The appointment for the air-conditioning maintenance man was for 9.00am last Saturday morning so when he still had not arrived at 10:30am I called him up and asked where he was. “Sorry ah! Will be a bit late ah! 2pm ah!” was the response. He turned up at 3pm some 6 hours late.
Then on Sunday I had to fly to Miri and while sitting in the departure hall came the announcement that we all dread to hear, the plane had been delayed leaving KL and would be 30 minutes late.
So, what has all this got to do with project management? Well, Its all about setting baselines for the deliverables of their services in both cases. If I had initially asked the ‘aircon’ man to come without setting a time then technically he could not have been late turning up at 3:00pm. If the airline had not set a departure time then it would not have been delayed. However, appointments and departure times where established resulting in notable delays to those baselines.
When a contractor embarks upon a project it is usual for the client to set contractual milestones that must be met or else the contractor will be penalized. When linked to the activities of work these contractual milestones form an immovable ‘peg in the ground’ that will generate a logical path to achieve the deliverables by the required date. Upon agreement by both parties a baseline is set against which progress is measured to determine if the deliverables are being met.
If baselines are not established then the project has no means to measure its performance against, resulting in no early warning indicators that the project may be slipping into the ‘sick’ category. Similarly, the contract will define what the contractor is required to deliver and these requirements should be strictly controlled to ensure both parties do not diverge from their commitments without justifiable compensation.
Baselines can take on a number of forms depending on what critical success factors where defined at the beginning of the project but the three most common ones are cost, schedule and scope.
Cost Baselines are time-phased budgets that will monitor and measure cost performance throughout the project life cycle. They form a forecast indicator as to the possibility of the project running over budget at any given point in time thus allowing for remedial action such as re-financing to be implemented.
Schedule baselines form the most common type of baselines that will highlight if the project will complete on time and are critical to the success of the project not only from a contractual point of view but also from the contractors financial perspective as any slippage from the contractual completion date will result in a depletion of profits through the overuse of indirect resources. When the project schedule is baselined each activity can be measured for slippage and highlight the necessity for a recovery plan to be implemented.
Scope baselines form the most critical baseline that defines the complete scope of the project as understood by both parties at the beginning of the project. Any changes within the scope baseline will require the other two baselines to be re-visited also as additional work will require it to be costed and schedule in with the original scope.
Because the baseline serves as the primary metric for evaluating performance as the project progresses, the stability of the baselines are crucial. Therefore, after establishing the baselines they must be put under some form of version control to ensure all changes are legitimately approved and entered.
Once the project has been baselined within these three dimensions, it is available to be measured, monitored and controlled.
We constantly use baselines in our daily lives to compare what we need or what is required to be done, against pre-defined benchmarks. Consider the following common baselines: Greenwich Mean Time (GMT) displayed in a clock or watch indicating how much time is left to complete a task or to meet an appointment; a rule or tape measure used to compare the length of an object or a distance required; and even the fuel gauge in your car that measures the actual fuel used against what is remaining.
Imagine how difficult life would be without these items that we all take so much for granted.
Baselines provide the benchmark against which we measure progress and without formal baselines projects cannot be monitored or controlled and will ultimately end up as a statistic in the archives of ‘failed’ projects.
Friday, April 30, 2010
Friday, April 16, 2010
Development and Use of Project Contingency (Borneo Post 16th april 2010)
It is common practice for practitioners tendering for lump sum contracts to apply a contingency to the estimated sum prior to client submittal however, the development and use of contingencies is often misunderstood.
It is not unusual for a company to simply apply 10 or 15 percent of the estimated sum as a contingency value to be used at the discretion of the Project Manager (PM) throughout the project life cycle.
The typical uses of the contingency fund by the PM vary with justifications ranging from additional scope of work, design changes, additional resources, scope creep or even that end of project party. In addition to how contingency is used the PM also usually determines when it is used and in most cases will ensure that it is in fact used before the end of the project, instead of returning any unused portion to the company coffers.
This misuse of contingency is a very common practice both in the development and use of contingency costs and if you are telling yourself ‘well that’s how we have always done it’ then consider the following reasons for not doing it.
Allocating subjective contingencies to projects could deprive the funding of budgets to other company projects resulting in those projects not being allowed to proceed. Conversely, the allocated contingency could be inadequate and the project has to be abandoned at the cost of the company. The reality is that contingency funds are an essential budgetary item that requires objective development and strict governance in the use thereof.
So first let’s look at the real reason for applying contingencies by looking at a simple example. You save all year for that holiday during Chinese New Year and a week before the time actually comes to fly off to that exotic island or back to your homeland to see long lost relatives, you look at the money you have saved and think to yourself “Maybe I should take a little extra, just in case something goes wrong like an accident, illness, robbery or loss of personal possessions or money”. Now that’s contingency!
