document that includes versions.
VI
Issue control or management is a process that provides a mechanism to document, research and
resolve issues that arise during project planning and execution.
CI
Action Item control is a process that provides a mechanism to document and track action items that
arises during project planning and execution.
Configuration Management Organization
NA
Effective configuration management requires an effective and well-defined configuration management role
and process. The configuration role is responsible for:
Defining who will be responsible for and have authority over configuration management
processes.
Setting standards, procedures, and guidelines for the full project team to follow.
Defining tools, resources, and facilities to be used for configuration management.
AN
This information is summarized in either a standard configuration management policy manual and/or in the
project Configuration Management Plan. The detailed configuration management information is
represented as a summary page in the Project Management Plan. The relationship of the Configuration
Management Plan in the Project Management Plan and the organizations Project Management
Configuration Management Manual is depicted in the figure on the following page.
Release: 2.0
Section 3 - Page 24

Project Management Configuration Management Summary
Project Management
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Configuration Management Manual

Person(s) responsible for Configuration Management:
(Should be represented on Organizational Chart)
How will CM be performed throughout the life of the project
Configuration
Management
Plan for
What is the repository for control items (both automated and paper)
Project XYZ
Date: 5/20/96
VI
How will project manager ensure that CM activities are done on a regular basis
CI
Configuration Management Plan
A sample Configuration Management Plan outline is shown below.
Sample Outline for a Configuration Management Plan

Configuration Management organization and resources
NA
1.
1.1
1.2
1.3
1.4
Standards, procedures, policies, and guidelines
AN
2.
Organization structure related to CM

Personnel skill level and qualifications for CM
Facilities needed
Equipment and tools used
2.1
2.2
3.
Configuration identification
3.1
3.2
3.3
4.
Diagram of information flow

Rules for documentation and approval
Method for defining control item

Method for configuration control
List of potential control items
Identification methods
(Naming and marking of document, software components, revisions, releases, etc.)
Release: 2.0
Section 3 - Page 25
5.
Submission and retrieval of control items
6.
Version control
6.1
6.2
Storage handling and delivery of project media
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7.
Preparation of software and documentation versions

Release approval procedure
Storage requirements (both automated and paper)
8.
Relationship to contractor configuration management (include their plan and procedures
if separate from state's processes)
Other information
9.
VI
Tasks During the Planning Phase
CI
During the planning process, the project manager defines the group or persons responsible for project
configuration management and defines the procedure and required resources for performing configuration
management. During the planning phase, the project team also identifies the control items. The goal is to:
Explicitly assign configuration managements authority and responsibility for the project.
Ensure that configuration management is implemented throughout the projects life cycle by
setting standards, procedures, and guidelines that are produced and distributed to the full
project team.
Ensure that project management has a repository for storing configuration items and
associated configuration management records.
Ensure that QA reviews the configuration management activities on a regular basis.
NA
AN
Relationship to Quality Management

Many of the issues related to configuration management are similar to the issues related to developing a
projects quality system. In fact, in software development projects, many of the tasks for quality and
configuration management overlap. For this reason, a clear definition needs to be established, even at the
planning stage, as to who will play what role.
Release: 2.0
Section 3 - Page 26

Authority and Responsibility
Every project includes some activity that requires configuration management. The responsibility for
configuration management is assigned in the project plan.
The configuration management authority and responsibility can be handled in the following ways:
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1. The state organization maintains a standard, enterprise-wide approach to configuration

management and has an identified group responsible for these tasks on all projects undertaken; or
2. The project develops a sub-team within the project management structure to perform the
configuration management. This team may be assigned to the project on a full-time or part-time
basis depending on the size of the project.
3. Contracted services
In all cases, both the authority and the responsibility for all roles and activities must be clearly defined.
Control Items
VI
During the early stages of project planning, the person responsible for configuration management and the
project manager defines the elements placed under configuration control. The list of control items is not
standard. The best place to start is with the Activity List or Work Breakdown Structure. Typically, all major
deliverables are controlled.
CI
Some of the more specific considerations include:
Hardware configuration, system architecture, and communication diagrams.
Software, code, design documents, testing plan, and software review data.
The Project Management Plan (schedules, budgets, contracts), support function plans, and
correspondence and other documents necessary to recreate a project.
NA
Requirements document, RFP, documentation, training materials.
AN
Configuration Management Procedures

Procedures and tools are necessary to ensure successful implementation of a configuration management
process.
The plan also contains information on how the detailed procedures will be developed and specifies that
these procedures are in place by project start-up. Some key processes to be addressed in the procedures
include:
How do developers and project team members request and retrieve configuration control
items?
What are the numbering, sequencing, and data processes to be used?
Release: 2.0
Section 3 - Page 27

Does the project contain sensitive or security-driven data; if so, will the configuration
management meet the control requirements for this data?
Where is the location of controlled items, and how does the project team get access to them?
What items will be placed under automated control and what items will be manually controlled?
Will there be a change control board for this project, and how will they interface with the other
configuration management procedures?
What is the relationship to the quality assurance and quality control teams?
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The plan may also include diagrams and flow charts to describe procedures for submitting change
requests and for reporting problems.
Storage of Control Items
Ensure that the Project has a repository for storing Configuration Items and associated Configuration
Management Records.
VI
The configuration management environment includes the resources necessary for the implementation of
the configuration plan. This includes:
Configuration control tools:
Automatic version control and change control tools.
CI
Monitoring, reviewing, and registration of support utilities.
Storage facilities -- a safe repository for all approved configuration items, including:
On-site automated storage for the day-to-day development process.
NA
On-site paper storage for the day-to-day project for configuration control items that are
not stored in automated form.
Off-site storage for disaster recovery.
AN
Configuration Management is one area in which many automated tools exist. Automated configuration
control is best when used in a multi-user development environment, such as a LAN, to facilitate the
sharing of project information and data and to allow for consistent application of the configuration
management procedures. Controlled elements can be stored in a central database, and developer access
is managed from a central configuration control system. Without such a system, added manual controls
and additional tasks for the developers may need to be imposed. Multi-location development is another
environment that could be more easily handled with automated tools.
Configuration Management Goes Beyond Development

Configuration management is a process that continues beyond the project development cycle and into the
maintenance and operation phases. A project that has clearly implemented a successful configuration
management process adds to the value of the system once it reaches maintenance.
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Section 3 - Page 28

Quality Planning
Quality Process
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The quality plan identifies the procedures and activities that the project team defines, plans for, and
executes for quality. A detailed quality model should be maintained by each state organization, and this
model should describe the detailed quality procedures that are used for IT projects. The following model
defines a quality assurance process that is consistent with ISO (International Standards Organization)
9000 standards.
Quality Assurance Model
Change Management
Functionality
Performance
Quality Attributes
Measurement
& Verification
Config. Management
Quality
Definition
Quality Process
Standards
Procedures
Methods, Tools,
Techniques
VI
Quality Definition
CI
PlanPlan
andand
Manage
Manage
Quality
Assurance
Quality
Assurance
Quality Management
Verify quality of solution being developed
NA
Quality
Assessment
Walkthrough
Reviews
Technical
Reviews
Verification &
Validation
Acceptance
Testing
Quality
Audits
Quality
Reviews
AN
Phase Reviews
Quality Assessment
Solution
Acceptance
Release: 2.0
Section 3 - Page 29

