Blowing the Budget

Throw the budget overboard and full steam ahead

The media headlines scream out, “Project blows its budget by 50%”, “IT project 100% overspent”, “Project management has failed”. But is the situation as bad as the sensational headlines proclaim?

At a recent project management conference, an internationally renowned speaker gave shocking figures of projects that had exceeded their budgets, but without clarifying if they referred to the original approved budget or current / final approved budget. It is crucial to make this distinction if we are to judge the project’s cost management performance. It is also important to drill down and find out the root causes of the changes before a judgement can be made on the project’s cost performance.

“Freezing” the scope

Preliminary budget / estimate approval may have been given in the concept stage when it is not possible to accurately determine the scope. It is accepted practice that a Rough Order of Magnitude (ROM) range estimate should have an accuracy of  -50% to +100% (the final actual cost of the project could be between 50% under the ROM or 150% over the ROM). Sometimes the ROM is followed by the Order Of Magnitude (OOM) estimate (the final actual cost of the project could be between 25% under the OOM or 100% over the OOM).

The foregoing should be called the preliminary budget or estimate, rather than the original budget.

As the project progresses down its project life cycle more accurate information becomes available through progressive elabloration. At some stage, normally at the end of the planning phase, the scope needs to be “frozen” and the client / customer must approve a budget which will be the cost performance baseline for the project. This should include a contingency amount to cover project risks such as variations in quantities, miscalculations, cost escalation, etc.  This is called the original budget or original cost baseline.

A project can exceed its original budget in a number of ways without being considered a failure. How does this arise?

Internal scope changes

As the project continues down its project life cycle, the budget can be modified by means of scope changes. Now here’s the rub.

How do scope changes come about? There are numerous sources: some are influenced by the project team itself (internal), and some thrust upon the project from the environment (external). In all cases they are approved by the client for inclusion in the current / final approved budget which forms the new cost performance baseline.

Internal scope changes can again be divided into two categories: Corrective Scope Changes or Value Adding Scope Changes.

Corrective Scope Changes can arise when the project team realizes that the scope as originally defined did not include something that is required for the project to succeed. The assumption here is that the project team should have reasonably included it in the scope, but did not, for whatever reason. The project manager could motivate the scope change to the client, by saying it’s not fruitless expenditure because it should have been included in the original approved budget. However, clients don’t like unpleasant surprises, so these scope changes could have been avoided by more thorough planning.

Value Adding Scope Changes arise where, for instance, a new technology becomes available that could not have been reasonably foreseen during scope definition. The client has a choice to accept the change and enhance the project product, or not.

External scope changes

Sometimes a scope change is required to deal with a Force Majeure event. Force Majeure can be acts of God (earthquake, tsunami, volcano eruption) or acts of man (war, national strike, terrorism). In both cases the project manager can request a scope change and adjust the performance baselines (usually both cost and schedule). This type of scope change will certainly cause the final approved budgetto exceed the original approved budget, but should never be construed as poor project performance.

Judging Project Success

Judging a project’s performance is seldom a simple exercise. Aspects such a scope creep (adding additional functionality without proper client approval) and the type of procurement contract selected can cloud the subject even further.

However, one thing is clear: A simple comparison of original budget to final budget can do a project manager’s performance rating a great disservice.

Millions, Billions, Zillions

Not so long ago it was quite an achievement to be a millionaire. But multi-millionaires are pretty common these days, so you need to reach the billionaire status to be considered super rich.

Figures in the billions are now commonplace when speaking of project budgets and company buy-outs. A billion originally meant a million million, but in the USA it was a thousand million, and this is now the accepted value globally. Even so, $1 000 000 000 is a staggering amount of money (except in Zimbabwe).

Mark Zuckerberg, a 22 year-old ex-Harvard student, is founder and chief executive of Facebook, a three-year-old social networking website that has exploded into an online hub for more than 17 million young people. Late last year, Yahoo offered to buy Facebook for $1 billion (R7 billion). Zuckerberg turned the offer down. In October 2007 Microsoft bought a 1.6% share for $240 million indicating that Facebook could be worth an awesome $15 billion (R105 billion)

Zuckerberg, who was writing software code in Grade Six, says he created Facebook to give his friends at Harvard University an easy way to communicate. "I threw it together in about a week," He ran the site on about $85 a month before dropping out of Harvard in 2004 and moving to the San Francisco Bay Area.

