Defining the Project

Step 1: Defining the Project Scope

Step 2: Establishing Project Priorities

Step 3: Creating the Work Breakdown Structure

Step 4: Integrating the WBS with the Organization

Step 5: Coding the WBS for the Information System

4–1
 Step 1: Defining the Project Scope

• Project Scope
• A definition of the end result or mission of the project—a
product or service for the client/customer—in specific,
tangible, and measurable terms.
• Purpose of the Scope Statement
• To clearly define the deliverable(s) for the end user.
• To focus the project on successful completion
of its goals.
• To be used by the project owner and participants
as a planning tool and for measuring project success.

4–2
 Project
1. Project objective Scope Checklist
2. Deliverables
3. Milestones
4. Technical requirements
5. Limits and exclusions
6. Reviews with customer

4–3
 Project Scope: Terms and
Definitions
• Scope Statements
• Also called statements of work (SOW)
• Project Charter
• Can contain an expanded version of scope statement
• A document authorizing the project manager to initiate and
lead the project.
• Scope Creep
• The tendency for the project scope to expand over time due to
changing requirements, specifications, and priorities.

4–4
Step 2: Establishing Project Priorities

• Causes of Project Trade-offs

• Shifts in the relative importance of criterions related
to cost, time, and performance parameters
• Budget–Cost
• Schedule–Time
• Performance–Scope
• Managing the Priorities of Project Trade-offs
• Constrain: a parameter is a fixed requirement.
• Enhance: optimizing a criterion over others.
• Accept: reducing (or not meeting) a criterion requirement.

4–5
Project Management Trade-offs

FIGURE 4.1

4–6
Project Priority Matrix

FIGURE 4.2

4–7
 Step 3:Creating the Work Breakdown
Structure
• Work Breakdown Structure (WBS)
• An hierarchical outline (map) that identifies the products and work
elements involved in a project.

• Defines the relationship of the final deliverable

(the project) to its subdeliverables, and in turn,
their relationships to work packages.

• Best suited for design and build projects that have tangible outcomes
rather than process-oriented projects.

4–8
 Hierarchical
Breakdown of the
WBS

* This breakdown groups work

packages by type of work within a
deliverable and allows assignment
of responsibility to an organizational
unit. This extra step facilitates a
system for monitoring project
progress (discussed in Chapter 13).

FIGURE 4.3

4–9
 How WBS Helps the Project
• WBS Manager
• Facilitates evaluation of cost, time, and technical performance of the
organization on a project.
• Provides management with information appropriate
to each organizational level.
• Helps in the development of the organization breakdown structure
(OBS). which assigns project responsibilities to organizational units and
individuals
• Helps manage plan, schedule, and budget.
• Defines communication channels and assists
in coordinating the various project elements.

4–10
Work Breakdown Structure

FIGURE 4.4

4–11
 Work Packages
• A work package is the lowest level of the WBS.
• It is output-oriented in that it:
1. Defines work (what).
2. Identifies time to complete a work package (how long).
3. Identifies a time-phased budget to complete
a work package (cost).
4. Identifies resources needed to complete
a work package (how much).
5. Identifies a person responsible for units of work (who).
6. Identifies monitoring points (milestones)
for measuring success.

4–12
 Step 4:Integrating theWBS with the
organization
• Organizational Breakdown Structure (OBS)
• Depicts how the firm is organized to discharge its work responsibility
for a project.

• Provides a framework to summarize

organization work unit performance.

• Identifies organization units responsible

for work packages.

• Ties the organizational units

to cost control accounts.

4–13
Integration of
WBS and OBS

FIGURE 4.5
4–14
 Step 5: Coding the WBS for the
Information System
• WBS Coding System
• Defines:
• Levels and elements of the WBS
• Organization elements
• Work packages
• Budget and cost information
• Allows reports to be consolidated at any level in the
organization structure

4–15
WBS Coding

4–16
 Responsibility Matrices
• Responsibility Matrix (RM)
• Also called a linear responsibility chart.
• Summarizes the tasks to be accomplished and who is
responsible for what on the project.
• Lists project activities and participants.
• Clarifies critical interfaces between units
and individuals that need coordination.

