The Project Management Triad Triangle explains the Triple Constraint when managing a project and when used in combination with effective project management software can give the project manager the ability to drive the projects he manages to success.
The Triple Constraint
The constraints are threefold:
- Cost: The financial constraints of a project, also known as the project budget.
- Scope: The tasks required to fulfill the project goals and objectives.
- Time: The schedule for the project to reach completion.
The Triple Constraint states that the success of the project is impacted by its budget, deadlines and features. The project manager can trade -off between these three constraints; however, changing the constraints of one means that the other two will suffer to some extent though it doesn’t determine the success of the project. Trade-offs and compromises are common in project management. The Triple Constraint helps managers know what trade-offs are going to work and what impact they’ll have on other aspects of the project. Metrics such as the schedule, cost and scope of the project will be easy to track and a manager can identify issues and adjust the Triple Constraint to prevent those issues from developing into problems by presenting all the critical project data.
Managing Cost Constraints
The financial commitment of the project is dependent on several variables. Resources are involved, from materials to people, including labor costs. Other outside forces that can impact on a project must also be considered in the cost of the work. There are the fixed and variable costs inherent in any project, which must be calculated.
Cost control in Project
Cost Control is the process for influencing the factors that create cost variances and controlling changes to the project budget. Like other controlling processes the process of project control therefore includes such tasks as handling influencing factors, managing actual changes, detecting wished and unwished changes by comparing the reported real values with the approved cost base Cost control processes include cost estimating to figure out the needed financial commitment for all resources necessary to complete the project. Cost control works to manage the fluctuation of costs throughout the project.
Cost control tool and techniques
- Cost change control system is the set of procedures and rules by which changes of the cost baseline can methodically be introduced into the project.
- Performance measurement analysis is a method for comparing the reported reality and the (pre) defined cost baseline. For being able to do that one often uses the Earned Value Technique:
- Planned Value is the budgeted cost for the work scheduled to be completed on an activity or WBS component up to a given point of time. If an activity should totally cost X and the work grows linearly over the planned time than the PV for the half of the working time is 50% of X.
- Earned Value (EV) is the budgeted amount for the work actually completed on the schedule activity or WBS component during a given time period ( The maximally enabled value of an activity is its total cost. If an activity has been fulfilled for 25% the earned value is 25%of the earnable value).
- Actual Cost (AC) is the total cost incurred in accomplishing work on the schedule activity or WBS component during a given time period.
- Cost Variance (CV) is earned value minus actual cost (EV – AC). Hence, if CV is positive you have won, if it’s negative you’ve lost money. CV at the end of the project is “budget at completion (BAC) minus real total costs.
- Schedule Variance(SV) is similar to CV, but refers to planned values
SV = EV – PV.
- Cost Performance Index (CPI) is defined as CPI = EV/AC: A CPI value less than 1.0 indicates a cost overrun of the estimates. A CPI value greater than 1.0 indicates a under run of the estimates. Note: CPI is also known as cost-efficiency indicator.
- Cumulative CPI (CPIC) is the sum of periodic earned values (EVC) divided by the sum of individual actual costs(ACC) CPIC=EVC/ACC
- Schedule Perfomance Index (SPI) is defined as SPI = EV/PV.
Forecasting uses techniques for determining new cost values on the basis of the made experiences during the project. Especially if one has a CPI indicating a cost overrun of the estimates one might ask what the results will be if this observation will be taken as base for the future. Here one uses the following concepts.
Estimate to complete (ETC) are the necessary costs to complete the activity/ WBS unit. This value might be; newly estimated computed on the base of a typical variances by accumulating the really earned values: ETC = (BAC – EVC). Computed on the base of typical variances by accumulating the really earned values and weighing the result with the observed cumulative cost performance index. ETC = (BAC – EVC)/ CPIC. This means: if you have to overrun the estimates in the past you will probably do it in future too. And that should be respected by the estimate to complete.
Estimate at completion (EAC) computes the newly estimated total costs by adding the actually already spent costs and the newly estimated costs to complete. With respect to the three possibilities to get Etcs you have three methods to get EAC: EAC using a new estimate (EAC = ACC + ETC). EAC using remaining budget (EAC = ACC + (BAC – EVC)): add the actually cumulated cost and the estimate to complete on the base of a typical variances, assuming that the cost overruns won’t happen again. EAC using CPIC (EAC = ACC + ((BAC – EVC)/CPIC): add the actual cumulated cost and the estimate to complete on the base of typical variances, assuming that the cost overruns will happen again and should be respected by weighing the values by the Cost Performance Index.
