Cost Overruns
Delicia Brice
PM3320
Professor Johnson
September 16, 2014 Abstract
Project management is to forecast and track costs to avoid cost overruns. Poor management leads to rising cost. Effective project management identifies such possible sources of cost overruns early and mitigates their effect. This paper explains the underlying causes of project cost overruns and provides some cost estimating methods used to avoid the overruns in the project.
Cost Overruns
Cost can be described as one of the most important issues of a project success. A cost overrun is the amount by which the actual cost exceeds the budgeted, estimated, original, or target cost. Society sees cost overruns as the norm. They are a built-in part of
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Specifications changes often voids the initial cost estimates. The project progresses according to a plan that assigns durations to project tasks. The Sponsor makes small changes in the plan that necessitates other changes which lead to still more changes ... and so on. Because estimates are predictions of future costs, there is always the potential for error, and cost overruns are more the norm than the exception. Consequently, additional allowances are needed to act as a buffer, so that the funds actually allocated to the project will be sufficient. This allowance is known as contingency
Lack of Scope leads to the creation of projects that have no clear purpose. Changes in the scope of supply within a project frequently cause cost overruns. These changes result from new requirements that the owners introduce and fixes for functions that don't work as specified. As project manager, you must confirm a comprehensive project plan is in place; all activities and their sequence required for project completion have been identified, and all major purchase orders have been submitted based on known prices and availabilities of materials and equipment. Given that definitive estimates are developed further down the project life cycle with more accurate information and fewer project uncertainties, these estimates provide a much more accurate expected cost of the project at completion, with a ±5 percent margin of error.
592 Week 1 DQ 1 WBS Construction PROJ 592 Week 1 DQ 2 Project Cost Estimates and Assumptions PROJ 592 Week 2 DQ 1 Cost Components PROJ 592 Week 2 DQ 2 Estimating Processes PROJ 592 Week 3 DQ 1 Project Schedules PROJ 592 Week 3 DQ 2 Sensitivity Analysis PROJ 592 Week 4 DQ 1 Resource Allocation and Leveling PROJ 592 Week 4 DQ 2 Advanced Schedule Techniques PROJ 592 Week 5 DQ 1 Earned Value Calculation PROJ 592 Week 5 DQ 2 Project Monitoring and Control & EV PROJ 592 Week 6 DQ 1 Forecasting Project Completion Cost PROJ 592 Week 6 DQ 2 Project Control PROJ 592
The earned value analysis has led to see the project will control the actual budget, which is $18,000. The actual cost at the period 4 totaled to be $7,050, and total of earned value at period 4 is $7,750. The estimate at completion for typical is $22,550. These variances show that this project will exceed the original budget of $18,000, so we are still exceeding the project’s original budgets. The SPI is less than a value of 1, which means that the project will also over schedule and activity plans. The requests immediate actions from the third-party company.
budget. As the project evolves, additional information is discovered and further estimates are produced. This is an extremely important process and we cannot emphasize enough the need for this re‐estimation or re‐budgeting process at each phase of the project. In any case, for the purpose of this article, we will call the revised budget the "actual budget." Another standard activity is to provide management with an expected cash flow. From a financial perspective this is an important activity, but it also can be used as your cost expectation.
* The final significant risk my firm identified is the possibility of not meeting the established budget ceiling of $320,000. There are many variables which we feel could cause the cost of build to exceed the budget. Some of those variables include having to pay a premium for in-demand subcontractors, the cost of buying and
Eichenberger, J. (1998). Project management, part III budgets for projects. AAOHN Journal, 46(5), 268-70. Retrieved from http://search.proquest.com/docview/101346
Another element that is essential in the project management plan is the cost management plan. The main focus of the cost management plan is overseeing the cost of the necessary resources for the execution of the project (PMI, 2013). This function is completed within the planning stage of an endeavor to provide a structure to support performance and efficiency throughout the lifecycle of the undertaking (PMI, 2013). For the AAE Project, analogous and parametric estimating was utilized in estimating the potential costs of the endeavor. Appendix T shows the cost breakdown of each activity within the project by separating the salaries, equipment/vendor costs, and vendor contract costs. Since
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We used PV (planned Value), AC (actual cost), and EV (earned value) to calculate SPI (schedule performance index), SV (schedule variance), CPI (cost performance index), and CV (cost variance). Among these indicators, SPI and SV show whether a project is behind schedule or not, and CPI and CV indicate whether a project is under budget. Therefore, the statuses of the schedule and cost of technical infrastructure, software customization, and combined projects can be easily and clearly checked, respectively.