• Provide an means for all participants to view their responsibilities

and agree on their assignments.

• Clarifies the extent or type of authority that

can be exercised by each participant.

4–17
 Project Communication Plan
• What information needs to be collected
and when?
• Who will receive the information?
• What methods will be used to gather
and store information?
• What are the limits, if any, on who has access to certain
kinds of information?
• When will the information be communicated?
• How will it be communicated?

4–18
 Information Needs
• Project status reports
• Deliverable issues
• Changes in scope
• Team status meetings
• Gating decisions
• Accepted request changes
• Action items
• Milestone reports

4–19
 Key Terms
Cost account
Milestone
Organization breakdown structure (OBS)
Scope creep
Priority matrix
Responsibility matrix
Scope statement
Process breakdown structure (PBS)
Work breakdown structure (WBS)
Work package

4–20
 Evaluating Economic Profitablity

 Engineering Economy focuses on return that a given project or capital

investment will or should produce. Five methods for evaluating the
economic profitability of a single proposed problem solutions (i.e
alternatives):
 1. PW - Present Worth
 2. FW – Future Worth
 3. AW – Annual Worth
 4. IRR – Internal Rate of Return
 5. ERR – External Rate of Return
 1, 2, 3 Converts Cash Flows into their equivalent worth by using interest rate
known as MARR
 4, 5 computes annual rate of profit or return resulting from an investment
and are then compared to MARR
 Types of Projects
Private Public

Purpose Provide goods or services at a Protect health, protect lives

profit, maximize profit or and property. Provide
minimize costs services (at no profit) provide
jobs
Sources of Capital Private Investors & Lenders Taxation; private lenders

Method of Individual Ownership; Direct Payment of Taxes,

Financing partnership, corporations Loans without interest; loans
at low interest; self
liquidating bonds; indirect
subsidies; guarantee of
private loans
Multiple Purposes Moderate Common (e.g. reservoir
project for flood control,
irrigation, drinking water,
electrical power, recreation
 Private Public
Project Life Usually Short (5-10 years) Usually Long (20 – 60
years)
Relationship of Direct Indirect or None
suppliers of capital
to capital in projects

Nature of Benefits Monetary or relatively easy Often non monetary,

to equate to monetary terms difficult to quantify ,
difficult to equate to
monetary terms

Beneficiaries of Primarily early undertaking General Public

Project project
Conflict of Purpose Moderate Quite Common (dam
for flood control or
environment protection
 Private Public
Conflict of Moderate Very common (between
Interests agencies)
Effect of Politics Little to Moderate Frequent Factors, short
term tenure for decision
makers, pressure
groups, financial and
residential restrictions,
etc

Measurement of Rate of Return on Capital Very Difficult, no direct

Efficiency comparison with prvate
projects
Benefit Cost Ratios with Present Worth

• Conventional Benefit Cost Ratio with PW

• B-C= PW (Benefits of Proposed Project)
PW (Total Cost of the Proposed Project)
• B-C= PW (B)
I – PW (MV) + P (O&M)

• Modified Benefit Cost Ratio with PW

• B-C= PW (B) – PW (O & M)

I – PW (MV)
 Benefit Cost Ratio with Annual
Worth
• Conventional Benefit Cost Ratio with AW
• B-C= AW (Benefits of Proposed Project)
AW (Total Cost of the Proposed Project)
• B-C= AW (B)
CR+ AW (O&M)
CR = Capital Recovery Per Annum

• Modified Benefit Cost Ratio with PW

• B-C= AW (B) – AW (O & M)