Variance at completion (VAC) is the difference between the budget at completion (BAC) and estimate at completion (EAC).
Project performance reviews use performance measurement analysis and forecasts to compare cost performance over time, schedule activities or work packages overrunning and underrunning budget (planned value), milestones due, and milestones met.
Project management software supports necessary collection of data and computations
Variance management follows the cost management plan
Important outputs of project cost control
- Updates of the (activity) cost estimate are generated by the offered cost control methods
- Updates of the cost baseline can be evoked by the given approved change request.
- Performance measurements are descriptions of the computed implications of the reported values using CV, SV, CPI and SPI value of WBS components.
- Forecast completion is constituted by the descriptions of the computed consequences into the future using ETC and EAC values.
- Requested changes can be evoked by the performance analysis and might concern scope or WBS or activity list and so on.
- Recommended corrective actions are proposals to bring expected future performance of the project in line with the project management plan.
- Updates of the organizational process assets may be evoked by lessons learned concerning the cost observation an analysis.
- Updates of the project management plan is evoked by approved change requests because on one hand activity list, WBS, schedule base line, cost base line and so on are components of the project management plan and on the other hand approved change requests change these documents.
There are several methods for project cost estimation:
- Historic Data: Using the costs of similar projects for comparison.
- Resource Costs:Determining the rate of cost for goods and labor by unit.
- Bottom Up:Estimating from the lowest- to the highest- level work package.
- Parametric: Measure statistical relationship between historic data and other variables.
- Vendor Bid:Average of some vendor bids on project
- Reserve:Aggregate cost of activities.
- Quality Analysis:Estimate cost of highest quality for activities.
Cost is one of the more complicated points on the Triple Constraint triangle.
Estimating the Project Cost
Cost estimating is the process of developing an approximation of the costs of the resources needed to complete the project activities. Cost estimating is part of the project cost management which includes the processes involved in planning, estimating, budgeting and controlling costs so that project can be completed within the approved budget.
Cost Estimating means estimating the costs of each activity: It is executed on the level of the activity list. Cost estimates are expressed in units of currency; the accuracy will be increased during the iterative loops of the planning phase.
Tools and Technique for Use in Cost Estimation
- Analogue estimating means estimating on the base of historical information by using a special idea/ assumption: the actual costs of an activity should be similar like those of a similar activity of another project, which already has(successfully) been executed.
- Determine resource cost rates is the step of collecting unit cost rates.
- Bottom up estimating means decomposing an identified activity, estimating the subtasks and aggregating the results as estimating for the activity as a whole.
- Parametric estimating computes the cost by a formula which operates on more or less unsure values.
- Project management software often helps collect, document and compute estimates and the needed basic values.
- Vendor bid analysis means that the bid of a vendor will be compared with bids of other vendors and/or by an own detailed cost analysis.
- Reserve analysis regards the more or less hidden contingency reserves which may be implicitly embedded into activity durance or explicitly integrated by the critical chain method. A good method is to integrate estimating for known unknowns into the cost baseline.
- Cost of quality analysis normally delivers results which can influence the cost estimating.
Important outputs of project cost estimating
- Activity Cost Estimates are quantitative assessments of likely costs of resources required to complete schedule for each activity of the activity list the document of the activity cost estimates contain one value.
- Activity Cost Estimate Supporting Detail is the activity specific documentation which (provides) a clear professional and complete picture by which the cost estimate was derived. It contains constraints, assumptions, computations and basic values.
- Requested Changes may be generated if-for-example- the cost target budget can’t be be met and the scope or the WBS and the activity list must be refined.
- Updates of the Cost Management Plan may be generated to manage the costs.
Advantages of Cost Control:
1. It helps the firm to improve its profitability and competitiveness.
2. In the absence of cost control, profits may be drastically reduced despite a large and increasing sales volume.
3. It is indispensable for achieving greater productivity.
4. Cost control may also help a firm in reducing its costs and thus reduce its prices.
5. If the price of the product is stable and reasonable, it can maintain higher sales and thus employment of work force.
Role of Information Systems in Budgeting
Budgeting in Project Management
A Project Budget is the total amount of monetary resources that are allocated for particular goals and objectives of the project for a specific period of time. Project budget management is a process of formally identifying, approving and paying the costs or expenses incurred on the project. It involves using purchase order forms to state each set of project expenses, such as training, consulting services, equipment and material cost, etc.
The project budgeting process is conducted at the initial steps of project planning, and typically it is performed in parallel with the project scheduling process. The project manager should use the Work Breakdown Structure (WBS) of the project, the costs estimates, historical data and records, resource information, and policies in order to identify the monetary resources required for the project.