Quality Planning
Creating the Quality Plan
The state organizations quality model should be based on standards and procedures that enable the
quality manager to ensure quality throughout the life of the project by:
enforcing quality standards and procedures through formal reviews, walkthroughs, and
inspections
tracking and reviewing defects at each phase of the project
ensuring all approved project management activities are properly planned and executed.
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Most projects will not require a unique quality plan, but can be completed under the standard process.
For large or complex projects requiring a unique Quality Plan, it defines, tracks, and measures the
projects quality goals. The Quality Plan describes how the project implements its quality process and
defines the processes that will be taken to prevent and remove defects. It is important for management to
consider the quality goals early in the project and ensure that quality activities are integrated into the
overall project management plan.
VI
The quality plan identifies the role or roles is responsible for the quality assurance activities, identifies the
scheduled quality activities, and identifies the resources required to conduct the activities. Quality activities
are included in the project schedule as milestones and quality audits that require budgeting and staffing.
CI
Successful quality processes always strive to see quality through the eyes of the customer. The customer
is the ultimate judge of the quality of the product they receive. They will typically judge a project by
whether or not their requirements and business objectives are met. To ensure delivery of a quality product,
each phase of the project should ensure that requirements are addressed.
NA
It is important to include a process that validates that the currently defined requirements will be satisfactory
to the customer. It is counterproductive to develop a system that meets a documented requirement if you
and the user know that the requirement has changed. The change management process helps to control
the number of such changes, but quality processes must be in place in order to make changes when they
are necessary.
Responsibility for Quality
AN
Though the Project Manager has overall responsibility for the quality of the final product, every project
member needs to buy-in to the responsibility for doing quality work. Through ownership of the
organizations quality policy, the individual team members become the most effective way to implement
quality into products efficiently and completely. A quality policy cannot rely on adding quality at the end of
a process; it must be built into the work of each individual on the team. This is why it is important to see
Quality Assurance reviewing as a process. It is far more cost effective to have team members add quality
into their day-to-day jobs than to have a quality analyst find a problem after a process has been
completed.
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Quality Planning
Independence of the Quality Assurance Team
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The Quality Assurance team assures that the quality plan is executed as planned. This quality team
reports functionally to the Project Manager, but must also have a reporting chain outside the project to
facilitate problem escalation. Problem escalation is the process of moving a problem to a higher
management level if sufficient attention is not given by the project manager. The independent reporting
chain provides a check and balance on the project.
Checklist
Quality checklists are often developed as part of the quality procedure definitions. The checklists and
associated quality procedures are developed individually by each state organization and by each Quality
Assurance audit team.
References
AN
NA
CI
VI
The quality plan overview for the project is included in the Project Management Plan.
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Requirements Definition
Importance of Project Requirements
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Requirements definition in the Planning process is one of the most crucial steps in the process of creating
a project. Without well-defined requirements, managers cannot plan a project, developers and integrators
do not know what to build, customers do not know what to expect, and there is no way to validate that the
system as built satisfies the needs of the organization.
What is a Requirements Process?
The disciplined application of proven methods and tools to describe a

proposed system's intended behavior and its associated constraints.
When are Requirements Defined?
VI
System requirements evolve over time. At each stage planning or execution, additional information is
derived and documented. At the onset of the initiating phase, for instance, basic business needs are
expressed and documented. Over time, these needs are refined and developed into functional user
requirements and are later developed into detailed technical specifications.
CI
During project planning, product requirements must be understood in enough detail to develop project
budgets and define resources needed to implement the solution.
A project team should never commit to the project activities list, schedule, or budget to build something
product requirements are defined.
NA
At project startup, requirements are reviewed to ensure that they are clear and that the development team
has a full understanding of the requirements. Areas where additional definition is required are noted and
logged as action items.
AN
During the design phase of the System Development Life Cycle, detailed specifications are developed
based upon the product functional and technical requirements and the defined scope of the project. These
specifications are used to define the specific technical approach and implementation that will be used to
fulfill system requirements.
Requirements Specifications
The requirements specifications involve many layers of specification, but starts with a Business Problem
Statement within the Project Charter. This is a very high level document that describes the top level needs
that the solution must meet. The statements are high level and may be met by a combination of automated
and manual processes. For example, a Business Problem might be: The system must support timely
payment of invoices.
A functional specification describes the hardware and software requirements needed to perform defined
functions. It is based upon the Business Problem and further defines those business needs into technical
requirements. The functional requirements express more specifically how business needs might be met.
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For example: Invoices must be created weekly based on input received from the order processing
system.
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The functional specification defines requirements in terms of inputs, outputs, and behavior of the system.
External interfaces are also defined. Non-functional requirements and constraints, such as performance,
portability, standards compliance, and reliability are also defined in a functional specification.
Who Defines Requirements?
Requirements definition is a difficult task. People often have difficulty expressing needs without
immediately attempting to define the solution. It is also difficult to conceptualize how new automation will
affect a task that is currently being done manually or with older technology.
Requirements definition is also a communication intensive process, and, unfortunately, technologists and
subject matter experts have different vocabularies, backgrounds, and preferences. This makes the
specification process difficult.
VI
To successfully define the requirements of a system, the requirements process includes, and is focused
on, the intended users. There are various techniques that can be used to derive the requirements,
including interviewing users, observing users conducting their tasks, and holding Joint Application Design
(JAD) sessions, where users and analysts interactively explore requirements in a facilitated session.
CI
For more complex systems, prototyping of user screens and reports can help facilitate the communication
process. With a prototype, users can see samples of how the system operates, and the developers can
provide detailed information that the user group can comprehend.
Requirements Traceability
NA
The requirements process ensures that the requirements defined in the functional specification are carried
through the planning, execution, and testing phases. Requirements definition performed during the
Planning is always done at a very high level. The traceability process involves the following steps:
Develop requirements
table and indicate
source
Track requirements in
plan, design and
implementation
Develop tests to ensure

requirements are fully
met
AN
Decompose
requirements to
discrete statements
Throughout the SDLC, requirements traceability is facilitated by decomposing requirements from a

document format to a list or table format. Often requirements that are not decomposed result in some
ambiguities, such as:
Multiple requirements may be embedded in a single sentence.
Compound conditions to requirements may exist in a single sentence (i.e., and/or

conditions).
Requirements may not be testable or determined as met.
Requirements may be inconsistent.
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By placing each requirement as an individual statement that can be tracked and accounted for, the project
team can ensure that stated needs of the system can be traced. The first traceability can occur when the
WBS is completed. Each requirement is reviewed to ensure that there is a task defined for fulfilling that
requirement. Allocation of requirements to the WBS helps define the WBS element and indicates the
scope of work covered by the item. This definition allows for a more careful estimate of schedule, budget,
and resources in the planning phase.
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A sample requirements traceability table is shown below:
Project Requirements
Project Traceability Table
Product Scope Statement
Documents Product Specifications with appropriate cross-references to other documents.

SOW
Reference
Task
Reference
RFP
Reference
Requirement
VI
No.
1.
The system shall incorporate a well

defined help function
2.
Function key macros and /or other

shortcut techniques shall be provided
for power users
3.
The system shall require each user to

sign on to the system with a password
2.2.10
2.4.2
4.
The average response time to all