CR
 Example
• The city of Columbia is considering extending the runways of its municipal airport so
that commercial jets can use the facility. The land necessary for runway extension is
currently a farmland that can be purchased for $350,000. Construction costs for the
runway extension are projected to be $600,000 and the additional annual maintenance
costs for extension are estimated to be $22500. If runways are extended, a small
terminal will be constructed at a cost of $250,000. The annual operating and
maintenance cost are estimated at $75,000. The projected increase in flights will require
the addition of two traffic controllers at an annual cost of $100,000. Annual benefits
of the runway extension have been estimated as follows:
• $ 325,000 - Rental from airline leasing space
• $65000 – Airport tax charged to passengers
• $50,000 - Convinience benefits for residents of Columbia
• $50,000 – Additional tourism benefits for Columbia
Study Period is 20 years and MARR is 10% per year to determine if runway should be
extended or not?
• Conventional B-C (Here MV is considered negligible as expenditure incurred in non
refundable)
• B-C= PW (Benefits of Proposed Project)
PW (Total Cost of the Proposed Project)
= $490,000 (P/A 10%, 20)
$1,200,000 + $ 197000
(by using Interest and Annuity Tables for discrete compounding)
= 1.448 > 1 (therefore extend runways)
 Project Cost Estimates
• Labor
• Materials
• Subcontractors & Consultants
• Equipment & Facilities Rental
• Travel
• Contingencies
 Cost Control

• Project cost control includes

• monitoring cost performance
• ensuring that only appropriate project changes are included
in a revised cost baseline
• informing project stakeholders of authorized changes to
the project that will affect costs
• Earned value analysis is an important tool for cost
control
 The Gantt Chart and Progress Reporting
Time Now

Activity A Complete

Activity B Behind

Activity C Complete

Activity D Ahead

Activity E Behind

Activity F

Activity G

Activity H
The Need for Earned Value Analysis

cost progress
actual
budget

time now time now

time time
Over-budget Ahead of schedule

We need to be able to resolve this as we may be

• under-budget and ahead of schedule
• over-budget and ahead on schedule
• on budget and ahead of schedule
Cannot make management decisions until we know the status of the project
 Earned Value Analysis (EVA)
• EVA is a project performance measurement technique that
integrates scope, time, and cost data.

• (original plan plus approved changes), you can determine how

well the project is meeting its goals
 Earned Value Analysis Terms
• Budgeted cost of work performed (BCWP), also called earned
value, is the percentage of work actually completed multiplied
by the planned cost
• Budgeted cost of work scheduled (BCWS), also called planned
value, is that portion of the approved total cost estimate planned
to be spent on an activity during a given period
• Actual cost of work performed (ACWP), also called actual cost,
are the total direct and indirect costs incurred in accomplishing
work on an activity during a given period
 Earned Value Analysis--EVA

• Earned value = Budgeted Cost of Work Performed

(BCWP)
• Planned value = Budgeted Cost of Work Scheduled
(BCWS), and
• Actual Cost = Actual Cost of Work Performed
(ACWP)
• When you complete an activity, you earn the
budgeted value of that activity
 Schedule Performance Index (SPI)

• Defined as the ratio BCWP/BCWS

• A value close to 1 indicates an activity that is on
schedule
• Values greater than 1 suggest the activity is
ahead of schedule
• Values less than 1 indicate a schedule overrun
 Cost Performance Index (CPI)

• Defined as the ratio BCWP/ACWP

• A value close to 1 indicates an activity that is on
budget
• Values greater than 1 suggest the activity is
below budget
• Values less than 1 indicate a budget overrun
 Cost Variance (CV)

• Defined as the difference between the budgeted cost

of work performed and the actual cost of work
performed
• = BCWP - ACWP
• A positive CV indicates a lower actual cost than
budgeted for the control period, while a negative CV
indicates a cost overrun
 Schedule Variance (SV)