The purpose of project budget management is to estimate and control project costs within the approved budget and to achieve the stated goals of the project.
Types of Budgets
- Long-Term Budgets: prepared for a longer period between five to ten years.
- Short-Term Budgets: prepared for a period of one year.
- Current Budgets: prepared for the current operations of the business.
- Functional Budget: one which relates to any of the functions of an organization.
- Master budget: The master Budget is a summary budget.
- Fixed Budget: is designed to remain unchanged irrespective of the level of activity actually attained.
- Flexible Budget: is designed to change in accordance with the various level of activity actually attained.
Requisites for Effective Budgetary Control
- The ultimate objective of realising maximum benefits should always be kept uppermost.
- There should be a budget manual which contains all details regarding plan and procedures for its execution.
- Budget committee should be set up for budget preparation and efficient execution of the plan.
- A budget should always be related to a specified time period.
- Support of top management is necessary in order to get the full support and co-operation
- To make budgetary control successful, there should be a proper delegation of authority and responsibility.
- Adequate accounting system is essential to make the budgeting successful.
- The employees should be properly educated about the benefits of the budgeting system.
- Key factor or limiting factor, should be considered before the preparation of the budget.
- Proper periodic reporting system should be introduced.
- There should be defining clear cut objectives and goals.
The Budgeting Process
The process of determining budget for a project is an activity of aggregating the cost estimates of individual activities, or a work package, to develop the total cost estimate that allows setting a formal cost baseline. The steps of the process are highly dependent upon the cost estimations, task durations and allocated resources.
However, the budget may differ from the formal cost baseline and constitute the funds authorized to perform the project and its activities. The purpose of the process is to authorize and allocate the monetary resources necessary to complete all project activities and deliver the project on schedule.
The main output of the process is a set of monetary resources requirements that serve as a foundation for estimating and controlling the budget and provide valuable data to the project resource management process.
The budgeting serves as a cost control mechanism that allows comparing actual project costs to the items of the authorized project budget. The process allows developing a budget considering key cost factors associated with time durations of project tasks.
Steps in the Project Budget Determining Process
Using the WBS
The project manager should identify the dependencies between the work items or tasks while using WBS dictionary to get the identification of the project deliverables and the description of each WBS component that are approved to produce the deliverables. He works with the cost estimating team to receive cost estimates per work package of the WBS. The obtained information will then be used for aggregating cost estimates and setting the cost baseline.
Reviewing Historical Data and Lessons Learned
The project manager needs to review records and historical data of the previous successful projects and look for tools, methods and techniques that have made these projects succeed. Cost estimates, WBS examples, resource allocation, estimating methods, members of the estimating team, budget control tools, etc. obtained from successfully completed projects should be collected and examined, then sorted and filtered, and finally specific solutions generated.
Investigating Resource Information
The project manager in collaboration with the estimating team should collect and investigate information on available resources, including human resource, equipment and materials and create a description of resources available which are then used for estimating costs.
Following Project Policies
The project manager should review existing standards and requirements stated in project policies.
Budget determining inputs:
- Activity Cost Estimatesprovide a cost estimate for each work package (a set of individual activities) within the WBS.
- Estimates Basisshows all details on cost estimates and specifies the basic decisions regarding the inclusion or exclusion of indirect project costs.
- Scope Baselineincludes the scope statement, the WBS and WBS dictionary which allow determination of the project budget in accordance with the cost estimates per work package.
- Project Schedule whichis a component of the project management plan and reflects planned start and finish dates for the project activities, milestones, time-frames for individual activities and work packages, as well as auditing calendars. The information in Project Schedule is used to develop a cost schedule that indicates when the costs are planned to be incurred.
- Procurement Contracts whichare used to determine the project budget considering all costs incurred and associated with products and services purchased from vendors and suppliers.
- Resource Calendarsare used to investigate information on resource assignments and allocation of working time assigned to the resources.
Budgeting Process Outputs
- Cost Performance Baseline that gives a formal time-phased budget for estimating, tracking and controlling the overall cost performance of the project.
- Project Funding Requirements identified requirements for the total project funds. The cost baseline and the management contingency reserve amount will be covered by the requirements.
- Project Document Updates. The process of project budgeting is a critical activity that involves updates of relevant project documents, such as Project schedule, Project Management Plan, Risk Register, project cost estimates.
- Requested Changes may be evoked for example by the funding limit reconciliation.
The following questions may be helpful:
- How much is this project going to cost?