entries shall be 1/2 second or less.
5.
Any data item shall only have to be

entered once.
Completed Comments / Clarification
2.2.10
2.4.2
S01230
S01230
SSS 3.2.6.4
Yes
2.2.10
S01230.1
S01230.1
SSS 3.2.6.4
Yes
S01230
S01230
SSS 3.2.6.1
Yes
2.2.10
S01230.1
S01230.1
SSS 3.2.6.1
Yes
2.2.10
2.4.2
S01240
S01240
SSS 3.2.6.1
Yes
CI
NA
Specification
Reference
Yes
6.
7.
AN
8.
9.
10.
SOW = Statement of Work
Numbering each requirement with a unique identifier further facilitates reference to the requirement for the
purposes of contract, engineering, quality assurance, and project management.
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Where appropriate, columns can also be added that assign the requirement to a category for sorting. Also,
as the project progresses, there can be references to the test plans and procedures, and a compliance
field can be entered to define which requirements have been fulfilled and tested.
Approvals
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This requirements analysis process allows specific requirements to be uniquely identified and serves as a
common method between developers, customers, and the project management team. It facilitates general
communication, traceability, and provides a method for controlling requirements changes.
Requirements documents are approved by the project team, the users, and the Steering Committee.
Specifications are reviewed and baselined at the start of the project. Detailed specifications developed
within the project execution phase are rebaselined at approval to incorporate changes to the project
scope, of course, these changes must be approved by the Steering Committee.
Managing Requirements Changes
References
VI
A change control process is developed to ensure that the requirements of a project do not change
uncontrollably as discussed in Configuration Management.
AN
NA
CI
The Requirements Traceability Table, i.e. Project Requirements, is included in the Project Plan.
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Resource Planning
Overview of Resource Planning
Determining the Size of the Team
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Every organization has a limited number of resources to perform tasks. A project manager's primary role is
to find a way to successfully execute a project within these resource constraints. Resource planning is
comprised of establishing a team that possesses the skills required to perform the work, as well as
scheduling the non-labor resources (tools, equipment, and processes) that enable the staff to complete the
project.
The optimal size of a project team is driven by two principal factors. One is the total number of tasks to be
performed, and the other is the effort needed to perform the tasks.
In developing the schedule and assigning the resources, the project manager determines the optimal mix
of staff to activities. Doubling resources does not necessarily double productivity. For example, 365
engineers could not complete in a day a project estimated at one person per year. At some point, people
begin to get in each others way. The significance of the project duration, as well as each major activity's
duration, needs to be clearly understood and documented as part of the scheduling process.
CI
VI
Adding more people to an activity creates the need for additional communication and may also increase
the need for equipment or tools. Large teams require a significant amount of coordination and teamwork.
Sometimes a smaller team can accomplish much more than a larger one in a shorter period of time. The
optimal selection also depends on the personalities of the team members and the communication and
organizational skills of the project manager.
NA
Adequate and timely personnel planning contains cost overruns. Having personnel on-board when they
are not essential is extremely costly. It is important for the project manager to understand the size of the
required team needed to perform the work on a week by week basis. For this reason, significant effort
needs to be made in the planning phase to identify the resources required to complete each task. And
then determining when those resources are needed within the Execution process.
Determining Required Skills
AN
Finding available staff with the skills required to perform a task is critical to project success. For example,
some assumptions about the skills of the person performing the task are made by the project manager.
The skills of the people performing the work is directly related to the time it takes to perform a task.
In the planning process, develop a list of skills required. This skills list is then used to determine the type
of personnel required for the project and all the individual tasks.
During Start-up, project manager pragmatically assesses the skills of the available people for the project.
The project managers job is to determine the risks associated with the available skills and to build a plan
that realistically accounts for those skills. Unfortunately, skill level is not a yes/no factor. People have
varying degrees of skill, and the manager needs to determine the level of schedule adjustment that should
be made based upon the staff skill level. Significant issues should quickly be addressed by management.
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Resource Planning
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Identifying Required Non-Labor Assets
Where staff with the necessary skills are largely unavailable, the project manager and project sponsor has
the option to hire the necessary talent or contract services to perform the work or adjust the schedule
accordingly if agreed to in the Management Plan. Typically, these decisions are made early in the
planning process.
All project teams require the tools necessary to successfully perform the tasks assigned. In scheduling
resources, the project manager must ensure that both people and necessary equipment are available
simultaneously.
The need for adequate work space is often overlooked when planning a project. If a 15-person project
team is going to start work, there needs to be a facility to house the staff. Ideally, the team should be
placed in contiguous space to facilitate interaction and communication. By having everyone working in
close proximity, chances for project success are increased.
VI
In addition to workspace, equipment for the team should be included in the plan. Assuring the availability
of equipment at critical points in the project is key in planning a successful project. Also, technical support
for equipment and software should be identified at this point. Efficiency and morale are negatively affected
by non-availability of equipment information or support needed to perform a task.
CI
Define Resource Profiles
A staffing plan is developed for each project. For small projects, this may be simply stated as the
assignment of three people full time to the project throughout its six month duration. For more significant
projects, the staffing plan identifies when and how staff is brought onto and taken off the project team.
AN
NA
The chart and the graph on the following page are useful in the Project Plan for staffing projects and are
required to be included in the Project Management Plan. Both of these documents are also updated
during Execution and are used in Project Status Reports.
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Resource Planning
FTE Resource Loading

Wk. 1
Wk. 2
Wk. 3
Wk. 4
Wk. 5
Wk. 6
Wk. 7
Wk. 8
Wk. 9
Wk. 10
Wk. 11
Project Manager
SW Mgr
Sr. SW Eng.
SW Analyst
0.5
0.5
0.5
Config. Mgr
0.5
Tech Writer
0.5
0.5
Support
0.25
0.5
0.5
Steering Committee
.2
.2
.2
Sponsor
.1
.1
.1
.1
.1
PLANNED
5.05
5.6
8.3
9.1
9.8
POSITION
Wk. 1
Wk. 2
Wk. 3
Wk. 4
Wk. 5
TOTAL
Project Manager
0.5
0.5
0.5
0.5
0.5
0.5
0.5
0.5
0.5
0.25
0.25
0.25
0.25
0.25
0.5
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Programmer
Wk. 12
POSITION
.2
.2
.2
.1
.1
.1
.1
.1
.1
.1
8.35
8.55
8.35
8.55
8.35
9.8
8.1
Wk. 6
Wk. 7
Wk. 8
Wk. 9
Wk. 10
Wk. 11
Wk. 12
SW Mgr
Sr. SW Eng.
SW Analyst
Programmer
VI
Config Mgr
Tech Writer
Support
Steering Committee
CI
Sponsor
TOTAL
ACTUAL
DIFFERENCE
NA
Staffing Plan
10
PLANNED
Number of FTE's
AN
ACTUAL
0
01
02
03
04
05
06
07
08
09
10
11
12
Weeks
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Resource Planning
The previous chart and graph illustrates the planned number of people required by week for a project
team. Both of these charts will be used in the Execution Phase to depict how actuals might be applied in
the performance of the project.
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The graphic representation of the staffing plan helps to point out peaks and valleys in staffing that can
present serious project management problems. The project manager realistically determines how a
relatively consistent staffing level can be maintained. Particular attention is paid to releasing resources
when they are no longer needed on the project. It is unrealistic to assume that the project can go from a 5person to 10-person level of effort in a month and then return to a 5-person effort in another month.
Resource leveling is supported by many project scheduling tools, but requires the special attention of the
project manager in both the planning and the execution phases of the project.
Forming the Team
Project organization is used to coordinate the activity of the team and to define the roles and
responsibilities of team members. Project organization is needed for every IT project, and a project
manager must always be identified and active.
VI
Confusion and lack of productivity are the result of poor project organization. This is where many projects
run into trouble. A good organization facilitates communication and clearly defines roles and
responsibilities.
AN
NA
CI
There are numerous ways to organize a project, but projects require a unique organizational structure.
There are no standard organizational methodologies that every project should use. A sample organization
chart for a large project is shown on the following page, with the types of functions that are often assigned
to a project. Some projects update the organization chart to indicate those who will be attending the
project status meetings, risk meetings, and change control board meetings.
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Resource Planning
Sample High-Level Organizational Chart

For a Large Project
SM = Steering Committee
Meeting
RM = Risk Manager
CCB = Change Control Board
STM = Status Meeting
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Executive
Steering
Committee
STM CCB
Administrative
Support
Software Task
Manager
SM
Desktop
System
Designer
STM
Budgeting
Manager
Scheduling
Manager
Project Services
Task Manager
STM
WAN
Manager
CCB STM RM
Training
Manager
External
Contract
Programming
Staff
Documentation
Manager
Test Manager
Data
Conversion
Manager
LAN
Manager
NA
Development
Manager
Hardware / Comm
Task Manager
CI
Database
Designer
Configuration
Manager
STM
Project Resource
Task Manager
STM CCB
Users and Steering

Committee
also represented on CCB
User Subject
Experts
VI
Quality Assurance
SM
Change Control
Board
Project Manager
SM
Trainers
Programmer /
Analysts
Test
Team
Documenters
AN
The larger the project, the more critical the organizational structure becomes. In a small project, a single
team member may be responsible for several functions, whereas in a large project the functions might
require full-time attention. A very large project, for instance, often requires a deputy project manager. A
small project might have the senior technical staff member serving as a development manager. Definition
of the project organization is a critical part of the planning process.
Project complexity also is a major factor when organizing a project. For example, a project that includes a
large software development component typically includes a software development manager. This allows
for a concentration of resources on a high risk area. Unless a project is extremely small, it is useful to
organize the project into functional teams. This approach leads to idea synergy and improved
communications. The project manager is responsible for defining and selecting the team leaders. Team
leaders can off-load some of the work of the project manager and take responsibility for completion of
tasks. Team composition should be determined early in the planning phase.
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Project Management
Support Functions
While the project manager, in theory, is responsible for all of the management aspects of a project, rarely
can all of these tasks be performed by one person. In fact, some should not be performed by the project
manager due to the time consuming nature of the function. These necessary support tasks can be divided
into administrative and technical support functions and are shown in the following figure.
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Project Management Support Functions

