The Costs of Project Quality

According to Leon M. Cautillo, "The bitterness of poor quality remains long after low pricing is forgotten!" Therefore, it is important for project managers to understand the cost of quality and the types of costs associated with it.

The cost of quality refers to the total cost of all the processes that are involved in producing a quality product or service. This includes costs that ensure all specified requirements are met, as well as the costs of nonconformance to those requirements. There are three types of costs associated with quality.

1. Prevention
Prevention costs are those costs associated with planning and implementing the project so that it is error-free. Prevention costs are an investment in quality, as they help the project manager ensure that the project is done right the first time. This helps reduce project rework or revisions.

It is cost-effective to find and fix product defects before they reach the customer. When planning, 70 percent of the total cost of quality should be focused on prevention. For example, you can include the costs of staff training, process studies, and vendor surveys in your prevention costs, since all of these can help you ensure project quality.

2. Appraisal
Appraisal costs are the second type of quality cost. These costs are associated with evaluating the working processes and the product to determine how well they will meet customer needs. Ideally, appraisal costs should make up approximately 15 percent of the total cost of quality.

There are many types of appraisal costs, including inspection and testing, maintenance of test equipment, and various types of design reviews, which are described below.

• Internal design reviews. These reviews are carried out within the company by its own employees. They check to make sure that processes and products meet the specified quality requirements.
• External design reviews. These reviews are performed by people outside the company. The findings are reported to company officials.
• Walk-through design reviews. These design reviews check the quality of the products coming off the line. The findings of these spot checks are used to correct quality problems.
• Expense design reviews. These reviews compare the project budget with the actual costs and are important for future project budgeting.

3. Failure
The last type of cost associated with quality assurance is failure costs. These are incurred when a product does not meet customer requirements. Failure costs can be internal or external.

• Internal failure costs are the costs incurred to correct product defects before they reach the customer.
• External failure costs are the costs incurred to correct product defects that were not detected before reaching the customer.

In an ideal situation, internal failure costs should make up 10 percent of the total cost of quality, while external failure costs should make up only five percent.

There are many factors that contribute to the preparation and delivery of a quality product. When planning for the cost of quality, remember to include all the types of quality costs—prevention, appraisal, internal failure, and external failure. Keep in mind that it is cost-effective to find and fix any defects in a product before it reaches the hands of the consumer.

Revising Project Cost Estimates and Budgets

Projects need to have parameters. It only makes sense that there should be a set duration of time in which to produce what the customer has asked for, and a limited amount of money to spend doing it. But what if early measurements of cost efficiency reveal that you are going to have trouble remaining within the cost and budget boundaries?

Revising cost estimates and making updates to the overall budget through the course of the project as more information becomes available is a part of the project cost control process. Preliminary estimates that were set during the planning stages of the project may need to be revised for the following reasons.

• Real costs for certain resources have changed.
• The original estimates contained errors.
• There has been a change in the project or product scope.
• Vague estimates can now be refined.

Cost revisions are justified when it becomes apparent that cost variances to date are not due to isolated causes. A poor rating of cost performance to date may show that your total costs at completion are going to be outside the permitted range. The sooner you can bring variances into line, the better. Revising cost estimates can result in the following benefits.

• Revised cost estimates ought to be much more accurate.
• You will have more confidence in the estimated costs at completion.
• You will know better if the project will come in on budget.

Cost revisions that lead to a change to the budget must be approved as outlined in the project's cost change control system. The person making the change should indicate in the change request the reason for the proposed revisions and await final approval before making any changes.

To revise cost estimates, you simply go back to your original estimates, isolate the specific items that are causing the variance, and then update the estimates based on the more accurate information.

Not all revisions to cost estimates will necessarily lead to updates to the budget. Offsetting revisions to cost categories may not affect the overall budget for a certain time frame or task. Budget updates involve a change to the approved cost baseline and should only be done under certain circumstances.

A change to the budget is considered to be one of the "last resorts" of project cost control. Cost variances should be assessed to see if there is any other way to correct them before re-baselining the entire project.

When you have determined that revised estimates will lead to a budget update, you must follow the approval process laid out in your cost change control system. Any changes to the product or project scope must be analyzed to see how they will affect overall costs. You will want to consult the project's scope management plan and integrated change control system as well. Additional details are provided below.

• Cost management plan (CMP). If your CMP states that the project budget will have a 25 percent contingency on top of the original estimate, a 5 percent variance might be easy to accept. If there is no contingency, or the variance is more significant, you would update the budget.
• Product scope. Changes to the features and functions of the product or service you are delivering, whether imposed or optional, will likely affect costs. You need to determine if the changes in cost are great enough to warrant altering the budget.
• Project scope. Changes to the work that must be done in order to deliver the specified product or service, whether imposed or optional, may also affect costs. You need to determine if the budget should be altered to compensate for these prospective variances.