- Have all budgetary items been accounted for including man hours, equipment, outside resources etc.
- Can this project be delivered successfully within the assigned budget?
Reasons for Preparing Project Budget
- The project budget helps determine what the scope items should be included in the PM plan and which items should be removed from this document.
- It provides a means to monitor the projects financial activities over the life of the project.
- It provides a framework for expenditure to achieve the objectives of the project in an efficient manner.
- It eliminates the number of changes of resources during the lifetime of the project.
NB
- A project that is completed within the predetermined schedule and reaches the goals set should not be considered successful unless the project meets its budgetary requirements.
- Review the budget forecasts frequently to avoid unnecessary risk into the project,
- Manage the project scope because unplanned resource hours can have a huge impact on projects pre-designed budget.
- Communicate to the project team any details regarding the project budget so that they are well informed to avoid risks that arise from communication problems.
- Pay close attention to the resources and skills assigned to a project to ensure that they are being fully utilized and that there is a right balance.
- Existing project risks and issues should be monitored to reduce the level at which they can affect the projects budget.
- The budget should be reviewed by the project manager, financial team, stakeholders and key project team members regularly.
- Learn from other projects. Past projects that were similar in type or scope to the current one, and identify where resources were added or subtracted.
- Know the core costs including team members, equipment, software, travel, etc. and compare them to the total budget.
- Prepare to change budget estimates if there are occurrences of scope creep, risks, etc.
- Manage scope. Scope creep busts budgets. To avoid unplanned work that leads to cost overruns, create change orders for work that goes beyond initial project requirements,
- Keep monitoring project’s daily progress through stand-up meetings (or something equivalent)- what the team members are doing at all times, especially if they are working on tasks on the critical path.
Two main approaches for creating a budget:
- Top-down approach: deciding how much the project will cost and dividing the amount between the work packages.
Through guessing explain how you will do the work within the allocated amount of budget for each work package. Prior experience is important in validating the budget allocation for work packages.
The advantage of the top-down budgeting approach is that it focuses on achieving the project within the budget allocated and leads to efficiencies and reduction in wasteful practices.
A disadvantage of the top-down budgeting approach is that it assumes that the person creating the budget has enough knowledge and expertise to make a reasonable cost estimate.
There is also a risk of deliberately low budgets created with the belief that it will encourage cost savings.
- Bottom-up approach: estimating the total cost of the project by costing the lowest-level work packages and rolling up.
The team identifies the tasks and activities needed to complete the project. The project is based on the lowest-level work packages and rolled up to arrive at the total project cost. The direct and indirect costs are calculated for each work package.
The advantage here is its accuracy (as long as no task or activity is missed).
It boosts team morale because the project manager involves the team in budget creation.
A disadvantage of the bottom-up budgeting approach is the difficulty in getting a full list of tasks and activities needed to complete the project.
Types of Costs.
Direct Costs; These are easily attributed to the project and charged on an item-by-item basis
Examples are:
- Labour (people)
- Consultancy fees
- Raw materials
- Software licences
- Travel
- Hotel bookings
Indirect Costs
These costs are for items that benefit more than one project, and only a proportion of their total cost is charged to the project. Examples are:
- Telephone charges
- Office space (rent)
- Office equipment
- General administration
- Company insurance
Contingency Reserve
A contingency reserve or buffer is added to projects (usually a percentage of the total project cost and time) to cover risk. This fund is used when encountering unexpected events during the project.
Estimating Costs
Other techniques that project managers use to create budgets include:
- Expert Judgment: This approach uses subject matter experts (SMEs) to calculate the total cost of the project. It uses expert knowledge and experience.
- Supplier Bid Analysis: This approach compares bids from different suppliers to arrive at a cost estimate for the project.
- Analogous Estimating: This approach uses history from similar projects to create an estimate. It looks at how much past projects cost while taking any differences with the new project into account.
- Three-Point Estimating: This approach uses the weighted average of three estimates — best-case, most likely case and worst case — to gain a greater degree of control over how the value of a task or activity is calculated.
- Parametric Estimating: This approach uses a statistical relationship between historical data and other variables, such as lines of code in a software application or square footage of a building to calculate an estimate.
Project Management Budgeting Tools
These include software, models, templates and calculators; an effective project manager estimates accurately, monitors carefully and manages risk appropriately.
Budgeting and Risk Management
The budgeting process will not be complete and effective if no risk assessment and assignment have been applied. Without assessing risks surrounding the project, uncertainties and threats that happen regularly during the project implementation will affect the project’s bottom line. Cost estimates should be developed with reference to conducted risk assessing activities. Once the risks have been identified and analyzed a scope and percentage can be assigned to each identified risk.