Note I didn’t say “Maybe I should take a little extra, in case I run out of money” or “… in case I decide to stay a little longer”, because that’s not contingency.
Contingency is an allocation of funds to be used in the event of identified risks eventuating, remembering that risks are potential events that cannot be forseen.
If the holiday went as planned, then one should return home with the contingency fund in the pocket. It should not be exchanged at the duty free store for goods that you never knew existed prior to walking into the store, it should be returned to your bank account for the next holiday.
So contingency is used for use during the eventuation of identified risks and therefore it requires some objective method of determining both how much money to allocate in total and when to spend that allocation. If the amount allocated is a lump sum determined subjectively then it is expected the spending of that allocation can only be subjective also.
When we talk of ‘risk’ we think of harmful or damaging results but there are also positive risks that if eventuate are opportunities for a project to capitalize on. As such, contingency allocations should be made available to seize opportunities as well as remove hazards. This can only be executed effectively if each individual potential risk is identified and allocated a contingency budget.
Before determining the contingency value thought must be given to the probability of the individual risk occurring and the consequence should it occur, then estimate what impact in terms of time and cost that risk will have on the project.
Each identified risk should, if possible, be associated with certain activities in the project schedule, however certain risks may only be applicable to activities in a particular timeframe like cyclones. If these activities are delayed then they could move outside the cyclonic weather window and the potential risk may reduce or increase as the case may be.
The next step is to develop strategies to be implemented should the potential risk occur or to mitigate the risk from occurring and it is these strategies that need to be costed for the contingency allocation. In the event that the potential risk does occur then the mitigation strategy can be implemented utilising the allocated contingency.
After totaling all the individual values the PM has a total contingency budget determined objectively that can be justified to senior management. In addition, senior management can monitor the spending of the contingency and forecast any unspent money for allocation to other projects upon its return.
There are other methods of determining the contingency funds, one being a quantitative method using ‘Monte Carlo’ analysis. This use of standard deviation to calculate the contingency is very popular with the larger organisations or enterprises but requires the use of sophisticated software for a full analysis of the data outputs.
Whatever method is employed the bottom line is, anything is better than a subjective assessment of adding 10 to 15 percent to the estimated value.
On May 29, 2006, an Indonesian company drilled a well into pressurized rocks in an East Java oil field but something went wrong when the well breached rocks somewhere around 3,000 meters underground, depressurizing the fluid in the rocks below.
Since the rupture, more than 90 million cubic meters (approx 14 football fields) per day of 80 degree Celsius clay and water have percolated to the surface displacing 30,000 people and causing roughly USD1 billion in damages.
I can guarantee you that every future risk management workshop held in that company will be identifying that risk as maybe a medium possibility with an extremely high consequence resulting in the allocation of well defined contingencies.
It is not unusual for a company to simply apply 10 or 15 percent of the estimated sum as a contingency value to be used at the discretion of the Project Manager (PM) throughout the project life cycle.
The typical uses of the contingency fund by the PM vary with justifications ranging from additional scope of work, design changes, additional resources, scope creep or even that end of project party. In addition to how contingency is used the PM also usually determines when it is used and in most cases will ensure that it is in fact used before the end of the project, instead of returning any unused portion to the company coffers.
This misuse of contingency is a very common practice both in the development and use of contingency costs and if you are telling yourself ‘well that’s how we have always done it’ then consider the following reasons for not doing it.
Allocating subjective contingencies to projects could deprive the funding of budgets to other company projects resulting in those projects not being allowed to proceed. Conversely, the allocated contingency could be inadequate and the project has to be abandoned at the cost of the company. The reality is that contingency funds are an essential budgetary item that requires objective development and strict governance in the use thereof.
So first let’s look at the real reason for applying contingencies by looking at a simple example. You save all year for that holiday during Chinese New Year and a week before the time actually comes to fly off to that exotic island or back to your homeland to see long lost relatives, you look at the money you have saved and think to yourself “Maybe I should take a little extra, just in case something goes wrong like an accident, illness, robbery or loss of personal possessions or money”. Now that’s contingency!
Note I didn’t say “Maybe I should take a little extra, in case I run out of money” or “… in case I decide to stay a little longer”, because that’s not contingency.
Contingency is an allocation of funds to be used in the event of identified risks eventuating, remembering that risks are potential events that cannot be forseen.
If the holiday went as planned, then one should return home with the contingency fund in the pocket. It should not be exchanged at the duty free store for goods that you never knew existed prior to walking into the store, it should be returned to your bank account for the next holiday.