In South Africa a R39 billion oil refinery is planned by PetroSA, possibly sited at Coega in the Eastern Cape. This is a staggering amount of money to build just one refinery, but compared to Facebook it’s cheap. And that doesn’t include the pipeline to distribute the products to the interior which will be a separate project. The refinery, which would employ 1 000 people directly and an estimated 5 000 indirectly, would give a much needed boost to the economy of the Eastern Cape, where growth has lagged behind provinces such as Gauteng. PetroSA generated "super profits" of R2.73 billion in financial year 2007 thanks to high natural gas prices that track the oil price.

In the biggest foreign direct investment in post-apartheid South Africa to date, the Standard Bank Group is selling a 20% stake to the state-controlled Industrial and Commercial Bank of China for an incredible R36,7 billion.

The Gautrain’s budget is also heading for astronomical figures. Originally estimated at R4 billion it is now expected to cost R25 billion and rising.

The gigabyte is the computer world's equivalent of the billion which is now being surpassed by the terabyte (1 000 000 000 000 bytes) as the new standard for hard disk capacity. According to Moore's Law, which said that advances in computer hardware doubles every 2 years, it won’t be long before we have petabytes or even exabytes (1 followed by 18 zeros).

Thanks a zillion for reading this e-News article.

The other day I recommended a book to a candidate as pre-reading for the Project Management Professional (PMP^®) examination preparation workshop that ProjectPro offers. She subsequently emailed me a review of Dr Harold Kerzner's book: Project Management:    A Systems Approach to Planning, Scheduling and Controlling that appeared on Amazon.com. I thought it appropriate to clear up some misconceptions that I believe the reviewer (a self-confessed bookworm) has.

The reviewer says rightly that "Kerzner's book adopts a systems approach to project management while the Project Management Body of Knowledge (PMBOK^® Guide) takes a process approach."  However the reviewer incorrectly states that this is a fundamental difference. A system comprises of subsystems or processes which need to be integrated with each other for the system not to become chaotic.

The human body is a system with its subsystems like the respiratory or digestive systems which in turn have their processes that consist of inputs, interactions and outputs. For instance, in the digestive system, the mouth inputs food to the stomach, where digestion allows the nutrients to be outputted to the blood stream. This process in turn inputs to the metabolic processes in the cells. etc, etc.

Business is a system, of which project management is a subsystem consisting of 44 processes distributed over 9 knowledge areas. Each of these processes has inputs, tools & techniques, and outputs, which in turn serve as inputs to other processes. All of these need to be integrated within the project management information system, which the PMBOK^® Guide emphasizes as being important, to support the strategic objectives of the business system.

Therefore there is no fundamental difference between a systems approach and a process approach. A system is merely bigger than a process. By definition the one is intimately integrated with the other.
The reviewer says disparagingly that "Kerzner's book was originally written a long time ago (this is the 9th edition)." Precisely! The author has taken the trouble to update the book 9 times to make sure it is still current.

The reviewer says the PMBOK^® Guide and Kerzner's book started from different roots. I disagree; the root of both books is efficient and effective project management. 

However, I agree with one statement the reviewer makes . "You can use it if you are looking for approaches to project management other than the PMBOK^® Guide approach." If you are sitting for the PMP^® exam you could have memorized all 388 pages of the PMBOK^® Guide and still fail. Why? Because about 75% of the PMP^® exam questions are "situational", not straight out of the PMBOK^® Guide. In other words, to answer them you need to know what would a competent project manager do in the given situation? This is where your experience and wider reading becomes invaluable.

The PMP^® is not for bookworms, it is for knowledgeable and experienced project managers

Who is accountable for ultimate project success?

Top management gives a new project the go-ahead with great expectations. The project manager and her team apply themselves to the planning and execution of the project deliverables with deep commitment. The project product is launched on due date and within budget, but within a few months it is clear that the product is a dismal failure. Who is accountable and answerable for this situation?

“Projects have two over-arching processes that run in parallel with each other,” explains Terry Deacon, CEO of ProjectPro, a Pretoria-based firm of project management consultants and training providers. “The project management process describes, organises and completes the work of the project, and the project manager is accountable for this process. The product-oriented process specifies and creates the project’s product, and the line or functional managers are traditionally accountable for this process. Integrating the two processes is the primary responsibility of the project manager.”