Remember, cost estimates and budgets need to be updated so that at any point in time the project plan continues to be a valid tool for predicting the future of the project. By keeping in mind the information discussed above, you'll know when and how to revise cost estimates and update budgets.

Computerized Tools for Project Cost Control

Many software companies have produced computerized tools to aid in project cost control. Project management software that will run on your personal computer or network is available at many different levels of sophistication, with prices ranging from $25 to over $10,000.

Computerized tools could include anything from standalone spreadsheets and accounting packages to fully integrated cost management systems. They offer planning and tracking capabilities at varying levels of detail.

Computers and the appropriate software have helped many project managers cut down on time, costs, and effort involved in getting their work done. You can use these tools to collect information, make calculations, and produce reports. In terms of project cost control, computerized tools can help you to:

• track performance more easily and quickly
• track multiple projects at once
• design, simulate, analyze, and improve cost control processes
• conduct "What if?" analyses
• obtain organized and summarized reports
• catch potential problems early in the project that may cause damage later on.

When it comes time to choose the appropriate computerized tools, you will have to ask, "What kind of tool can I afford?" Most inexpensive applications will enable you to produce charts and basic reports. If your budget allows, you can buy software that will do just about anything you need for project management.

Bear in mind that when implementing new software, you not only have to consider the expense of the tool, but also the time you have to invest to learn how to use it properly. New software costs time as well as money.

You also must decide how "large" a tool you need. Make sure you don't invest in project management software that is not right for you. Before you go shopping, spend some time figuring out:

• the maximum level of complexity you can handle
• aspects of cost control that you need automated
• the level of analysis that stakeholders demand.

Computerized tools should be tailored to your needs. Perhaps the projects you manage are fairly simple with straightforward work breakdown structures and modest budgets. You would likely then benefit most from low-end software that is easy to use.

The larger and more complex your projects become, however, the more you will require a system that integrates schedules and the cost management plan, and one that controls change. There are mid-range and high-end products that meet increasingly complex needs.

Computerized tools are a big help to project management. However, the package your company chooses to invest in will be worthwhile only if it suits your needs and the needs of the projects' stakeholders. Provided below are details about project management software for three main categories of users.

• Low-end users. Packages that will simply automate the basics for a low-end user are simple to use and will produce pretty charts. Cost: $25 to $200.
• Mid-range project managers. Mid-range users include managers of large projects or multiple projects. Software for these projects would need a moderate level of sophistication. Cost: $200 to $500.
• High-end/multi-project users. High-end users are those with complex projects running concurrently, and whose team members work on more than one project at a time. Software would allow simulations and more complex analysis. Cost: $2,000 to $10,000.

Computer software can be a very effective tool for controlling project costs. Remember to purchase software that fits your budget, that you can quickly come up to speed on, and that will meet your needs.

The Project Cost Change Control System

The cost change control system is one of the tools you can use to control project costs and ensure the project comes in on-budget. It outlines the procedure that is followed to make changes to the cost baseline. You can incorporate it into the integrated change control system to coordinate changes across the entire project.

The cost change control system is important to the cost control process. It helps the project management team by:

• guiding the team as they make decisions about changes to the budget
• making all changes auditable and traceable
• ensuring that incorrect or unapproved changes won't be reflected in the cost baseline.

Each change control system within a project plan is initiated by a change request, whether it is for the budget, the schedule, or for contracts your organization holds with its suppliers. Stakeholders must present a fairly compelling argument in the request why the proposed change must be made.

Once a change request is submitted, the steps of the cost change control system are followed to determine whether or not the cost baseline will change as a result of the request. The cost change control system involves five steps. Companies use this procedure to ensure that all change requests are properly dealt with and that only approved changes are reflected in the cost baseline. The steps in the procedure are listed below.

1. Receive the change request. The change request is initiated in the form of an oral, written, or electronic request. The person making the request can be either internal or external to the project. The requested change can be optional or legally mandated.
2. Record the request. The specifics of the change request are recorded, usually in a change request log, so that the request can be managed. The level of detail is up to project management. Enough information should be recorded so that anyone related to the project can understand the request.
3. Assess the request. Someone on the project team assesses the impact that the proposed change will have on the rest of the project. Budget changes can potentially affect time, cost, quality, and objectives. You have to do a cost/benefit analysis of the change.
4. Make a recommendation. Based on the assessment, the assessing team member or members make a recommendation to accept, reject, or modify the change request. The recommendation is presented to the project authority.
5. Decide whether to accept or reject the request. Based on the recommendation, the project authority decides what to do with the request. If rejected, the change request is closed and the documentation is filed. If accepted, the project budget is adjusted accordingly to incorporate the approved change.