So contingency is used for use during the eventuation of identified risks and therefore it requires some objective method of determining both how much money to allocate in total and when to spend that allocation. If the amount allocated is a lump sum determined subjectively then it is expected the spending of that allocation can only be subjective also.
When we talk of ‘risk’ we think of harmful or damaging results but there are also positive risks that if eventuate are opportunities for a project to capitalize on. As such, contingency allocations should be made available to seize opportunities as well as remove hazards. This can only be executed effectively if each individual potential risk is identified and allocated a contingency budget.
Before determining the contingency value thought must be given to the probability of the individual risk occurring and the consequence should it occur, then estimate what impact in terms of time and cost that risk will have on the project.
Each identified risk should, if possible, be associated with certain activities in the project schedule, however certain risks may only be applicable to activities in a particular timeframe like cyclones. If these activities are delayed then they could move outside the cyclonic weather window and the potential risk may reduce or increase as the case may be.
The next step is to develop strategies to be implemented should the potential risk occur or to mitigate the risk from occurring and it is these strategies that need to be costed for the contingency allocation. In the event that the potential risk does occur then the mitigation strategy can be implemented utilising the allocated contingency.
After totaling all the individual values the PM has a total contingency budget determined objectively that can be justified to senior management. In addition, senior management can monitor the spending of the contingency and forecast any unspent money for allocation to other projects upon its return.
There are other methods of determining the contingency funds, one being a quantitative method using ‘Monte Carlo’ analysis. This use of standard deviation to calculate the contingency is very popular with the larger organisations or enterprises but requires the use of sophisticated software for a full analysis of the data outputs.
Whatever method is employed the bottom line is, anything is better than a subjective assessment of adding 10 to 15 percent to the estimated value.
On May 29, 2006, an Indonesian company drilled a well into pressurized rocks in an East Java oil field but something went wrong when the well breached rocks somewhere around 3,000 meters underground, depressurizing the fluid in the rocks below.
Since the rupture, more than 90 million cubic meters (approx 14 football fields) per day of 80 degree Celsius clay and water have percolated to the surface displacing 30,000 people and causing roughly USD1 billion in damages.
I can guarantee you that every future risk management workshop held in that company will be identifying that risk as maybe a medium possibility with an extremely high consequence resulting in the allocation of well defined contingencies.
Thursday, April 8, 2010
A Failure to Plan is a Plan to Failure (Borneo Post Friday 9th April 2010)
I recently needed to take a business trip from Kuching to Miri and then on to Brunei and as I needed to call in on a number of clients in both locations I decided this was a great opportunity to undertake the journey by car. As this was the first time I had driven to these places I needed to establish how to get there so I purchased a map of Borneo and after making the appointments decided to plan the route I would take.
Projects are also ‘journeys’ and need a plan if they are to have any hope of being successful. When a project commences it is essential that the scope of work is defined to understand what deliverables are required (appointments) and a project schedule is developed to understand how those deliverables will be produced (the road map).
Projects, by definition, are unique and are never repeated, no matter how similar they were to the last project undertaken.
Take for instance road construction. Sure, the basic method of constructing a road does not change but no two roads are the same and therefore a plan must be developed to ensure it is completed within the given time frame, to the required client specification and within the agreed budget through the efficient use of resources (people, equipment and material).
The adoption of standardised project planning methodologies returns greater benefits than those typically perceived by some organisations evident by the production of a few shaded cells in a spreadsheet and submitted as a project schedule. However,, research does suggests that many organisations only undertake planning to conform with client requirements rather than the inherent value that it returns to the project and business as a whole, remembering that ‘project success equals business success’.
A client once told me they didn’t have time to do any planning as the project was so urgent they needed to ‘just get on with it’. I later learnt that the project completed seven weeks late and wondered how they didn’t have enough time to do any planning but they did manage find an additional seven weeks to complete the project which, cost them dearly in additional indirect costs and liquidated ascertained damages (LAD’s).
Fortunately in Sarawak many contractors do realise these benefits and have implemented methodologies such as ‘critical path method’ (CPM) that determines which activities of work, if delayed, will delay the project completion date (known as the critical path).
The project schedule in most industries is a contractual document that not only shows the project execution timeframe but after baselining, forms a benchmark against which progress is measured. This single document is the result of a concerted effort from the project management team and indicates their capability to perform the work logically, systematically and efficiently.
Planning is about establishing baselines against which progress is measured and involves defining the contractual deliverables, defining and sequencing the activities of work, defining and assigning the required resources, establishing budgeted cost, assigning responsibilities and identifying elements of risk together with their contingency plans.
