Cost and Value Management in Projects

Ray R. Venkataraman, PhD, is Professor and Chair of Project and Supply Chain Management in the Black School of Business at Penn State Erie.Jeffrey K. Pinto, PhD, is the Andrew Morrow and Elizabeth Lee Black Chair in Management of Technology in the Black School of Business at Penn State Erie.Together and individually, Dr. Venkataraman and Dr. Pinto are the authors of numerous publications in top-tier Operations Management and Project Management Journals, as well as authors or editors of some 30 books.

• About the Authors xiiiIntroduction to the Second Edition xv1 Introduction to the Challenge of Cost and Value Management in Projects 11.1 Importance of Cost and Value Management in Projects 21.2 Keys to Effective Project Cost Management 71.3 Essential Features of Project Value Management 91.4 Organization of the Book 11Chapter Summary 20References 212 Project Needs Assessment, Concept Development, and Planning 232.1 Needs Identification 252.2 Conceptual Development 292.3 Project Feasibility 322.3.1 Five Areas of Project Feasibility 322.3.2 Benefits of Conducting a Project Feasibility Study 332.4 The Statement of Work 342.5 Project Planning 372.6 Project Scope Definition 382.6.1 Purpose of the Scope Definition Document 382.6.2 Elements of the Scope Definition Document 392.6.3 Project Scope Changes 422.7 Work Breakdown Structure 432.7.1 Types of Work Breakdown Structures 442.7.2 Work Breakdown Structure Development 462.7.3 Coding of Work Breakdown Structures 492.7.4 Integrating the WBS and the Organization 492.7.5 Guidelines for Developing a Work Breakdown Structure 52Chapter Summary 53Discussion and Review Questions 53References 533 Cost Estimation 553.1 Importance of Cost Estimation 583.2 Problems of Cost Estimation 603.3 Sources and Categories of Project Costs 643.4 Cost Estimating Methods 663.5 Cost Estimation Process 753.5.1 Creating the Detailed Estimate 763.6 Allowances for Contingencies in Cost Estimation 783.7 The Use of Learning Curves in Cost Estimation 81Chapter Summary 85Discussion and Review Questions 86References 873A Appendix to Chapter 3: Forecasting Methods for Cost and Value Management 893A.1 Categories of Forecasting in Project Management 903A.2 Forecasting Methods for Projects 913A.3 Time Series Analysis 913A.4 Linear Regression Analysis 923A.4.1 Evaluating the “Fit” of the Regression Line 963A.4.2 Limitations in Forecasting Using Linear Regression 993A.4 Forecasting the Project End Conditions 1023A.5 S- Curve Forecasting 1023A.6 Technological Forecasting 109Chapter Summary 110Discussion and Review Questions 111References 1124 Project Budgeting 1134.1 Issues in Project Budgeting 1144.2 Developing a Project Budget 1154.2.1 Work Breakdown Structure (WBS) 1174.2.2 Issues in Creating a Project Budget 1174.3 Approaches to Developing a Project Budget 1184.3.1 Top- down Budgeting 1184.3.2 Bottom- up Budgeting 1204.3.3 Preparing the Project Budget 1234.4 Activity- based Costing 1244.4.1 Steps in Activity- based Costing 1244.4.2 Cost Drivers in Activity- based Costing 1244.4.3 Sample Project Budget 1 1254.4.4 Sample Project Budget 2 1254.5 Program Budgeting 1264.5.1 Time- phased Budgets 1274.5.2 Tracking Chart 1274.6 Developing a Project Contingency Budget 1284.6.1 Allocation of Contingency Funds 1294.6.2 Drawbacks of Contingency Funding 1304.6.3 Advantages of Contingency Funding 1314.7 Issues in Budget Development 1324.8 Crashing the Project: Budget Effects 1324.8.1 Crashing Project Activities— Decision Making 133Chapter Summary 138Discussion and Review Questions 138References 1385 Project Cost Control 1415.1 Overview of the Project Evaluation and Control System 1425.1.1 Project Control Process 1425.2 Integrating Cost and Time in Monitoring Project Performance: The S- Curve 1445.3 Earned Value Management 1485.4 Earned Value Management Model 1495.5 Fundamentals of Earned Value 1515.6 EVM Terminology 1525.7 Relevancy of Earned Value Management 1535.8 Conducting an Earned Value Analysis 1545.9 Performing an Earned Value Assessment 1565.10 Managing a Portfolio of Projects with Earned Value Management 1605.11 Important Issues in the Effective Use of Earned Value Management 1615.12 Benefits of EVM 1645.13 EVM Using Microsoft Project 1655.13.1 Step 1. Enter Resources in the Resource Sheet View 1655.13.2 Step 2. Assign Resources to Tasks 1665.13.3 Step 3. Save the Project Baseline 1685.13.4 Step 4. Record Project Actuals 1695.13.5 Step 5. Review the EVA View and Reports 1695.13.6 Step 6. Calculate Schedule Performance and Cost Performance indices 1725.13.7 Summary: Earned Value Management in Six Easy Steps 173Chapter Summary 173Discussion and Review Questions 174References 1746 Cash Flow Management 