Project Management
Planning / Organizating / Tracking / Reviewing / Leading
Administrative Support
Functions
Configuration
Management
Contract
Management
Procurement
VI
Testing
Technical Support
Functions
Document
Production
Quality
Assurance
CI
Relationship can be dotted or direct to PM, except

for QA, which should report outside of the project.
Administrative
Support
NA
The administrative functions are fairly obvious and can be further expanded to include scheduling and
budgeting in very large projects. Within the technical support functions, configuration management
ensures that changes to the product being developed are controlled; quality assurance monitors the
process of the product being developed; and testing or quality control verifies compliance of the product
being developed to the stated requirements.
AN
It is the project managers responsibility to organize the project support groups and to document their
planned activities.
Define Assumptions
Documenting the assumptions made in resource allocation is critical to the later success of the project.
Without clear documentation of these assumptions, later changes in the staffing are difficult and risky.
If, for example, a key person with a specialized technical skill was assumed in the plan, that assumption
must be documented. Then, if that resource is unavailable to perform the task, the project manager can
recognize the risk and make necessary decisions. Without documentation of the assumption, the plan is
open to serious risk without the project manager realizing it.
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Risk Management Plan
Identify Risks
A risk is any factor that may potentially interfere with successful completion of the project. Risk
management recognizes that a problem might occur. When a problem develops, the risk of it happening is
100%. By recognizing potential problems, the project manager can attempt to avoid a problem through
proper actions.
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Risks are inherently involved with scheduling resources. Sound resource planning makes allowances for
dealing with risks in one or more of the following ways:
The most recommended technique for risk allowance is to add an additional WBS task for
risk management/risk reduction, and financial reserves can be set aside to deal with
potentially delayed schedules.
Add time to those tasks where resources are known to be a problem. There is no rule of
thumb for this multiplier; it depends on the degree of risk and the overall impact that
resource problems can have on the project. The cost for this task would be derived from the
Total Risk Hours from the Risk Analysis Worksheet.
Add a percentage time multiplier to the schedule for specific individuals, particularly if new
technology is being used or if the person providing the estimate is extremely optimistic.
Remember that technical staff typically underestimates the time required to do any particular
task.
Where skill shortage is identified, add time and resources for training. By recognizing
resource shortfalls and providing the necessary training, a project manager mitigates some
level of risk.
CI
VI
Risk Management Process
NA
The procedure that the team will use to manage project risks is defined in the planning stage, documented
in the project plan, and then executed throughout the life of the project. Risk management deals with the
following risk phases:
Risk identification
Risk analysis, quantification and prioritization
Risk mitigation planning
AN
Risk response
The Risk Management Plan i.e. Risk Management Worksheet, documents the procedures used to
manage risk throughout the project. In addition to documenting the results of the risk identification and
analysis phases, it must cover who is responsible for managing various areas of risk, how risks will be
tracked throughout the life cycle, how contingency plans will be implemented, and how project resources
will be allocated to handle risk.
Project risks are identified and carefully managed throughout the life of the project. It is particularly
important in the planning stage to document risks and identify reserves that have been applied to the risks.
There are various areas that can affect a project, including:
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The technology used on the project
The environment in which the project is executed
Relationships between team members
How well the project fits the culture of the enterprise
How great a change will result from the project?
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Risk identification consists of determining risks that are likely to affect the project and documenting the
characteristics of those risks. Dont try to identify all possible risks that might affect the project, but focus
on those likely to affect the projects success.
Responsibility for Risk Identification
VI
All members of the project team can identify risk, but the project manager has overall responsibility. The
project manager is responsible for tracking risks and for developing contingency plans. Sometimes a risk
identification brainstorming session can help in the initial identification process. Such meetings help
team members understand various perspectives and can help the team members better understand the
big picture.
Risk identification begins in the early planning phase of the project. A Risk Management Worksheet
(shown later in this section) is started during the planning phase. Then, as scheduling, budgeting, and
resource planning occur, the worksheet is updated to reflect further risks identified in the planning stage.
CI
At project startup, the Risk Management Worksheet is reviewed again, and any new risks are added to it.
As the project progresses, members of the team identify new risk areas that are added to the Risk
Management Worksheet. Also during the project, risks identified earlier may be removed.
AN
NA
Risks are documented so that contingency measures can be taken to mitigate their effects. Risks to both
the internal and external aspects of the project should be tracked. Internal risks are those items the project
team can directly control (e.g., staffing), and external risks are those events that happen outside the direct
influence of the project team (e.g., legislative action).
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Risk Management Worksheet Instructions
The risk categories/events shown on the Risk Management Worksheet are provided for guidance, and do
not represent an exhaustive list of risks. The risk categories/events should be customized for each
individual project.
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The project manager, with the support of the project team, then evaluates each risk event for the following:
Loss Hours:
Indicate the expected increase in hours that will occur if the risk event occurs.
Probability:
Use the probability field to quantify the chance of the event taking place. Use a decimal value from 0 to
1 (e.g., .70).
Risk Hours:
Previous Risk Hours:
VI
This field represents the estimated risk for this event. The field is calculated by multiplying the loss and
the probability fields.
CI
This field represents the value of risk hours reported in the previous period of the Execution Phase. A
difference between this value and the current risk hours indicates a change in the risk status and is
used to alert management that a change has occurred.
Preventative Measures and Contingency Measures:
NA
The next two columns document the planned preventative and contingency measures that could
minimize the effect of the risk event. The measures shown in the next figure are representative of
common contingency measures, but are not an exhaustive list. The project manager should provide
specific contingency plans for the specific project.
Responsible Person:
AN
The individual assigned to track, report on or manage this specific risk.

Comments:
The comments column should be used to document items such as a change in value of risk hours from
the previous period, management actions needed to contain risk, and status of preventive and
contingency plans.
Total:
The sum total of values in column four is the total risk hours for the project and should be reported in
the project plan. This total should be multiplied by a blended rate for personnel and included in the
WBS, Schedule and/or Project Estimate Summary Worksheet.
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Contingency Planning
Contingency plans are developed as a result of a risk being identified. Contingency plans are pre-defined
action plans that can be implemented if identified risks actually occur. If a problem actually occurs, the
contingency plan must be implemented and reserves must be allocated.
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As a guideline, contingency plans are developed for the top five risks associated with a project. For large
projects the top five risks of each major sub-system may be actively tracked. To properly implement a
plan, a reserve is usually required where dollars and/or time are held by a project manager to apply to the
execution of a contingency plan. Such contingency reserves are discussed in the appropriate sections of
planning. Without maintaining a reserve, the project manager is forced to go back for additional time or
dollars for every risk as it becomes a problem. It is far more desirable to maintain a level of reserve where
problems can be dealt with from within the original budget and schedule of the project.
AN
NA
CI
VI
There are some situations where nothing can realistically be done to prevent or deal with a risk. In this
case, the project must be managed in such a way that the probability of the event occurring is minimized.
If the event does occur, the project manager must replan the project and include the effect of the problem.
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Risk Management Worksheet
A description of all risks identified for the project, the probability of the risk occurring, the impact of the risk on the project, and the suggested
mitigation activities.
Last Risk Assessment Date:
Risk Category/
Event
Loss
Probability
Hours
Risk
Hours
Previous
Risk Hours
Preventive
Measures
Personnel
200
.10
20
400
.25
100
100
100
.25
.15
25
15
Equipment
3
4
Delivery date slip
Infighting
150
.2
30
Unacceptable
working
environment
200
.3
Third party
involvement
300
Customer
availability
250
Insufficient
configuration
300
13
3, 4
3, 4
60
.1
30
14, 15
.25
63
7, 16
NA
AN
.2
60
Responsible
Comments
Person
Development
Manager
5, 6
Customer
Logistics
Multiple
customer
sites
1, 2
VI
Lack of
knowledge in this
hw/sw
Insufficient
resources
available
CI
Contingency
Measures
Ref
Prepared by:
29
Development
Manager
Purchasing
Technical
Architect
Project
Manager
Project
Sponsor
Steering
Committee
Project
Sponsor
20, 21, 22
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12
Customer
people on
team
Other
Probability
Risk
Hours
Previous
Risk Hours
Preventive
Measures
Contingency
Measures
200
.2
40
20, 21, 22,

23
200
.2
40
24, 25
300
.3
90
26
573
TOTAL RISK
HOURS
Responsible
Comments
Person
Project
Sponsor
Project
Manager
Project
Sponsor
$22,920 at $40 average hourly cost
AN
NA
Risk Reserve
BL
O
11
Physical
separation of
team and
customer
Organization
Team > 10
Loss
Hours
10
Risk Category/
Event
VI
CI
Ref
Release: 2.0
Section 3 - Page 47

Suggested Preventive and Contingency Measures
16.
17.
18.
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O
NA
19.
20.
21.
VI
8.
9.
10.
11.
12.
13.
14.
15.
Provide appropriate training.