If the change is accepted, the project continues according to the revised project plan. Performance continues to be monitored against the modified cost baseline.

Notice the pattern that is evolving. Change requests and the cost baseline were inputs to cost control. The cost change control system is a tool that uses these inputs to produce an output—a change to the cost baseline.

The Project Cost Management Plan

The cost management plan is an important element of project cost control. It is developed during the cost estimating process and forms one of the main inputs used during the cost control process.

The cost management plan describes how cost variances will be managed, should they occur. Project managers must review the cost management plan regularly to ensure that the guidelines it contains continue to be appropriate throughout the duration of the project.

The cost management plan can be either formal or informal, depending on the nature of the organization. The level of detail required by the project stakeholders will determine whether the plan needs to be detailed or broad.

During the planning stages, companies decide the range by which cost variances will be permitted to deviate. The permitted range may be dependent on such factors as:

• the particular phase of the project you are in
• the length of the phase
• the length of the entire project
• the nature of the task or materials being estimated
• the perceived accuracy of the estimate.

Variance management may be different from project to project. For many projects, variances are permitted to change over the project duration. For projects that involve research and development, for example, larger deviations may be allowed during the earlier phases of the project. On the other hand, for manufacturing projects, allowed variances may be fixed over the duration of the project. Since the risk for any project decreases as time goes on, so should the allowed variance.

When a variance occurs, you can deal with it in one of four ways. You can choose to ignore the variance, make functional modifications, replan the project, or redesign the product. The first issue to consider when choosing the appropriate management technique is the size of the cost variance.

• If the variance is inside the permitted range of deviation, the two best choices are to ignore it or to make functional modifications.
• If the variance is outside of the permitted range of deviation, you need to take a more drastic approach, such as replanning or redesigning the product.

The choices available to manage a cost variance vary in terms of how drastic they are, how much work they require, and how much they change the project. Ignoring the variance or making functional modifications are mild solutions. These choices require little or no work, and make minimal changes to the project, if any.

Replanning or making changes to the product scope are more drastic solutions. They require a great deal of work and make substantial changes to the project. More details about these four choices are provided below.

• Disregard. The cost variance can be ignored if it falls within the permitted range of deviation and does not appear to be a sign of future cost problems.
• Modify. If the variance is within the permitted variance range, but could potentially grow or become a problem in the future, functional modifications can be made. These are small changes to the project that can save time and money.
• Replan. Replanning occurs if the variance is outside of the permitted range. Management attempts to replan the project without changing the product scope. This means finding less expensive ways of doing things, such as using less expensive resources or contracting out.
• Redesign. This is the most drastic measure. It involves changing the product or service you will deliver. You have to find ways to make the product less expensive to produce and deliver. Redesign only if replanning is not sufficient.

Project replanning and product redesign involve major changes to the project. Both approaches require an assessment of the impact on the overall product quality and its ultimate usability by the customer. Taking either of these approaches too far could render the product sub-standard and unmarketable.

Remember, there is comfort in having a good plan for managing costs and knowing how to implement it. The cost management plan can help you effectively manage project cost variances when they occur.

The Cost Baseline

Project management is like baseball: You need to follow a baseline or else you will have a hard time bringing the project "home." The cost baseline is a time-phased budget that is used to measure and monitor project cost performance. It is established during the budgeting phase of the project.

Cost budgeting uses cost estimates, the Work Breakdown Structure, and the project schedule to create the cost baseline. The cost baseline is the plan that outlines how project costs are expected to be incurred over time.

Think of the cost baseline as a map that outlines planned cost performance. It is used to monitor where the project is, where it should be, and where it's going in terms of expenditures. The cost baseline is important to understand because:

• it is the basis for project cost control
• it serves as a benchmark for measuring cost performance
• discrepancies from the cost baseline foreshadow problems
• it gives everyone involved in the project a goal to work toward.

You establish the cost baseline by plotting the estimated total costs per time period on a graph. The resulting line usually takes the form of an S-curve. By reading the graph, you can see how costs are expected to be incurred over the life cycle of the project.

Large projects may have several cost baselines to measure various categories of spending. For instance, a project manager may want to measure labor costs separately from the expenses for materials and equipment.

The cost baseline is set in the planning stages of the project after a lot of time and effort has been spent on developing accurate cost estimates. Therefore, the cost baseline should change only if the project has changed substantially and only if there is no other way to control cost variances.

Day-to-day over- and underruns in costs are normal. Only persistent variances will warrant changing the cost baseline. Do not change the cost baseline if:

• cost variances are normal and based on accurate estimates
• cost variances are caused by poor cost estimating
• normally occurring costs have been forgotten in the planning stage.