So where does the buck stop if a product fails in the marketplace? “Depending on which project management philosophy you follow the answer could vary,” comments Deacon. “Project managers following the North American Project Management Body of Knowledge (PMBOK^® Guide) approach would say that they did their job to bring the project in on time and budget, and that it was the fault of the functional design and marketing team that the product failed. On the other side of the world the Japanese Project and Programme Management (P2M) approach expects the project manager to be accountable for the success of the project and product processes.” The European approach is somewhere in the middle.

However, in North America, great emphasis has recently been placed on the role of the project sponsor to increase the success rate of projects.

Team members turn to the project manager for help when they encounter a problem. But whom can the project manager turn to when s/he needs support? One of the major reasons for project failure is a lack of top management support, so it is important that a senior management representative be appointed to ensure that the project stays aligned with the organisation’s strategy.

This person is called a project sponsor who acts as a crucial link between the project and the originating organisation (client). By virtue of their senior position, sponsors can help project managers to obtain scarce resources, remove obstacles, test ideas, and help solve problems (particularly political ones!). The project sponsor should ensure that the feasibility studies and viability of the product is sound before project go-ahead is given. After the project life cycle has been completed (and the project manager has been re-deployed) the sponsor should monitor the product’s performance in the operating life cycle to feed back any lessons learned.

“So it appears that ultimate project and product success depends on the integration of the efforts of the project team, the functional managers and the sponsor to satisfy the needs of. project stakeholders. The project manager plays a pivotal role in integrating their efforts through building an efficient and effective team to achieve the project’s objectives,” concludes Deacon.

A project is like a journey; it has a beginning and an end, undertaken with specific objectives.

To have a successful journey or project one needs a vehicle, a driver and a road map. All three have been provided in the Project Management Institute’s (PMI^®) guide to the Project Management Body of Knowledge (PMBOK ^TM ). Regular updates to the PMBOK^® Guide by the best project management brains throughout the world have identified the essential knowledge, practices and processes that are applicable to most projects most of the time

The components of the vehicle are the nine project knowledge areas: Integration, Scope, Time, Cost, Quality, Human Resources, Communication, Risk and Procurement. These knowledge areas comprise a total of 39 sub-processes.

However, vehicles are useless without drivers. The PMBOK^® Guide has identified five project management process groups: Initiating, Planning, Executing, Controlling and Closing. These serve as the driving forces of the knowledge areas.

What about the road map? If one creates a matrix with the knowledge areas as rows and process groups as columns, a very clear map is obtained which indicates what project management sub-processes and activities need to be done, and when.

“This is an ingenious, flexible approach as the processes can be applied to the life cycle of the project as a whole, or applied iteratively to each life cycle phase, no matter how many phases one has in the life cycle”, says Terry Deacon, member of the Project Management Standards Generating Body (PMSGB) and CEO of ProjectPro Management Services. ProjectPro, a SAQA / Services Seta accredited provider of project management training from levels 3 to 6, has modeled their courses on the above approach.

This approach has been one of the inputs used by the PMSGB to identifying the project management unit standards and specific outcomes for the various NQF levels. It is also being considered as a framework for the NQF level 4 PM Learnership that is presently being developed.

 “One of the requirements of the South African Qualifications Authority (SAQA) is that our unit standards should be internationally compatible,” adds Deacon. “The PMBOK^® Guide is approved by the American National Standard Institute and is a de facto international standard. The International Standards Organisation’s ISO 10006 Guideline to Quality in PM is closely aligned to the PMBOK^® Guide. Furthermore the Australian National Competency Standards for PM are based on the PMBOK^® Guide’s nine knowledge areas.”

The proof of the pudding is the fact that Southern African projects that have been managed based on the PMBOK^® Guide, have on three occasions won the international Project Of the Year (POY) award since its inception in 1990. The POY is organised by the PMI^® based in the USA. The Project Management Institute South Africa organises the local stage of this competition, which is known as the Project Management Excellence (PME) award

Terry Deacon may be contacted at ProjectPro tel. 012-346 6674 or 082-557 3119 for more information.

Is the new Earned Value terminology an improvement?