Hire trained specialists.
Install temporary hardware.
Utilize internal hardware temporarily.
Purchase additional equipment.
Implement product functionality in a phased manner.
Get agreement on who has decision authority; designate key user
responsibility.
Locate project team in our offices.
Negotiate better environment.
Ensure that all the resources are provided.
Suggest/sell Functional Specifications before development.
Unilaterally develop Functional Specifications.
Adjust deadline and get our customer buy-in.
Do not commit to third-party performance.
Get third party commitment at least equal to (if not more than) our
commitment.
Get customer commitment to participate in the project.
Increase estimates for the related tasks.
Do not commit to response time unless absolutely necessary and,
then only if a study is done by knowledgeable persons.
Establish access to product support personnel.
Hold regular meetings with customer.
Maintain constant written and oral communication with remote
personnel.
Visit remote sites as needed.
Demonstrate incremental results.
Divide staff into teams and assign team leaders.
Dedicate our management resources.
Establish final authority of our project manager.
Use proven hardware for development if possible.
Reduce functionality to meet deadline.
Document our assumptions and understandings and get Customers
sign-off before investing substantial resources.
Design an alternate (contingent) solution strategy.
CI
1.
2.
3.
4.
5.
6.
7.
AN
22.
23.
24.
25.
26.
27.
28.
29.
30.
Release: 2.0
Section 3 - Page 48

Category
Risk
Risk Identification Summary

(Top Five Risk)
Prob
Imp
Personnel Availability
High
Med
Personnel developing the system did not

participate in the design effort, resulting in
less understanding of the system
functionality.
Ensure that specifications/overview

documents contain sufficient information
to allow new personnel to understand
system.
Personnel Skills
Low
High
Personnel assigned to project will not have

skills to perform work
Since contractor provided quality

personnel in design effort, anticipate that
skills will be met.
Schedule
Med
High
Completed system (i.e., the system ready

for use) not delivered within 18 month
timeframe.
Break project into smaller segments to

ensure schedule being maintained.
Cost
Med
High
Proposed budget does not reflect all

required activities.
Review costing to ensure that all state

organization activities reflected.
Change Control
Med
Med
System requirements will change during

the development time.
Ensure that a change control process is

established that limits changes to those
essential to business
VI
AN
NA
CI
Legend
Prob = Probability of Occurrence
Imp = Impact
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MANAGEMENT
Mitigation Approaches
Release: 2.0
Section 3 - Page 49

Project Plan Format
The Project Plan Template
The project plan forms the basis for all management efforts associated with the project. This plan
template emphasizes documenting only the pertinent information associated with the plan. The blank
forms for the project plan are provided in Appendix B: Forms. The forms are actually WordTM and ExcelTM
documents which are available for download from the Office of Information Technology.
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The plan does not require verbose textual content filled with boilerplate material. Information associated
with detailed procedures for executing such processes as technical development, configuration
management, and quality assurance should be documented in the state organizations policy manuals.
For example, the configuration management information contained in the plan only references a procedure
document that defines the specific activities and responsibility for each configuration item. The project
plan may only summarize who is responsible for the configuration management activities, what is under
configuration control, and where the repository will reside.
Plan Approval
VI
It is important that project plans are approved prior to beginning a project. These approvals should be
located at the beginning of the plan to emphasize support for the project plan. In the template format,
approval signatures are included on the cover of the plan, as shown below. In some cases, this approval
page may need to be modified to include the appropriate signatures.
CI
Project Management Plan Approval Signatures Form
AN
NA
Project Management Plan

Project Name: Document Handling System
Date: August 1, 2000
Plan Release #: 1.0
Project Manager: John Smith
Approvals:
John Smith
Betty White
Project Manager
Prime Contractor Manager
Tom Snow
Steve Brown
State Organization Management/Steering Committee Chair.
Faye McNeill
Oversight Manager
User Management
Peter Chan
Project Sponsor
CIO -(if Applicable)

The above signatures represent agreement with the attached plan including agreement with the activities,
the risks, the effort and the cost of the associated project.
Release: 2.0
Section 3 - Page 50

Project Plan Format
Project Summary
Following the approvals page, there should be a project summary that defines:
The project goals, objectives and success factors.
The estimated value of the project.
The duration of the effort.
The purpose of the project.
Major dependencies/constraints.
The Project Summary and Project Charter are maintained over the course of the project. It
needs to be updated with each new release of the plan.
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Page 2 of the Project Summary includes points of contact and prime contractor information.
AN
NA
CI
VI
The following two pages show a completed sample project summary from the template.
Release: 2.0
Section 3 - Page 51

Project Plan Format
1. Project Summary (Sample)
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Information in the project summary areas was started during the project initiating phase and should be included here
Document Handling System
State
Organization:
MDA
Prime
Contractor:
Vision Quest
Current Stage
of
Project:
Development Life Cycle (Design, Development, Integration, Testing or Implementation)
Yes
:
No
:
August 15,
20XX
Submitted
By:
John Smith
Date Awarded:
June 30,
20XX
Project is
withi
n
Budget
:
X Details are on page
Yes:
No:
Comments:
Please answer the following questions by marking Yes or No and provide a brief response
as
appropriat
e
Included additional activities
Is this an updated Project Plan? If so, reason for update:
for
statewide rollout
NA
Budget for project by fiscal year and is project funded? If so, for what amount(s) and periods(s):
Budget Amount: 1.2 m
Year: FY
20XX
.8
Budget Amount:
Year: FY
20XX
Budget Amount:
Year:
Yes
No
Funded?
Funded?
X
X
Funded?
2.0 m
AN
Total
Amount:
Additional funds were needed to add

more hardware for statewide rollout
CI
VI
Projec
tis
On
Schedule:
Start Date:
Project Name:
Release: 2.0
Section 3 - Page 52

Project Plan Format
Project Summary - Continued

Points of Contact
Name / Organization
Phone
John Smith
573-692-0962
Project Manager
Senior Management Sponsor
Joe Done
Senior Technical Sponsor
Mary Lane
Procurement Contract
Tina Black
Customers:
Unemployment
Bill Nick
Audit
Anne Wright
Compliance
Lance Gonlin
Other Stakeholders (Top 3)
Prime Contractor Information
573-359-0993
lanem@state.us
573-425-1254
blackt@state.us
573-694-3442
BNick@MDA.us
573-358-6996
Awright@MDA.us
573-536-8888
Lgonlin@MDA.us
VI
Name
Phone
E-Mail
573-664-3229
Bwhite@vquest.com
Ned Jack
573-664-3869
Njack@vquest.com
Bob Bowman
573-664-3283
Bbowman@vquest.com
Senior Management Sponsor
AN
NA
Senior Technical Sponsor
donej@state.us
Betty White
CI
Position
Project Manager
smith@state.us
573-752-1666
Same as above
Company:
E-Mail
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Position
This should be the list of individuals that will be involved with the project during the execution phase.
Release: 2.0
Section 3 - Page 53

Project Plan Format
Project Charter
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2. Project Charter (Sample)
The project charter follows the project summary information. Like the project summary, the program
charter information was developed during the project initiating phase. The project charter is completed in
the planning phase. It includes a business problem, statement of work, objectives, success factors,
project dependencies, and constraints. A sample of the completed information is shown below.
Business Problem.
All projects start with a business problem/issue to solve.