Change the cost baseline if:

• there is a change to a project deliverable that will affect overall costs
• there is a change in how the work will be done that will affect overall costs
• there are major, unforeseen changes to project costs.

Remember, adjusting the cost baseline does not change the actual cost of the project—it just eliminates a negative variance. Therefore, changing the cost baseline should not be used as a means of managing variances.

The cost baseline serves as a guide for measuring project performance in terms of cost. Review the cost baseline when variances occur to ensure that the cost estimates used are as accurate and as realistic as possible.

The Project Cost Baseline

What do you get when you cross a project budget with a schedule? It's something that gives you an idea of the total budgeted costs of project activities per time period—otherwise known as the project's cost baseline.

A cost baseline, which is an output of the cost budgeting process, is a time-phased budget that is used to measure and monitor cost performance on a project. It is developed by summing the estimated costs by period. The cost baseline takes the form of a cumulative cost curve, or an S-curve.

Why does a project's cost baseline look like a curve? It has to do with the typical spending pattern, or "burn rate," of project funds. A cost baseline usually takes an "S" shape, when plotted on a graph, for the following reasons.

• Costs in the planning or design phase are usually low.
• Once production begins, costs increase quickly relative to the passing of time.
• Costs decrease toward the end of the project during wrap-up and delivery.

But why stop at just one type of curve? You also can plot and display the values of expected cash receipts and actual project costs. Plot these curves next to the cost baseline for comparative purposes.
Plot expected receipts next to the cost baseline to display a forecast of the project's cash flow. You may have several periods of time during the project where you have significant expenses but have not received payment for that work, especially if you are paid only for deliverables.

If this creates a need for short-term financing to cover bills, you will want to know the likely time frame in which this will occur. Then you will be able to predict the terms for any necessary loans.

Plotting budgeted costs and actual costs side by side enables you to quickly see whether cost performance is good, evaluate the size of cost variances, and easily report cost performance to stakeholders.

Before you can plot planned costs over time, you have to establish the coordinates—that is, what costs should be per time period. If you are using a computerized scheduling tool, simply input the data and generate a cost report by time period. The software will probably create the cost curve for you.

In the absence of computerized tools, you can use a bar-chart of your schedule to establish cumulative costs over time. Follow these steps.

1. Draw a chart of activity durations.
2. Assign a budget to each activity.
3. Measure the accumulated costs per time period.
4. Plot cost-per-time data on a graph with duration on the x axis and cost on the y axis.
5. Connect the dots to see the curve.

The cost baseline for your project is the plan against which you will measure, monitor, and control costs. Use the cumulative cost curve as a graphical representation of the baseline when comparing planned costs to actual costs.

Tools and Techniques for Cost Budgeting

Budgeting for your project is not simply a matter of taking the cost estimates for various activities and saying, "This is the budget for this task." Estimates provide merely the base or frame upon which you will build a finalized project budget.

You can use a number of tools and techniques to take your bare-bones estimates and create the budget that will guide all your cost-control efforts. The tools and techniques of budgeting are based on the tools and techniques for cost estimating. Several tools and techniques you can use for cost budgeting are described below.

1. Create contingency funds and a management reserve.
The main difference between an estimate and a budget is the additional cushion a budget has built into it. Budgeting takes your estimates a step further by adding contingencies based on previous experience and risks related to particular activities.

Contingency funds are specific provisions for unforeseen increases in costs at the project activity level. In other words, contingencies are added to work packages and activities at the lower level of the work breakdown structure.

While cost budgeting takes place at the project activity level, it also takes place at the project management level. General project budgeting takes into account overall risk and establishes a management reserve for the project. This account contains a percentage of the project's funds that are set aside for potential problems.

The management reserve is held over and above the budgets for individual work packages. The size of a management reserve depends on the type of project, industry standards, and the guidelines for establishing reserves found in the project's risk management plan.

Although a number of factors must be weighed when developing a management reserve, you can follow this general rule of thumb: find the optimal add-on percentage that will minimize risk and yet not be overly cautious. You want to ensure that actual costs don't exceed your estimates, but you also want to remain competitive and avoid creating a "fat" budget.

2. Identify the ranges of accuracy for each of the cost-estimating techniques.
You developed the cost estimates for your project using one or more of the cost-estimating tools and techniques that are listed below. How accurate do you think your estimates are? It depends on the method you used, since the degree of accuracy varies between estimating techniques. Cost budgeting uses the deemed accuracy of your estimates to come up with appropriate contingencies.