The familiar acronyms for earned value parameters viz. BCWP, ACWP, and BCWS found in most project management books were changed in the 2000 edition of the Project Management Institute’s Guide to the Project Management Body of Knowledge (PMBOK^® Guide). Their equivalents are now EV (Earned Value), AC (Actual Cost), and PV (Planned Value) respectively. These new acronyms may cause some confusion with PV also meaning Present Value (the discounting at the cost of capital of future streams of income to present day values) and EV also meaning Expected Value (the product of an event’s probability of occurrence and its impact).

BCWP (Budgeted Cost of Work Performed) or EV (Earned Value) is the budgeted amount (or estimated cost at the original budgeted rates) of the work that has been done at the point or date of measurement. Budgeted Cost is the monetary amount that was estimated for the work, and Work Performed is the work actually done. ACWP (Actual Cost of Work Performed) or AC (Actual Cost) is the monetary amount that we paid for the work that has been done (Work Performed) at the point of measurement. So, BCWP – ACWP will tell us if we have a cost variance. This answers the question “How much difference is there between the planned cost and the actual cost?” A negative variance means a cost overrun and could indicate that some corrective action is necessary.

To check how the schedule (timeline) is doing we compare BCWP (or EV) to BCWS (Budgeted Cost of Work Scheduled) or PV (Planned Value). BCWS is the monetary amount that was planned to be paid for the work scheduled to be done at the point of measurement. We compare this to the budgeted cost of the work that was performed (BCWP or EV). What we are comparing is the work that should have been done with the work that was done based on original budgeted rates. BCWP- BCWS or EV-PV.

Additionally, two other formulas are used in Earned Value calculations to avoid the significance of variances being influenced by the size of the project e.g. a -R 100 000 variance on a R1m project is more serious than on a R100m project. These formulae provide dimensionless indices viz. CPI (Cost Performance Index) and SPI (Schedule Performance Index). The following formulae are used:

CPI = BCWP / ACWP or EV / AC
SPI = BCWP / BCWS or EV / PV

The result is a measure of efficiency and is particularly useful to establish trends by plotting the results as the project progresses.

I believe that it was easier to understand this technique using the original terminology BCWP, ACWP, and BCWS. In the CPI formula the WP is the same at the top and bottom so we are comparing Budgeted Cost to Actual Cost. In the SPI formula the BC is the same at the top and bottom so we are comparing Work Performed to Work Scheduled.

Can the next PMBOK^® Guide update in 2004 please revert to the original acronyms? What do you think?

How do we manage time?

Time ticks by at 60 minutes per hour for everyone on Earth whether you are a king or a beggar. Nobody can slow time down or speed it up. But, how efficiently and effectively we use our time varies greatly from person to person.

Good time management techniques can save you one or two hours of wasted time per day, sometimes more. The value of time management is not about controlling time just so that you can pack more work into your day, but the ways you can use time to improve your life.

How many people on their deathbed wish they’d spent more time at the office? We shouldn’t just be competing with the clock all day. We should also get some direction from a metaphorical compass. In other words, what do we ultimately want to achieve in our lives?

This brings us back to the two “eff” words: efficiency and effectiveness. Do they mean the same thing? I think not. Efficiency is about minimizing waste and effort, following procedures, working against the clock – in other words “Doing things right”. Effectiveness is about setting your compass at the outset to produce the desired results – in other words “Doing the right things”. When we combine the two “eff” words we get high productivity, which is what Africa desperately needs right now to be globally competitive.

Time management has two dimensions: managing your personal time; and managing the time of others . An example of the former could be making sure you are on time for the theatre. An example of the latter would be a project manager making sure the team members finish their tasks timeously so that the project is completed by the deadline. 

When time is badly managed it can cause stress, with negative effects on our health. Conversely, good time management improves the quality of our lives, and our value to our families, friends, colleagues and society. 

I’d like to conclude with these thought-provoking words from Max Lerner, American author and columnist, “We all run on two clocks.  One is the outside clock, which ticks away our decades and brings us ceaselessly to the dry season. The other is the inside clock, where you are your own timekeeper and determine your own chronology, your own internal weather and your own rate of living.  Sometimes the inner clock runs itself out long before the outer one, and you see a dead man going through the motions of living”.

To learn more about personal and project time management, join one of ProjectPro’s Seize the Day!

To book a course please phone 012-346 6674, fax 012-346 675 or email training@projectpro.co.za

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