The lack of a statewide automated planning system for scheduling transportation road repair maintenance
resources has resulted in road closures, duplicated capital expenditures, and increased staff overtime costs.
Statement of Work / Goal / High-level Project Scope Statement

The statement should be short and to the point.
Design and prototype an automated, dynamic planning system by Q4, 20XX, based on an SQL database and
GUI front end. Based on the prototype, pilot the system and complete full implementation by Q4,20XX.
Project Objectives / Detailed Project Scope Statement
VI
Provide a brief, concise list of what the project is to accomplish. The project objectives are a detailed version of the
statement of work. Taken with the statement of work, the objectives define the boundaries (scope) of the project. The
objective statement can also be seen as a decomposition of the statement of work into a set of necessary and
sufficient objective statements.
NA
CI
Short-Term
1. Define the planning requirements for the system
2. Define user needs in terms of inputs and outputs
3. Develop the prototype and test
4. Conduct the pilot of system with completion by Q2, 20XX, with the pilot lasting at least three months
5. Complete system acceptance and user documentation
6. Complete system installation at all locations by Q4, 20XX
Long-Term
7. Substantially reduce road maintenance cost over the next several years.
Success Factors:
AN
List factors that will be used to determine the success of the project.
Short-Term
1. Have all locations installed and trained by Q1, 20XX
Long-Term
1. Reduce total maintenance project cost by 3% per year in the 12 months following implementation.
2. Reduce total maintenance project cost by 5% per year in the subsequent following 12 months.
Project Dependencies/Constraints:
The schedule for implementation for such a large, complex system is very constrained.
Release: 2.0
Section 3 - Page 54

Project Plan Format
Project Trade Off Matrix and Status Summary
Managing a project requires the balancing of three factors: resource, schedule, and scope. These three
factors are interrelated, i.e., a change in one of them causes the others to change as well. The project
trade off matrix shows the relative importance of each factor:
constrained means the factor cannot be changed or is severely limited
accepted means the factor is somewhat flexible
improved means that the factor is very flexible
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Also included on this page of the template is a matrix for project status. The matrix reflects whether the
technical, schedule, and cost estimates for each task are behind, on schedule, or ahead of schedule.
Comments are added for any deviation from the original estimate. For each project, the unique teams or
phase should be filled in the appropriate category.
Schedule
Scope
CONSTRAINED
ACCEPTED
VI
3. Project Tradeoff Matrix and Status Summary

Resources
IMPROVED
+/- Status
Team/Phase
Technical
Schedule
Cost
On
Ahead
On
Completed this phase ahead of

schedule, on budget.
NA
Req.
CI
Identify variable to be CONSTRAINED, IMPROVED, ACCEPTED
Comment
On
Ahead
On
Completed this phase ahead of

schedule, on budget
Dev Team 2
On
On
On
Completed this phase on schedule,

on budget
Testing
On
On
On
Cannot be closed until installation is

complete
Behind
Behind
On
Additional pieces of hardware were

required to complete statewide
rollout causing impact to technical
and schedule measures
AN
Dev Team 1
Installation
Release: 2.0
Section 3 - Page 55

Project Plan Format
Project Organization
BL
O
See Resources Planning for a sample Project Organization Chart.
The project plan should include a description of the project organization team. A project manager is
required for every project. Many plans may also include a narrative of key project member responsibilities.
Small projects will require less organizational definition than larger projects, but responsibilities should
always be defined.
Activity List / Work Breakdown Structure / Schedule

The WBS describes each task required in the project.
Tasks are assigned as work packages which define schedules, identify requirements to be completed and
describe specific work to be performed. Refer to Activity Definition and Sequencing for further information
on development of a work breakdown structure.
VI
It should include milestones, task dependencies, task duration, work product delivery dates, quality
milestones (reviews/audits/inspections), configuration management milestones, and action items (with
deadlines and responsibilities). See Activity Definition and Sequencing for samples of GANTT Charts.
CI
Work Product Identification
NA
The list of project deliverables that includes the date due and the role responsible for the delivery is part of
the plan. This information is derived from the project activity list. See the Activity Definition and
Sequencing Section for a sample of a Work Product Identification Form.
Estimated Cost at Completion
AN
This estimated cost at completion is an assessment of the total project effort in terms of time and dollars.
See Budgeting within this section for a sample of the Estimated Cost at Completion Worksheet.
Release: 2.0
Section 3 - Page 56

Project Plan Format
Resource Loading Profiles
The FTE Resource Loading and the Staffing Plan shows the number of personnel, by type, that are
required on the project on a weekly or monthly basis. This information is compared on a planned versus
actual basis. See Resource Planning for a sample Project Staffing Plan.
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Requirements
The detailed listing of product requirements should be included in the Project Management Plan. Refer to
Requirements Definition for a sample.
AN
NA
CI
VI
A Risk Management Plan for the project should be included. A risk is anything that could potentially
affect the successful completion of the project. The contractual, management, and technical risks
associated are identified and assessed for the probability of the risk occurring, the cost to correct if the
risk occurs, the impact of the risk on the project, and the prevention and mitigation activities. Refer to
Risk Identification section for further information and sample forms.
Release: 2.0
Section 3 - Page 57

Project Plan Format
Configuration Management Plan
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O
The Configuration Management Plan defines the staff level or the actual person, if known responsible for
project configuration management, the procedures used, the planned configuration items and resources
required to conduct Configuration Management. This Configuration Management Plan is summarized in
a format depicted in the figure below. Refer to the Configuration Management section for further
information on configuration management planning.
12. Configuration Management Plan
Provide a configuration management plan that defines the person responsible for project configuration management, the procedures
that will be used, the planned configuration items, planned release dates for configuration items, and resources required to conduct
CM.
Manager: J. Smith
VI
Additional Staff for CM:

No additional staff anticipated.
CM Responsibility
CI
Procedure Reference: MDA CM-01 to CM-03
No.
Item
1.
System / Management / PPlan
2.
NA
Configuration Items: Ensure that CM is implemented throughout the projects life cycle.
3.
4.
Comments
Project Plan
System / Req / Sys Spec
System Specifications
System / Test / TPlan
Test Plan
System / Management / TPlan
Implementation
AN
Ensure that project has a repository for storing configuration items and associated CM records. Briefly describe.
Release: 2.0
Section 3 - Page 58

Project Plan Format
Quality Plan
BL
O
The Quality Plan defines the person responsible for project quality, the planned quality activities, and
resources required to conduct QA activities is summarized in the project plan. Refer to the Quality Plan
Development section for further information on quality planning. The QA Plan is summarized in a format
illustrated in the figure below.
13. Quality Plan
Provide a quality plan that defines the person responsible for project quality assurance, the procedures that will be used and
resources required to conduct quality assurance.
QA Responsibility
Procedure Reference: MDA QA01 to QA -10
No
.
1.
2.
Ensure that QA is implemented throughout the projects life cycle. Dates include QA audits, reviews
and other project activities that QA staff will participate in.
Item
Comment
s
Due
Requirement Review
10/1/XX
CI
Planned Quality
Event:
VI
Support needed by lead design and development

members
Manager: M.
Anderson
Additional Staff for QA:
Code Walk
Through
User Interface Prototype
11/1/XX
3.
4.
Testing Audit
12/13/XX
11/15/XX
NA
Ensure that project has a repository for storing configuration items and associated QA records. Briefly describe.
QA records are stored w/project CM material
Ensure that QA audits the baselines and CM activities on a regular basis. Briefly describe
AN
Defined in project schedule
Release: 2.0
Section 3 - Page 59

Project Plan Format
Top Five Issues
Open Date
Closure Date
A. Smith
4/5/XX
5/1/XX
Estimated release date

4/15/XX
D. Hall
4/1/XX
5/1/XX
Awaiting input form Jim who

needs to meet with Bob on
3/15/XX
Out of scope item on

month end processing
must be decided
A. Smith
2/15/XX
3/1/XX
Determined effort was out of

scope. No action to be taken.
Configuration Item
Status Reporting system
not yet installed.
B. Jones
1/15/XX
1/25/XX
System installed and

operational. Baselines
entered into CM.
Change order pending

for AP processing
Enhancement number 1
inactive; requirements
still not defined
Status
CI
Issue Item Status
Responsible
Individual
VI
Issue Description
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O
14. Top Five Issues
This form identifies the Top Five Issues that have been identified for this project. It defines the person
responsible for resolving the issue, and an associated open and close date, with proposed or
recommended solutions.
The plan should include a list of issues that are maintained by the Configuration Manager. A sample table
is shown here.
NA
15. Issue Status
Maintain a list of action items, including a description of the item, a point of contact a date by which action should be taken and a
description of the action taken to close items.
Issue Description
Responsible
Individual
Open
Date
0001
Document Flow for hardware

acquisition
Check status of subcontract
agreement
Organize team meeting to review
support requirements
R. Smith
8/1/XX
B. Hill
8/2/XX
8/4/XX
M. Jones
8/1/XX
8/2/XX
Contact W. Smith regarding

coordination of delivery
PMP updates Past Due
B. Hill
8/3/XX
C. White
8/4/XX
AN
Issue
Item
#
0002
0003
0004
0005
Closure
Date
Status
Developing Flow
Signed and
Executed
Meeting
scheduled for
8/12/XX
Required by
8/1/XX
0006
0007
Release: 2.0
Section 3 - Page 60