• Parametric modeling. Parametric models provide a rough order of magnitude. These estimates could have a range as great as plus or minus 35 percent. To increase accuracy for budgeting purposes, you may want to run project activities through a more detailed methodology, such as bottom-up estimating.
• Analogous estimating. The accuracy of estimates improves somewhat if you have based cost estimates on a similar project. An analogous, or top-down, estimate may be accurate to plus or minus 15 percent to 20 percent. The range will decrease relative to an increase in similarity between the two projects.
• Bottom-up estimating. Bottom-up estimates are the most reliable (plus or minus five percent to 10 percent) since you have examined each activity in the work breakdown structure. When preparing a budget based on detailed and finalized estimates, you can reduce contingencies and overrun allowances due to the reduction in risk.
• Computerized tools. Project management software greatly simplifies cost budgeting. You can use statistical analysis and simulation to generate a budget based on the probability that actual costs will be over or under the base estimates, giving you an accuracy range as low as plus or minus five percent.

3. Use cost-budgeting techniques based on the cost-estimating techniques you used.
As you work with your base estimates to develop a project budget, remember how your estimates were developed and their level of accuracy, since you will use cost-budgeting techniques based on the cost-estimating techniques you used.

For example, you may have used a parametric model or analogous estimating to develop your cost estimates. If you based estimates on another accurate budget or used an accepted model, why not base the new budget on these, making allowances for any differences? You can use the accuracy range of your estimates to find the "most likely" total cost of your project. Set your budget somewhere between the low and high cost.

If accuracy is not paramount and you are looking for a general contingency, you can use the formula: Most Likely = Estimate + (x percent ÷ 2). Take the maximum cost based on the range of results, divide it in half, and use it as the "most likely" amount. This dollar figure, or percentage amount, is what you add over and above the estimated amount.

Have you used the bottom-up technique to develop the cost estimates for your project? If so, you can use statistical sums to develop the cost budget. The most common approach is to use the Expected Value calculation for each estimate. This formula is: Expected Value = (a + 4m + b) ÷ 6.

In this formula, Expected Value is the mean or average of the base, most likely, and maximum values, a = low or most optimistic forecast, m = the most likely estimate, and b = high or most pessimistic forecast for cost outcomes. Sum up the values for each estimate and base your budget on the total.

You can follow a number of guidelines for setting base budgets when you have used an estimating technique other than bottom-up estimating. Use computerized tools to assess risk and determine appropriate contingencies. You can also use the contingencies from other similar projects as a benchmark. The most likely cost will fall somewhere between the maximum and the base estimate.

In summary, cost budgets are based on the general accuracy of, and statistical information about, cost estimates. Budgeting depends on the assessed risk related to individual activities and the project as a whole. Appropriate contingencies are based on known risks. The higher the impact and probability of the risk, the more contingency you will want to allocate in your budget.

Four Inputs to Project Cost Budgeting

You will want to enter the cost budgeting phase of a project well-equipped. To do this, you will need to know what the inputs to cost budgeting are, and you should understand their importance to the budgeting process.

During cost budgeting, a number of project elements come together to form the project's cost baseline. The following four inputs are used in the cost budgeting process.

1. The project's work breakdown structure (WBS)
The project's work breakdown structure is important in cost budgeting because it organizes all project activities into work packages. Cost budgeting involves assigning a budget, or cost account, to each work package.

Can you imagine trying to assign budgets to project elements if the work was not organized in some way? Without reference to the WBS, vital costs may be overlooked. Any omissions would cause variances later on between planned and actual costs, and cost performance may be reported as "poor."

Part of creating the work breakdown structure is assigning accounting codes to project tasks and activities based on the organization's chart of accounts. Budgeting is simplified when the cost accounts are integrated in this way.

2. The cost estimates for the work
You have made predictions about the costs of the resources required to complete your project's activities. These cost estimates are another important input to cost budgeting.

The budget for each work package is based on the estimates you have prepared. For budgeting purposes, you should be using budget or control estimates with a range of 15 percent or better. The budgeting process may increase an estimate's range by adding an appropriate allowance or contingency to cover the risk of overruns.

3. The project schedule
The third input to cost budgeting is the project schedule. In fact, it is the application of the schedule to the project budget that produces your main tool for cost control: the project's cost baseline.

Once budgets have been assigned to work packages, use the schedule to distribute the predicted costs over time. The project schedule includes the expected start and finish dates for each activity to which costs will be allocated. This information is important to the cost budgeting process because allocated funds must be assigned to the time period in which the costs will be incurred.

As you develop the control budget for your project, you'll find that a bar-chart diagram can be useful. Use it to measure the total costs that fall within each week for planning or comparative purposes. You can easily measure the cumulative costs as the project progresses.

Time-phasing the budget in this way provides the project's cost baseline. Information about cumulative costs over time is also used to determine the project's "burn rate"—that is, the rate at which funds are expended.

4. The risk management plan
Finally, the risk management plan is an important input to cost budgeting. It outlines strategies for dealing with potential risks that could cause project cost overruns. It also can include cost contingencies that are based on the reliability of your cost estimates. You will build contingencies into the budget to compensate for potential cost overruns.