A successful project management will include time control and cost planning. Accompany with these two important features, and then bring out the best quality project.
In field of project management, there are a plethora of mechanisms under perpetual reevaluation. One specific segmentation of project management under such scrutiny pertains to cost duration, which is the time and monetary costs of completing individual tasks within the project’s critical path (IBM Knowledge Center, 2016). The process of monitoring and evaluating the time and financial impacts of each task is referred to as cost duration analysis (IBM Knowledge Center, 2016). A chief concern of cost duration analysis is identifying tasks within the project’s critical path which can reduce project duration (PMI, 2013). A common approach to reducing a project’s duration is task “crashing” (PMI, p.181). According to The Project Management Institute (2013) crashing refers to the process of methodical determining the financial value of increasing a critical path task’s resources in order to decrease project duration (p.181).
ABI is using a top-down process in this project, meaning that determination of the final budget comes almost strictly from a compilation of experiences and judgments of the top and mid-level managers in the company. The higher-level managers break down costs into major categories, pass down their cost estimates to the next lowest level, lower-level managers break the major categories down into subcategories and so on until the estimation process reaches the lowest level of the company. By the end, each level knows the specific amount of money that it is allotted to complete the project tasks required at that level. Because the project is so extensive in price and risk, it would have been smarter for them use a bottom-up process which would have involved the employees who would actually be part of the work team so that management could get a more accurate estimate of the time and money that would be required to complete the project.
Project Cost Management – controlling the cost of the project, which includes estimating, budgeting, financing, funding, and managing costs of each task.
There are many shortcomings of this method and the unacknowledged compromises made during this process are many. In order to get an initial budgetary allocation, rough estimates must be made as to the cost and timeline of the project - quite often without gathering complete (or any) requirements for the project. While this may be useful for making rough comparisons with other projects competing for funds, it isn 't historically as accurate as it should be. Accordingly, with the requirements neither clearly nor accurately defined at this stage, these estimates are highly prone to error. After the project is funded, earnest requirements gathering and assessment begins, and project manager(s) begin to determine the best path to "finish" the project in the promised time frame without going over budget. With the bulk of requirements definition, collection, and interpretation occurring after budget allocation, projects ultimately must make the compromise to produce the most effective features possible with the budget that was
The completion of any project depends on the execution of various parameters mostly set at the beginning of the project. In order to complete the project to satisfactory levels, the project must be completed within the stipulated timelines, fall within the approximate budget and be of the required quality standards. However, most of the projects are affected by adverse changes and unforeseen events that occur during the execution period. Research shows that the magnitude of change is dependent on the size of the project, with large projects experiencing more uncertainties due to several factors including; planning and design complexity, interest groups having deferring opinions, resource availability, Economic and political climate and statutory regulations, which may necessitate change of plan. Most of the uncertainties are known to occur in the concept phase and if not intervened, they may affect the entire project. The burden falls on the management of such risk as some managers choose to ignore the uncertainties since they call for additional costs. Other inherent risks may go unnoticed and therefore remain unsolved,
A key activity in project management is assessing project constraints. A project has three limitations: scope, budget and schedule. These limitations are project constraints because they are sensitive to change and have an impact on project risk. Risk is exposure to uncertain outcomes. Project constraints are mutually exclusive. If one constraint changes it affects the others and adjustments may be required to compensate and manage risks. For example, a delay in the schedule can increase the risk that the project will not finish on time. Time is money and delays have a negative impact on the budget. To