Project Plan Format
Action Item Status
AN
NA
CI
VI
BL
O
A similar chart as the one above can be used to show Action Items that need to be tracked at the
beginning and throughout the project. Action item are important items but too short to be included as a
Work Assignment.
Release: 2.0
Section 3 - Page 61

Table of Contents
SECTION 3
PROJECT MANAGEMENT PLANNING
INTRODUCTION _______________________________________________________ 1
Planning is the Seed for Success ___________________________________________________ 1
Responsibilities _________________________________________________________________ 1
Terminology____________________________________________________________________ 1
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PLANNING PROCESS AND PROJECT PLAN _______________________________ 3

What is Project Planning? _________________________________________________________ 3
The Planning Process ____________________________________________________________ 3
Importance of the Project Plan _____________________________________________________ 4
Steps in the Planning Process______________________________________________________ 5
Overview of Project Scheduling_____________________________________________________ 5
ACTIVITY DEFINITION AND SEQUENCING _________________________________ 7
Develop Project Tasks____________________________________________________________ 7

Define Task Relationships ________________________________________________________ 11
VI
Defining Deliverables____________________________________________________________ 11
Development of a Project Schedule ________________________________________________ 12
CI
Define Precise and Measurable Milestones __________________________________________ 13

Steps to Creating a Project Schedule _______________________________________________ 14
Estimate Task Duration __________________________________________________________ 15
Define Priorities ________________________________________________________________ 16
NA
Define Critical Path _____________________________________________________________ 16

Document Task Relationship______________________________________________________ 16
Document Assumptions__________________________________________________________ 17
Review the Results _____________________________________________________________ 17
AN
BUDGETING _________________________________________________________ 18
Overview of Project Budgeting ____________________________________________________ 18
Identify Cost Factors ____________________________________________________________ 18
Project Estimate Summary Worksheet ______________________________________________ 18
Instructions for the Project Estimate Summary Worksheet _______________________________ 19
Document Assumptions__________________________________________________________ 23
Review the Cost Estimates _______________________________________________________ 23
Estimated Cost at Completion Report _______________________________________________ 23

Table of Contents
CONFIGURATION MANAGEMENT _______________________________________ 24
Configuration Management _______________________________________________________ 24
Configuration Management Organization ____________________________________________ 24
Configuration Management Plan ___________________________________________________ 25
Tasks During the Planning Phase __________________________________________________ 26
Relationship to Quality Management________________________________________________ 26
Authority and Responsibility ______________________________________________________ 27

Control Items __________________________________________________________________ 27
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Configuration Management Procedures _____________________________________________ 27

Storage of Control Items _________________________________________________________ 28
Configuration Management Goes Beyond Development_________________________________ 28
QUALITY PLANNING __________________________________________________ 29

Quality Process ________________________________________________________________ 29
Creating the Quality Plan_________________________________________________________ 30
Responsibility for Quality _________________________________________________________ 30

Independence of the Quality Assurance Team ________________________________________ 31
VI
Checklist _____________________________________________________________________ 31
References ___________________________________________________________________ 31
REQUIREMENTS DEFINITION ___________________________________________ 32
CI
Importance of Project Requirements ________________________________________________ 32

When are Requirements Defined? _________________________________________________ 32
Requirements Specifications ______________________________________________________ 32
NA
Who Defines Requirements?______________________________________________________ 33

Requirements Traceability ________________________________________________________ 33
Approvals_____________________________________________________________________ 35
Managing Requirements Changes _________________________________________________ 35
AN
References ___________________________________________________________________ 35
RESOURCE PLANNING ________________________________________________ 36

Overview of Resource Planning ___________________________________________________ 36
Determining the Size of the Team __________________________________________________ 36
Determining Required Skills ______________________________________________________ 36
Identifying Required Non-Labor Assets ______________________________________________ 37
Define Resource Profiles _________________________________________________________ 37
Forming the Team ______________________________________________________________ 39
PROJECT MANAGEMENT ______________________________________________ 41

Support Functions ______________________________________________________________ 41

Table of Contents
Define Assumptions_____________________________________________________________ 41
RISK MANAGEMENT PLAN_____________________________________________ 42

Identify Risks __________________________________________________________________ 42
Risk Management Process _______________________________________________________ 42
Responsibility for Risk Identification ________________________________________________ 43
Risk Management Worksheet Instructions ___________________________________________ 44

Contingency Planning ___________________________________________________________ 45
Risk Management Worksheet Sample ______________________________________________ 46
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Suggested Preventive and Contingency Measures_____________________________________ 48

Risk Identification Summary (Top Five Risk)__________________________________________ 49
PROJECT PLAN FORMAT ______________________________________________ 50

The Project Plan Template _______________________________________________________ 50
Plan Approval _________________________________________________________________ 50
Project Summary _______________________________________________________________ 51
Project Charter ________________________________________________________________ 54

Project Trade Off Matrix and Status Summary ________________________________________ 55
VI
Project Organization ____________________________________________________________ 56

Activity List / Work Breakdown Structure_____________________________________________ 56
Work Product Identification _______________________________________________________ 56
CI
Project Schedule _______________________________________________________________ 56

Estimated Cost at Completion _____________________________________________________ 56
Resource Loading Profiles________________________________________________________ 57
Requirements _________________________________________________________________ 57
NA
Risk Management Plan __________________________________________________________ 57

Configuration Management Plan ___________________________________________________ 58
Quality Plan ___________________________________________________________________ 59
Top Five Issues ________________________________________________________________ 60
AN
Issue Item Status_______________________________________________________________ 60

Action Item Status ______________________________________________________________ 61

QUALITY CONTROL AND SAFETY DURING CONSTRUCTION
Quality and Safety concerns in construction
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Quality control and safety represent important concerns for project managers.
Defects or failures in constructed facilities can result in very large costs.
Even with minor defects, re-construction may be required and facility operations
impaired.
Increased costs and delays are the result. In worst case, failures may cause personal
injuries or fatalities.
Accidents during the construction process can similarly result in personal injuries and
large coats.
Indirect costs of insurance, inspection and regulation are increasing rapidly due to these
increased direct costs.
AN
NA
CI
VI
As with cost control, the most important decisions regarding the quality of a completed
facility are made during the design and planning stages rather than during construction.
It is during these preliminary stages that component configurations, material
specifications and functional performance are decided.
Quality control during construction consists largely of insuring conformance to this
original design and planning decisions.
There are expectations on the primary focus of quality control, i.e. unforeseen
circumstances such as incorrect design decisions or changes desired by an owner in the
facility function may require re-evaluation of design decisions during the course of
construction.
Some designs rely upon informed and appropriate decision making during the
construction process itself.
For example, some tunnelling methods make decisions about the amount of shoring
required at different locations based on better information concerning actual site
conditions; the facility design may be more cost effective as a result.
Quality requirements should be clear and verifiable, so that all parties in the project can
understand the requirements for conformance.
Safety during the construction project is also influenced in large part by decisions made
during the planning and design process.
Some designs or construction plans are inherently difficult and dangerous to implement,
whereas other, comparable plans may considerably reduce the possibility of accidents.
For example, clear separation of traffic from construction zones during roadway
rehabilitation can greatly reduce the possibility of accidental collisions.
Beyond these design decisions, safety largely depends upon education, vigilance and
cooperation during the construction process.