An accurate and appropriate budget is one of a project manager's greatest assets when it comes to cost management. Understanding the inputs to cost budgeting will help you to create such a budget.

Computerized Cost-estimating Tools

Whichever cost-estimating technique you choose for your project, you'll find that performing cost estimates manually can consume a lot of time and resources. If you feel you would rather be spending your valuable time actually managing your project, you'll want to consider using computerized cost-estimating tools.

Even the simplest tool can dramatically speed up cost estimating by totaling long columns or rows of figures in a split second. Which tools do you use in the workplace now? Perhaps you use a basic spreadsheet program, or you may use project management software.

A computerized spreadsheet of project costs allows for easy reference and analysis from a single page. Most basic applications also enable you to create simple charts and graphs for reporting purposes.

Project management software applications are specifically designed to aid in the planning and controlling of project activities. These programs are designed to make schedule and cost control much easier for project management teams.

Most software applications contain cost-estimating features that enable you to develop your cost estimates quickly and accurately. More details on how project management software can benefit your project are provided below.

• Triangulation. Triangulation is the act of using two points in space to accurately position yourself. You can use your computer to run two or more sets of cost estimates using different approaches in order to verify and affirm their accuracy.
• Simulation. There are some fairly sophisticated software products on the market that perform simulations. These programs enable you to develop various cost performance scenarios based on a few key inputs.
• Integration. Computer software enables you to integrate your cost estimates with your company's coding system for cost accounts. Your project team will also benefit from having cost information about current and past projects available on-line through a computer network.

There is a range of project management software available, from low-end software you can use to manage simple projects to high-end software that will enable you to handle multiple or complex projects. You should choose the product that best meets your needs.
Computerized tools have a number of advantages when used in cost estimating. They can save you time and money in the following ways.

1. They can simplify the use of other costing techniques.
Computerized tools simplify the use of other cost-estimating techniques, including analogous estimating, parametric modeling, and bottom-up estimating. Cost estimating often relies on statistical analysis that is simplified by computers. Totaling and rolling-up costs is also quicker and more accurate if you use computerized tools. More details are provided below.

• Analogous estimating. Analogous estimating means using the actual cost of a previous, similar project as the basis for estimating the cost of a current project. With the right software, you can easily use computerized databases to aid in cost estimating.
• Parametric modeling. You know how well computers crunch mathematical formulas. Put this power to use if your project lends itself to parametric modeling as the best cost-estimating technique to use.
• Bottom-up estimating. Even the most basic of applications can make bottom-up estimating much easier and faster. Automated spreadsheets would be ideal for totaling individual work items, and then rolling-up the individual estimates to find the project total.

2. They can calculate cost estimates quickly and accurately and enable you to perform simulations and "what if" analyses.
Computerized tools make preparing a variety of costing alternatives easy. You can decide which estimates are most feasible and achievable in the current project. Computer applications can also run simulations and do this much more quickly and accurately than most humans can.
Plus, you can use your computer to consider costing alternatives and to perform "what-if" analyses. For example, you could "ask" your software, "What if I add five percent to all production estimates?" or "What if I used this type of metal?"

Speed, accuracy, and the ability to run simulations are all characteristics that make computerized tools both time-savers and money-savers when developing cost estimates for a project.

The Components of a Risk Management Plan

Imagine trying to build a house without a house plan. Do you think the process would go smoothly? Would you be happy with the results? Do you think it would take less time than if you had planned it out first?

The answer to all of these questions is likely no. The same is true when it comes to managing risk which is why it is important to put a risk management plan in place to guide your project decisions.

A risk management plan indicates how risk identification, analysis, planning, monitoring, and control will be handled throughout the project's life cycle. The components of a risk management plan are:

• methodology
• scoring and interpretation
• thresholds
• budgeting
• timing
• tracking
• roles and responsibilities
• reporting formats

In order to begin the risk management plan there must be an analysis stage that looks at methodology, scoring and interpretation, and thresholds.
Methodology refers to the approaches, tools, and data sources that may be used to carry out risk management. The methodology chosen will depend on the project stage and the amount of information available.

Scoring and interpretation refers to the numerical ranking of risks. The method of scoring and interpretation must be determined in advance, used in a consistent manner, and measured using tools such as a risk rating matrix or probability analysis.

Thresholds describe the who, what, and how criteria for risks that will be acted on. Project team members may have different risk thresholds. An acceptable target threshold must be determined to gauge the effectiveness of the risk response.

Deacon Oil Explorations, Limited (DOEL) is one of the leading oil exploration companies in the country. The project that DOEL is about to embark on is of great importance and is predicted to move DOEL to the top of its field. DOEL has just finished the analysis stage for this project's risk management plan.

