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  • 1. The Project’s Success leads to Business Success.
    A Study on Calculating the Optimal Contingency and Management Reserves for Project Budget
    (프로젝트 예산 편성을 위한 적정 예비비 산정에 관한 연구)
    Kwon, HyukChun CPA / PMP
    November27th,2009
  • 2. Problem Background
    Background
    • Project Management?
    The Application of Knowledge, Skills, Tools andTechniques to Project Activities to meet Requirement.
    UAA MSPM
    Personal
    Knowledge
    Skills
    Techniques
    Tools
    Experiences
    Theory
    Application
    Business
  • 3. Project Management
    Background
    • Project
    Temporary, Unique
    • Project Triple Constraints
    Scope, Time, Cost
    • Project Cost Management
  • Budget
    Background
    • Why Accurate Budget ?
    Estimate, Predict the Budget What a Project will Cost.
    • Loss Business
    Opportunities
    • Budget > Cost
    Surplus Fund
    • Stop Project
    • 4. Budget < Cost
    Lack of Fund
    • Add more Fund
    • 5. Impact Financing Plan
  • Budget / Cost
    Background
    • Budget : The Sum of Resources Monetary Value
    Specification
    (Quality)
    Project
    Resources
    Scope
    Quantities/
    Time
    Work Package

    =
    Budget
    Unit Price
    ˟
    Activity
    • Budget : Plan, Estimate, Predict
    • 6. Cost : Sumof Expenses, Result
    WBS
  • 7. The Factors to Change the Budget
    Background
  • 8. The Study Approach
    Background
  • 9. Theory
    Theory
    UAA, MSPM
    PMBOK Guide, Text Book, Case Study
  • 10. The Factors to affect Project Risk
    Theory
    Uncertainty
    (Known, Unknown, Identified, Not Identified)
    * External
    Environment
    Stakeholders
    Project
    Team Members
    * Internal
    Project Boundary
    Human Resources
  • 11. Internal Factors – Human Resource
    Theory
    * Stakeholder’s Risk Tolerance
    Risk Tolerance Line
    Probability
    Impact
    * Team Member’s
    • Experience Level
    • 12. Required Skill (Tech, Leadership, Communication …)
    • 13. Knowledge, Competency, Ability
    -> Refer to NASA Cost Estimating Hand Book Volume 4
  • 14. Cost /Time / Scope / Risk
    Theory
    Budget without Risk
    Scope with Risk
    Scope without Risk
    (Scope Management)
    Cost
    Management
    Budget with Risk
    Resources
    Risk Management
    Scope
    (WBS)
    Resource Management
    Time
    Time Management
  • 15. Risk / Budget
    Theory
    (Net Cost)
    (Contingency Reserve)
    (Allowance)
    (Management Reserve)
    (Point Estimate)
    PMI Global Congress North America 2007
  • 16. Budget
    Theory
    Resources
    Allowance (Unknown Knowns)
    Contingency Reserve
    (Known Unknowns)
    Net Cost (Known Knowns)
    Management Reserve
    (Unknown Unknowns)
    Uncertainty(Risk)
    Time
    Point Estimate
    Budget Base Line
    Total Project Budget
  • 17. Contingency & Management Reserve
    Theory
    Management
    Reserve
    Contingency
    Reserve included
    From PMBOK Guide, page 170
  • 18. Contingency Reserve Process
    Theory
    Plan Risk Management
    Risk Management Plan
    Risk List / Description
    Identify Risks
    Risk Description / Probability / Impact Matrix
    Perform Qualitative Risk Analysis
    Planning Process
    Risk Description / Probability / Impact / Amount
    Perform Quantitative Risk Analysis
    Risk Resister(Updates)
    • Budget & Schedule activity for
    Responses
    • Contingency Reserve
    Plan Risk Responses
    Monitor & Control Risks
    Estimate Costs