1776.1 The Concept of Cash Flow 1786.2 Cash Flow and the Worth of Projects 1836.2.1 The Time Value of Money, and Techniques for Determining It 1846.2.2 Applying Discounting to Project Cash Flow 1856.3 Payment Arrangements 1906.3.1 Cost- Reimbursable Arrangements 1916.3.2 Payment Plans 1926.3.3 Claims and Variations 1946.3.4 Cost Variation Due to Inflation and Exchange Rate Fluctuation 1976.3.5 Price Incentives 1986.3.6 Retentions 199Chapter Summary 201Discussion and Review Questions 201References 2027 Financial Management in Projects 2037.1 Project Financial Management 2047.2 Project Accounting 2057.3 Financing of Projects Versus Project Finance 2067.4 Principles of Financing Projects 2077.5 Types and Sources of Finance 2087.6 Sources of Finance 2107.7 Cost of Financing 2117.8 Project Finance 2127.9 The Process of Project Financial Management 2147.9.1 Conducting Feasibility Studies 2147.9.2 Planning the Project Finance 2147.9.3 Arranging the Financial Package 2157.9.4 Controlling the Financial Package 2157.9.5 Controlling Financial Risk 2167.9.6 Options Models 217Chapter Summary 219Discussion and Review Questions 220References 2208 Value Management 2238.1 Concept of Value 2248.2 Dimensions and Measures of Value 2288.3 Overview of Value Management 2298.3.1 Definition 2308.3.2 Scope 2308.3.3 Key Principles of VM 2308.3.4 Key Attributes of VM 2318.4 Value Management Terms 2318.5 Need for Value Management in Projects 2338.6 The Value Management Approach 2348.6.1 Cross- functional Framework 2348.6.2 Use of Functions 2358.6.3 Structured Decision Process 2358.7 The VM Process 2358.8 Benefits of Value Management 2378.9 Other VM Requirements 2388.10 Value Management Reviews 2398.11 Relationship Between Project Value and Risk 2438.12 Value Management as an Aid to Risk Assessment 2458.13 An Example of How VM and Risk Management Interrelate 2468.14 Project Benefits Management 248Chapter Summary 251Discussion and Review Questions 251References 2529 Change Control and Configuration Management 2559.1 Causes of Changes 2569.2 Influence of Changes 2629.3 Configuration Management 2629.4 Configuration Management Standards 2649.5 The CM Process 2659.6 Role and Benefits of Configuration Management in Projects 2679.7 Control of Changes 2709.8 Change Control Procedure and Configuration Control 2729.9 Responsibility for the Control of Changes 2759.10 Crisis Management 2769.11 An Example of Configuration Management 282Chapter Summary 282Discussion and Review Questions 283References 28310 Supply Chain Management 28510.1 What Is Supply Chain Management? 28610.2 The Need to Manage Supply Chains 28810.3 SCM Benefits 28910.4 Critical Areas of SCM 29010.4.1 Customers 29010.4.2 Suppliers 29010.4.3 Design and Operations 29110.4.4 Logistics 29110.4.5 Inventory 29210.5 SCM Issues in Project Management 29210.6 Value Drivers in Project Supply Chain Management 29410.7 Optimizing Value in Project Supply Chains 29710.7.1 Total Quality Management 29710.7.2 Choosing the Right Supply Chain 29910.8 Project Supply Chain Process Framework 29910.8.1 Procurement 29910.8.2 Conversion 30210.8.3 Delivery 30310.9 Integrating the Supply Chain 30310.10 Performance Metrics in Project Supply Chain Management 30510.11 Project Supply Chain Metrics and the Supply Chain Operations Reference (SCOR) Model 30810.12 Future Issues in Project Supply Chain Management 310Chapter Summary 313Discussion and Review Questions 313References 31411 Quality Management in Projects 31711.1 Definition of Quality in Projects 31811.2 Elements of Project Quality 31911.2.1 The Project’s Product 32011.2.2 Management Processes 32611.2.3 Quality Planning 32611.2.4 Quality Assurance (QA) 32711.2.5 Quality Control 32911.2.6 Corporate Culture 33011.3 Total Quality Management in Projects 33011.4 Root Cause Analysis 33211.5 Quality Management System 33311.6 Quality Management Methods for a Project Organization 33411.6.1 The Six Sigma Methodology 33711.6.2 The Six Sigma Model for Projects 33811.6.3 Application of Six Sigma in Software Project Management 33911.7 Quality Standards for Projects 340Chapter Summary 342Discussion and Review Questions 342References 34312 Integrating Cost and Value in Projects 34512.1 The Project Value Chain 34612.2 Project Value Chain Analysis 34812.3 Sources and Strategies for Integrating Cost and Value in Projects 35012.3.1 The Project’s Inbound Supply Chain 35012.3.2 Project Design 35112.3.3 Project Development 35612.3.4 Project Delivery/Implementation 35812.3.5 Costs of the Project Life Cycle Employing the LCC Model 36212.4 Integrated Value and Risk Management 36312.5 The Project Cost and Value Integration Process 367Chapter Summary 369Discussion and Review Questions 370References 370Index 373