• methodology - In a brainstorming meeting, DOEL used open-ended questions to ask its staff what risks they thought would be concerns for the upcoming project.
• scoring and interpretation - DOEL's risk management team has decided to use a risk rating matrix to score risks. It will use a scale from 0.0 to 1.0, rating 0.0 to 0.3 as low risk, 0.4 to 0.7 as medium risk, and 0.8 to 1.0 as high risk. Having this planned in advance will ensure risks are scored and interpreted consistently.
• thresholds - DOEL's risk management team has decided that it cannot act on all identified risks. The team decided that risks scored at 0.7 or above will be acted on, while risks scored at 0.6 or below will not. Therefore, the acceptable threshold is 0.7.

After the analysis stage of the risk management plan, team members can start thinking about planning for the next three components: budgeting, timing, and tracking.
Budgeting involves setting the amount of money that will be invested in the risk management plan for the project.

Timing refers to how often the risk management process is performed. The process should be performed often enough so that the results will impact on decisions, and decisions should be reviewed periodically to allow for improvement.

The tracking process considers the current project, future needs, and lessons learned when documenting how risk activities will be tracked. It also takes into account when and how risk management processes will be audited.

Now that you know the basic structure of the risk management plan, it's time to focus on who is in charge and how reporting will take place within the process. The last two components are roles and responsibilities and reporting formats.

Roles and responsibilities should be established for every action in the risk management plan. It is necessary to define who leads, who supports, and who belongs to the team. Independent risk management teams are made up of people who are not biased.

Reporting formats refer to the reporting relationships and structures that exist within the risk management process. The reporting formats define the risk management response plan and indicate how results will be documented, analyzed, and communicated to stakeholders.

Bennett Publishing is getting its risk management plan ready for its new distance learning courses. They are assigning roles and responsibilities and determining reporting formats for the process.

Peter Croft has been chosen to lead the risk management team. He will conduct a brainstorming meeting with team members Jill, Richard, and Seela on Thursday.

It has been decided that the results of the risk management process will be reported to all concerned parties via an intranet site. The site will be updated regularly.

A risk management plan helps to guide your project decisions. It indicates how risk identification, analysis, planning, monitoring, and control will be handled throughout the project's life cycle. Risk management plan components such as methodology, scoring and interpretation, thresholds, budgeting, timing, tracking, roles and responsibilities, and reporting formats give substance and structure to the plan so it can be carried out effectively. Once you have a risk management plan in place, your project should sail smoothly.

Should You Approve, Endorse or Reject a Change Request?

Knowing how to manage scope changes can make the difference between project success and failure. To increase your chance of success, you need a technique that enables you to track and manage changes as they occur.

Some changes to project scope, such as legislative changes or new safety standards, are mandatory. By definition, mandatory changes must be implemented. Other requests for changes are not mandatory but may be beneficial. If implemented, these changes can impact the project schedule, budget, or both, so they must be effectively managed.

Scope change control defines the procedures by which the project scope may be changed. It includes the paperwork, tracking systems, and approvals necessary for authorizing changes.

Before authorizing changes, a project manager must:

1. assess the impact of the requested change
2. choose the appropriate status for the change request

Since the opportunity to add value decreases and the cost of change increases as project work progresses, you need to consider the work effort and the associated cost when assessing the impact of proposed scope changes.
The more time a scope change requires, the more it will affect the project budget. You need to assess the length of time, or work effort, it will take to implement the proposed change.

The most common method for calculating the work effort in relation to a specific scope change request is the resource profiling method. The resource profiling method uses the Baseline Effort, Skill Factor, Work Interruption Factor, and Part-time Effect to calculate Normalized Effort (NE)—a real-world estimate of work effort.

• Baseline Effort (BE) - The BE assumes that the task will be worked on full-time, without interruption, by a team member with a high level of technical skill and knowledge. To determine the BE, determine the ideal length of time it will take to complete the task in a perfect world.

• Skill Factor (SF) - The SF represents the proficiencies of the team members who will complete the proposed work. A value of one indicates expert knowledge in the area. A value of two indicates a proficient and acceptable skill level. A value of three indicates little or no knowledge.

• Work Interruption Factor (WIF) - The WIF takes into account reasons for temporary work stoppage. The most common type of interruptions are idle time, meetings, breaks, and communication. To calculate the WIF, add ten percent per interruption type and one percent for each team member.

• Part-time Effect (PTE) - The PTE compensates for the fact that the team may work on more than one activity at a time. To determine PTE, assign a 0 percent loss for full-time work, a 10 percent loss for three quarter time work, a 15 percent loss for part-time work, and a 20 percent loss for one quarter time.