Workers should be constantly alert to the possibilities of accidents and avoid taken
unnecessary risks.
Organising for Quality and Safety
AN
NA
CI
VI
BL
O
A variety of different organisations are possible for quality and safety control during
construction.
One common model is to have a group responsible for quality assurance and another
group primary responsible for safety within an organisation.
In large organisations, departments dedicated to quality assurance and to safety might
assign specific individuals to assume responsibility for these functions on particular
projects.
For smaller, the project manager or an assistant might assume these and other
responsibilities.
In both the cases, insuring quality and safety are main concerns for a manager in addition
to personnel, cost time and other management issues.
Every project will have their own quality and safety inspectors, including the owner, the
engineer/architect, and the various constructor firms.
These inspectors may be contractors from specialised quality assurance organisations. In
addition to on-site inspections, samples of materials will be tested by specialised
laboratories to insure compliance.
Common examples of inspectors for the local governments building department, for
environmental agencies and for occupational health and safety agencies.
The US Occupational Safety and Health Administration (OSHA) routinely conducts site
visits of work places in conjunction with approved state inspection agencies.
Safety standards prescribe a variety of mechanical safeguards and procedures; for
example, ladder safety is covered by over 140 regulations.
In cases of extreme non-compliance with standards, OSHA inspectors can stop work on a
project. (Only visit a small fraction of construction sites).
As a result, safety is largely the responsibility of the managers on site rather than that of
public inspectors.
Quality control should be the primary objective for all the members of a project team.
Mangers should take responsibility for maintaining and improving quality control.
Employee participation in quality control should be sought and rewarded, including the
introduction of new ideas.
Work and Material Specifications
Specifications are important feature of quality and its components need documentation
which includes special provisions to be made in design to be used during construction if
required.
General specifications of work quality are available in numerous fields and are issued in
publications of organisations such as the American Society for Testing and Materials
CI
BL
O
VI
(AATM), the American National Standards Institute (ANSI), or the Construction

Specifications Institute (CSI).
Distinct specifications are formalised for particular types of construction activities, such
as welding standards issued by the American welding Society, or for particular facility
types, such as the standard specifications for Highway Bridges issued by the American
Association of state Highway and Transportation officials.
Construction specifications normally consist of a series of instructions or prohibitions for
specific operations. For example, the following passage illustrates a typical specification,
in this case for excavation for structures:
Conform to elevations and dimensions shown on plan within a tolerance of plus or minus
0.10 foot and extending a sufficient distance from footings and foundations to permit
placing and removal of concrete formwork, installation of services, other construction and
for inspection. In excavating for footings and foundations, take care not to disturb bottom
of excavation. Excavate by hand to final grade just before concrete reinforcement is
placed. Trim bottoms to required lines and grades to leave solid base to receive concrete.
In recent years, performance specifications have been developed for many construction
operations.
Rather than specifying the required construction process, these specifications refer to the
required performance or quality of the finished facility.
For Example, traditional specifications for asphalt pavement specified the composition of
asphalt material, the asphalt temperature during paving and compacting procedures.
In contrast, a performance specification for asphalt would detail the desired performance
of the pavement with respect to impermeability, strength,etc;
Example: Concrete Pavement Strength
AN
NA
Concrete pavements of superior strength result in cost savings by delaying the time at
which repairs or re-construction is required.
In contrast, concrete of lower quality will necessitate more frequent overlays or other
repair procedures.
Even if a pavement does not meet the ultimate design standard, it is still worth using
the lower quality pavement and re-surfacing later rather than completely rejecting the
pavement. Based on these life cycle cost considerations, a typical pay schedule might be:
Load Ratio Pay Factor

< 0.50
Reject
0.50-0.59
0.90
0.70-0.89
0.95
0.90-1.09
1.00
1.10-1.29
1.05
1.30-1.49
1.10
>1.50
1.12
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In this table load ratio is the ratio of the actual pavement strength to the desired design
strength and the pay factor is a fraction by which the total pavement contract amount is
multiplied to obtain the appropriate compensation to the contractor.
For example, if a contractor achieves concrete strength twenty percent greater than the
design specification, then the load ratio is 1.20 and the appropriate pay factor is 1.05, so
the contractor receives a five percent bonus.
Load factors are computed after tests on the concrete actually used in pavement. Note that
a 90% pay factor exists in this case with even pavement quality only 50% of that
originally desired.
This high pay factor incurred in preparing the payment foundation. Concrete strengths of
less than 50% are cause for complete rejection in this case, however.
Total Quality Control
Quality control in construction typically involves insuring compliance with minimum

standards of material and workmanship in order to insure the performance of the facility
according to the design.
For the purpose of insuring compliance, random samples and statistical methods are
commonly used as the basis for accepting or rejecting work completed and batches of
materials.
VI
Rejection of a batch is based on non-conformance or violation of the relevant design

specifications.
Materials obtained from suppliers or work performed by an organisation is inspected and
CI
passed as acceptable if the estimated defective percentage is within the acceptable quality
level.
Problems with materials or goods are corrected after delivery of the product.
But the traditional approach of quality control is the goal of total quality, in this system,
NA
no defective items are allowed anywhere in the construction process.
While zero defects goal can never be permanently obtained.

The best known formal certification for quality improvement is the international
Organisation for Standardizations ISO: 9000 standard.
AN
ISO:9000 emphasizes good documentation, quality goals and a series of cycles of

planning, implementation and review.
Major elements of total quality control are design reviews to insure safe and effective
construction procedures.
Other elements include extensive training for personnel, shifting the responsibility for
defecting defects from quality control inspectors to workers, and continually maintaining
equipment.
Worker involvement in improved quality control is often formalized in quality circles in

which groups of workers meet regularly to make suggestions for quality improvement.
Material suppliers are also required to insure zero defects in delivered goods.

Initially, all materials from a supplier are inspected and batches of goods with any
defective items are returned.
Suppliers with good records can be certified and not subject to complete inspection
subsequently.
Many companies have found that commitment to total quality control has substantial
economic benefits.
Expenses associated with inventory, rework, scrap and warranties were reduced.
Worker enthusiasm and commitment improved.
Customers often appreciated higher quality work and would pay a premium for good
quality.
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Off course, it is difficult apply total quality control in construction. The unique nature of
each facility, the variability in the workforce, the multitude of subcontractors and the cost
of making necessary investments in education and procedures make programs of total
quality control in construction difficult.
Experience with Quality Circles
VI
Quality circles represent a group of five to fifteen workers who meet on a frequent basis to
identify, discuss and solve productivity and quality problems. A circle leader acts as a link
between the workers in the group and upper levels of management.
NA
CI
Examples:
1. On a Highway project under construction, it was found that the loss rate of ready-mixed
concrete was too high. A quality circle composed of cement masons found out that the
most important reason for this was due to an inaccurate checking method. By applying
circles recommendations, the loss was reduced by 11.4 %.
2. In a building project, many cases of faulty reinforced concrete work were reported. The
iron workers quality circle examined their work thoroughly and soon the faulty
workmanship disappeared. A 10 % increase in productivity was also achieved.
Quality Control by Statistical Methods
AN
The use of statistics is essential in interpreting the results of testing on a small sample.
Without adequate interpretation, small sample testing results can be quite misleading.
As an example, suppose that there are ten defective pieces of material in a lot of one
hundred. In taking a sample of five pieces, the inspector might not find any defective
pieces or might have all sample pieces defective.
Drawing a direct inference that none or all pieces in the population are defective on the
basis of these samples would be incorrect.
Due to this random nature of the sample selection process, testing results can vary
substantially. It is only with statistical methods that issues such as the chance of different
levels of defective in the full lot can be fully analysed from a small sample test.

There are 2 types of statistical sampling methods:
AN
NA
CI
VI
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Statistical Quality Control with Sampling by Attributes
1. The acceptance or rejection of a lot is based on the number of defective or non

defective items in the sample. This is referred to as sampling by attributes.
2. Instead of using defective and non defective classifications for an item, a quantitative
quality measure or the value of a measured variable is used as a quality indicator. This
testing procedure is referred to as sampling by variables.
AN
NA
CI
VI
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COST CONRTROL MONITORING AND ACCOUNTING

Cost control preliminaries

1. Cost control approach:

C. Gross margin (A-B)

Variable overheads control

Stages in profit Computation

G. Operating profit (E-F)

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Cost control responsibility

Importance of Project Budget:

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Cost variance (CV) = BCWP-ACWP

Schedule variance (SV) = BCWP-BCWS

Cost performance index (CPI) = BCWP/ACWP

Schedule performance index (SPI) = BCWP/BCWS

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Clearing and Preparing Site

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5. Measurement of Cost Performance:

Project progress (%) =

Budgeted cost of total project

7. Management Role in Cost Control:

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The forecast total cost, C f is

Where, C f = forecast total cost

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Cost performance index (CPI) = BCWP/ACWP

Schedule performance index (SPI) = BCWP/BCWS

Actual Unit Rate

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Illustration of Proportion Completion versus Expenditure of an Activity

Percent of Budgeted Expenditure

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1. Completed Contract method:

2. Percentage of Completion method:

Then revenues earned = 1,000,000 x 0.2

The profit for this period = 200,000 180,000

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Net Profit on Completed Contracts ( Amounts in thousands)

Calculating Net Profit:

Original contract price

Total Cost to Date

Payments Received or Due to Date

Total Net Profit on Completed Jobs

Contract Changes (Change orders, etc.)

Estimated Cost to Complete

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