• Defined as the difference between the budgeted cost

of work performed and the budgeted cost of work
scheduled
• = BCWP - BCWS
• Indicates the deviation between the work content
performed and the work content scheduled for the
control period
 Table Earned Value Formulas
Term Formula
Earned Value Budgeted Cost of Work Performed (BCWP) =
budgeted cost to date X % complete
Cost Variance CV=BCWP-ACWP (actual cost of work performed)
Schedule Variance SV=BCWP-BCWS (budgeted cost of work
scheduled)
Cost Performance Index CPI=BCWP/ACWP
Schedule Performance Index SPI = BCWP/BCWS
 Earned Value Calculations for One
Activity After Week One
Activity Week 1 Week 2 Total % Complete EarnedValue
after Week 1after Week 1
(BCWP)
Purchase web server 10,000 0 10,000 75% 7,500
Weekly Plan (BCWS) 10,000 0 10,000
Weekly Actual (ACWP) 15,000 5,000 20,000
Cost Variance (CV) -7,500
Schedule Variance (SV) -2,500
Cost Performance 50%
Index (CPI)
Schedule Performance 75%
Index (SPI)
 Earned Value Calculations for One
Activity After Week One
Activity Week 1 Week 2 Total % Complete EarnedValue
after Week 1after Week 1
(BCWP)
Purchase web server 10,000 0 10,000 75% 7,500
Weekly Plan (BCWS) 10,000 0 10,000
Weekly Actual (ACWP) 15,000 5,000 20,000
Cost Variance (CV) -7,500
Schedule Variance (SV) -2,500
Cost Performance 50%
Index (CPI)
Schedule Performance 75%
Index (SPI)
 Rules of Thumb for EVA Numbers

• Negative numbers for cost and schedule variance indicate

problems in those areas. The project is costing more than
planned or taking longer than planned
• CPI and SPI less than 100% indicate problems
 Why Earned Value Analysis??

• You can’t tell what your true cost variance is because

you don’t know where you are relative to schedule
• Suppose you are behind schedule but also you have spent
less than what the schedule has called for. Are you really
under budget?
 Budgeted Cost of Work Performed (BCWP) =
Earned Value
• Defined as the monetary value of the work actually accomplished
within the control period.

ACTIVITY BCWP

1 $12,000

2 $20,000
3 $25,000

$57,.000
CUMULATIVE
 Budgeted Cost of Work Scheduled
(BCWS)
• Defined as the value of the work scheduled to be
accomplished in a given period of time

ACTIVITY BCWS

1 $12,000
2 $30,000
3 $32,000

CUMULATIVE $74,000
 Actual Cost of Work Performed
(ACWP)
• Defined as the cost actually incurred and recorded in
accomplishing the work performed within the
control period
ACTIVITY ACWP

1 $10,000
2 $25,000
3 $16,000

CUMULATIVE $51,000
 Table Earned Value Formulas
Term Formula
Earned Value Budgeted Cost of Work Performed (BCWP) =
budgeted cost to date X % complete
Cost Variance CV=BCWP-ACWP (actual cost of work performed)
Schedule Variance SV=BCWP-BCWS (budgeted cost of work
scheduled)
Cost Performance Index CPI=BCWP/ACWP
Schedule Performance Index SPI = BCWP/BCWS
 Let’s try it

• For each of the activities in the examples above,

calculate
• SCHEDULE VARIANCE
• COST VARIANCE
• Calculate cumulative schedule and cost variance
 Let’s try it

• For each of the activities in the examples above,

calculate
• SCHEDULE PERFORMANCE INDEX
• COST PERFORMANCE INDEX
• Calculate cumulative cost and schedule performance
indices
 Answers to Schedule and Cost
Variance

• Cumulative schedule variance = -17,000

• Cumulative cost variance = 6,000
 Budgeted Cost

• Total Budgeted Cost

• Cumulative Budgeted Cost
• Cumulative Actual Cost
• Cumulative Earned Value
 Cost Performance Index
 CPI = Cumulative Earned Value
Cumulative Actual Cost

If CPI is below one – corrective action

required
If CPI is above one – project is going with
economy/profit generating

 Cost Variance
 CV = CEV – CAC
 Cost Forecast

Forecasted Cost at completion =Total Budgeted Cost

Cost Performance Index
FCAC = TBC
CPI
Forecasted Cost at completion =
Cumulative Actual Cost + Total
Budgeted Cost – Cumulative Earned
Value