Once you know how to calculate the factors used in resource profiling, you can calculate the Normalized Effort (NE).
To calculate NE, subtract the WIF from 100. Then divide 100 by this value. Next, subtract the PTE from 100. Then divide 100 by this value. Finally, multiply these two values with BE and SF.

In addition to determining the work effort, you need to determine the associated costs of the proposed change. There are many direct and indirect costs associated with implementing a scope change. Some of these costs include:

• overtime payments
• late completion penalty
• lost business opportunity
• rework
  
• new equipment
• insurance requirements
• changes to guarantee or warranty.

The associated costs of a proposed change should be expressed in a cost estimate (CE). To produce an effective cost estimate, you need to include all of the resources required for the task, including the time it takes to complete the change. The more resources you include, the more accurate your cost estimate will be.

There are some situations in which you won't have enough information to assess the impact of a requested change. The change request form could be missing vital information or be improperly filled out. In these situations, you should request more information from the person who originally requested the scope change or from other members of the project team who would be able to supply supporting details. You must then reassess the impact of the change.

Once you have all of the required information, you need to choose the appropriate status for the change request. The three status options are: approve, endorse, or reject.

You should base your scope change control decision on the results of comparing the estimated effort and the associated costs to the contingency reserve for your project.

• You should approve a change request if the contingency reserve is greater than the effort and cost estimate. For example, if the estimated effort is 12 hours, and the contingency reserve is 40 hours, you should approve the change.
• You should endorse the change request to the project steering committee if the estimated effort and associated cost are less than ten percent above the reserve. The project steering committee would need to approve the discrepancy.
• You should reject a change request if the contingency reserve is less than the effort and cost estimate. Approving a change in this situation would cause deviations and overruns not approved by the project steering committee or the client.

By using accurate work effort and cost estimates, you will be able to assess the impact of project changes and determine the status of the changes. These methods of scope change control will help your project stay on the right track.

The Most Common Reasons for Change Requests

Change is inevitable. As a project manager, you will probably encounter many changes as you plan and execute your project. At least some of these changes will affect the project's scope, either increasing it or decreasing it. To better manage and control these kinds of changes, you should know what changes are most often requested.

A change request may be initiated internally or externally. It may be written or verbal, legally mandated or optional.

There are five common reasons for changing the scope of your project.

1. an external event - The first reason for a scope change request is an external event. These are factors outside of your control that impact the scope of the project. External events can be general or project-specific.
   
   A general event, such as a state-wide power failure due to a violent hurricane, does not directly relate to the project, but could force a change request.
   
   A project-specific event could be a change in local zoning regulations that require immediate changes to the project. While this is out of your control, it affects the project.
   
   
2. a "product" scope error - The second reason for a scope change request is a product scope error. This includes any omissions, inaccuracies, or miscalculations relating to the product of the project. Any of these errors could prompt a change request.
   
   Think about a software development project. An example of a product scope error would be the failure to include a required feature in the original design. Without a change request, the final product would be missing a desired feature.
   
   
3. a "project" scope error - A project scope error is the third reason for change requests. A project scope error usually results from an error in estimating or planning the work in the initial phases of the project. This could include anything from underestimating the time it takes to complete each task to not properly defining the work in each phase. Although most project scope errors cause the project to run behind schedule, they can also result in phases or deliverables being completed ahead of schedule.
   
   Using an incomplete WBS for a telecommunications project would prompt a change request due to a project scope error. Since the project manager did not properly define some activities, activities were duplicated, causing schedule and budget problems.
   
   
4. a value-adding change - The fourth reason for changing the scope of your project is a value-adding change. Value-adding changes are caused by factors that cannot be considered when the original scope is defined, but if implemented into the project scope, will improve the project or make it more cost effective. In a software game development project, a value-adding change could be new technology that enables players to play against other competitors online. This situation would require a change request due to a value-adding change.
   
   
5. a contingency plan implementation - The final reason for a change request might occur if you implement a contingency plan to handle a risk on your project. A contingency plan is applied to the identified risks on a project to reduce the cost and impact if the risk does occur. If the risk has a higher impact than anticipated, a change in project scope may be required. Tom, a software engineer, is working on a software development project that will allow a home entertainment system to be activated by both remote control and a human speaking a command. Tom needed to implement a contingency plan—human voice recognition—because the project manager learned a competitor was developing a similar product with voice recognition capabilities. Without this change request, the company risked losing sales to the competitor once the project went to market.

Change requests act as a record of the project's evolution and progressive elaboration. Since change requests explain the reason for change, they help ensure that all stakeholders understand and agree to the proposed change.

Whether changes to your project come in the form of federal laws or an error in judgment, one thing is certain—change will happen. Familiarizing yourself with the most common reasons for changing the project scope will allow you to manage and control these kinds of change requests.