Tools and Techniques in project budgeting
- Cost aggregation is the accumulation of single costs following the structure of the WBS ( and the distribution of payments with respect to the schedule base line)
- Reserve analysis is the reasonable expansion of the costs by management contingency reserves for being able to handle unknown unknowns:
- Parametric estimating computes the costs by formulas which operate on more or less unsure values of smaller (WBS) values.
- Funding limit reconciliation is the act of comparing and adjusting the funding limits and the estimated costs by refining the scope, rescheduling the activities and so on.
- The Cost Baseline which becomes “ a component of project management plan” is “ a time-phased budget that is used as a basis against which to measure, monitor, and control overall cost performance on the project”.
- The Project Funding Requirements are planned limitations being derived from the cost baseline
- Updates of the cost Management Plan become necessary if the real work evokes changes of the rules how to manage the cost.
- Requested Changes may be evoked for example by the funding limit reconciliation.
The Advantages of Budgetary Control
- Budgetary Control guides the management in planning and formulation of policies
- Budgetary control facilities effective co-ordination of activities of the various departments and functions.
- It ensures maximization of profits through cost control and optimum utilization of resources.
- It evaluates for the continuous review of performance of different budget centres.
- It helps the management for efficient and economic production control.
- It facilitates corrective actions, whenever, there are inefficiencies and weakness in actual performance.
- It helps to adopt the principles of standard costing.
- It facilitates reduction of cost.
- It guides management in research and development.
- It ensures economy in working.
- Budgetary control integrates and brings together all activities of the enterprise right from planning to controlling.
- Budgetary control provides a yardstick against which actual results can be compared.
- Budgetary control provides a clear definition of the objectives and policies of the concern.
- Budgetary control is a useful tool in profit-planning.
- Budgetary control helps to eliminate or reduce unproductive activities and minimising waste.
- Budgetary control makes everyone accountable for his work, as it defines the responsibility for performances.
- Budgetary control system acts as a basis for internal audit by providing a method of continuous appraisal of performance.
Limitations of Budgetary Control:
- The main problem in budgetary control comes because of uncertainty of future. It is a known fact that budgets are formulated on the assumptions of future happenings in a certain way.
- The budgetary programme takes a long time to develop a reasonably good system of budgetary control.
- The role of budgetary control system in planning is sometimes over emphasised. This inflexibility contributes negatively to the organisational objectives.
- The effectiveness of the budget depends largely on the dedication and co-ordination of the top management.
- Budgetary control system requires a lot of paper work which the technical personnel always resent.
- Budgetary control may affect the organisational morale. Managers may adopt defensive attitude and this may create many types of problems and conflicts in the organisation.
Time Constrains- Time Frames
The schedule is the estimated amount of time allocated to complete the project, or producing the deliverable. Usually, this is figured out by first noting all the tasks necessary to move from the start to the finish of the project.
A Work Breakdown Structure (WBS) is used to take the large project goal and break it down into a series of more manageable tasks. These tasks are then prioritized, dependencies are linked, and then placed on a timeline. A Gantt chart is used to visualize the project schedule, with each task a point on that timeline, with task dependencies linked, and durations determined. Having historic data can help make more accurate estimates.
The schedule can be managed through a process of time management through the following steps:
- Plan Schedule Management: Creating policies, procedures and documentation for planning, executing and monitoring the project schedule.
- Define Activities: Identifying and documenting what actions must be done to produce the project deliverables.
- Sequence Activities: Identifying and documenting the logical order of work to be most efficient.
- Estimate Activity Resources: What type and how many materials, people, equipment, supplies, etc. are needed to perform each activity
- Estimate Activity Durations: How long will it take to complete each activity with the resources estimated
- Develop Schedule: Analyze activity, duration, resources and timeline to develop a schedule
- Control Schedule: Comparing planned schedule to actual progress to determine if your project is on track
Time management is also important at the team member level too. Project managers look to get support from the team in this area, through collaborative time management tools and processes so the project is collectively able to stay on track.
Importance of the Triple Constraint
When managing a project, some variables can change. Others can’t. The Triple Constraint gives a firm sense of what can and can’t be adjusted throughout the course of the project. For example, if the project is running behind schedule, the project manager can work to reduce the features of the project. That’s reducing scope. More resources can be dedicate to moving the schedule ahead. That’s increasing cost. The due date can then be adjusted to give more time. The Triple Constraint is basically a balancing act. Planning for the schedule, scope and cost will help the PM achieve project goals and objectives.