Think of it this way. If you are planning to get married (yes, getting married is a project) you need to determine what type of ceremony and reception is required (scope) when it will occur and when the individual deliverable milestones are required (time) and how much money should be allocated (cost). You will need to determine who will arrange the ceremony, reception and organise the honeymoon (responsibilities) and what are the contingencies should something not go as planned (risk).
As I mentioned earlier all projects are unique so each wedding must be planned individually and to emphasis this point may I say I have been married twice (to the same person) so you would have thought that these two weddings would have been, at the very least, similar, but nothing was further from the truth. The first one happened in Australia and the second in my wife’s kampong so consider the cultural, social, environmental, legal, logistical and financial differences of these two events and one quickly realises that individual planning was absolutely essential.
Divergences from planned baselines that affect the projects ability to produce contractual deliverables are essential ‘early warning indicators’ that trigger corrective actions. If a project is planned correctly and a baseline applied at the outset then you have established a benchmark to monitor where you should be today and where you are heading tomorrow.
Remember the story about the Cheshire cat in ‘Alice’s Adventures in Wonderland’ where Alice comes upon the cat sitting in a tree at the junction of 3 paths and she asks the cat which path she should take. The cat replies “Well, where would you like to go?” Alice says, “I don’t know.” The cat responds “Then any path will take you there”. Apply that to projects and it is easy to see that a failure to plan is a definite plan to failure.
Projects are also ‘journeys’ and need a plan if they are to have any hope of being successful. When a project commences it is essential that the scope of work is defined to understand what deliverables are required (appointments) and a project schedule is developed to understand how those deliverables will be produced (the road map).
Projects, by definition, are unique and are never repeated, no matter how similar they were to the last project undertaken.
Take for instance road construction. Sure, the basic method of constructing a road does not change but no two roads are the same and therefore a plan must be developed to ensure it is completed within the given time frame, to the required client specification and within the agreed budget through the efficient use of resources (people, equipment and material).
The adoption of standardised project planning methodologies returns greater benefits than those typically perceived by some organisations evident by the production of a few shaded cells in a spreadsheet and submitted as a project schedule. However,, research does suggests that many organisations only undertake planning to conform with client requirements rather than the inherent value that it returns to the project and business as a whole, remembering that ‘project success equals business success’.
A client once told me they didn’t have time to do any planning as the project was so urgent they needed to ‘just get on with it’. I later learnt that the project completed seven weeks late and wondered how they didn’t have enough time to do any planning but they did manage find an additional seven weeks to complete the project which, cost them dearly in additional indirect costs and liquidated ascertained damages (LAD’s).
Fortunately in Sarawak many contractors do realise these benefits and have implemented methodologies such as ‘critical path method’ (CPM) that determines which activities of work, if delayed, will delay the project completion date (known as the critical path).
The project schedule in most industries is a contractual document that not only shows the project execution timeframe but after baselining, forms a benchmark against which progress is measured. This single document is the result of a concerted effort from the project management team and indicates their capability to perform the work logically, systematically and efficiently.
Planning is about establishing baselines against which progress is measured and involves defining the contractual deliverables, defining and sequencing the activities of work, defining and assigning the required resources, establishing budgeted cost, assigning responsibilities and identifying elements of risk together with their contingency plans.
Think of it this way. If you are planning to get married (yes, getting married is a project) you need to determine what type of ceremony and reception is required (scope) when it will occur and when the individual deliverable milestones are required (time) and how much money should be allocated (cost). You will need to determine who will arrange the ceremony, reception and organise the honeymoon (responsibilities) and what are the contingencies should something not go as planned (risk).
As I mentioned earlier all projects are unique so each wedding must be planned individually and to emphasis this point may I say I have been married twice (to the same person) so you would have thought that these two weddings would have been, at the very least, similar, but nothing was further from the truth. The first one happened in Australia and the second in my wife’s kampong so consider the cultural, social, environmental, legal, logistical and financial differences of these two events and one quickly realises that individual planning was absolutely essential.
Divergences from planned baselines that affect the projects ability to produce contractual deliverables are essential ‘early warning indicators’ that trigger corrective actions. If a project is planned correctly and a baseline applied at the outset then you have established a benchmark to monitor where you should be today and where you are heading tomorrow.
Remember the story about the Cheshire cat in ‘Alice’s Adventures in Wonderland’ where Alice comes upon the cat sitting in a tree at the junction of 3 paths and she asks the cat which path she should take. The cat replies “Well, where would you like to go?” Alice says, “I don’t know.” The cat responds “Then any path will take you there”. Apply that to projects and it is easy to see that a failure to plan is a definite plan to failure.
Subscribe to:
Posts (Atom)