    • PMBOK Guide, Risk Management Process
  • Management Reserve Process
    Theory
    Risk Resister
    • Budget & Schedule activity
    for Responses
    • Contingency Reserve
    Scope Baseline
    Project Schedule
    Human Resource Plan
    Basis of Estimates
    Estimate Costs
    Planning Process
    Determine Budget
    Cost Performance Baseline
    Project Funding Requirement
    • Management Reserve
    EVM
    (Earned Value Management)
    Control Costs
    • PMBOK Guide, Cost Management Process
  • Literature Review
    Literature
    Review
    • NASA Cost Handbook 2008
    • 19. Dr. Stephen Book
    - Allocating “Risk Dollars” back to Individual Cost Elements
    • Paul Garvey
    - Cost Risk Analysis without Statistics
    • Michael W. Newell, Marina N. Grashina
    - The Project Management Question and Answer Book
    • Dr. Prasanta Kumar Dey
    - A Combined Analytic Hierarchy Process and Decision Tree
    Approach
    • Others
  • Solution Approach/Methods/Techniques
    Literature
    Review
    • Decision Making Tools
    • 20. Three Points Estimate
    AHP(Analytic Hierarchy Process) / Ph. D Thomas L. Saaty
    HDP (Hierarchical Decision Process) Ph. D Jang W. Ra
    • Normal Distribution @risk, Crystal Ball
    • 21. Decision Tree Analysis
    • 22. Confident Level
  • Three Points Estimate
    Literature
    Review
    • Base Estimate or Point Estimate Cost.*
    The total cost of a project, where Cost (BE) is the sum of the cost element costs summed across the system’s Work Breakdown Structure(WBS) without any adjustment for Risk/Uncertainty ;
    • Three Point Estimate
    Reserves ?
    Point Estimate
    (Most likely)
    Probability
    Budget
    Low
    High
    Cost
    Cost Account(Work-package)
    * Cost Risk Analysis Without Statistics.
    - Paul R. Garvey
  • 23. AHP(Analytic Hierarchy Process) /
    HDP (Hierarchical Decision Process)
    Literature
    Review
    • Three basic principles of the AHP/HDP
    • 24. Hierarchical Representation and Decomposition
    • 25. Priority Discrimination and Synthesis
    (Pair-wise comparison)
    • Logical Consistency
  • High-Volume Coil Winding machine
    Future capability
    Management Requirement
    Safety
    Net present worth
    Upgrade existing
    Machine
    New semiautomatic
    Machine
    Fully automatic
    Machine
    AHP/HDP
    Literature
    Review
    • Example
    Goal
    Criterion/ Factors
    Alternatives
  • 26. Coil Winding machine
    Future
    Mgmt
    Safety
    Net
    Upgrade
    New
    Fully automatic
    AHP/HDP
    Literature
    Review
    Net : Safety = 3:1
    Net : future = 6:1
    Net : Mgmt = 7:1
    Safety: Fut = 5:1
    Safety:Mgmt = 2:1
    Fut : Mgmt = 1:3
  • 27. Normal Distribution @risk, Crystal Ball
    Literature
    Review
    • Monte Carlo Simulation
  • Decision Tree Analysis
    Literature
    Review
    • Incorporate the cost of each choice, the probabilities of each
    possible scenario , and rewards of each alternative logical path.
    • EMV(Expected Monetary Value)
  • Confidence Level
    Literature
    Review
    • Appropriate level of Confidence
    • 28. Cover Unidentified Risk, Residual Risks, and Secondary
    Risks
    • Consider Risk Dollar amount beyond Budget Baseline
    • 29. Executable within the Level of Confidence
    • 30. Lessons learned : Historical Data, Performance
  • 2008 NASA Cost Estimating Handbook
    Literature
    Review
    Table of Contents
    Volume 1 Cost Estimating
    Volume 2 Cost Risk
    Volume 3 Economic and Supporting Analysis
    Volume 4 NASA Cost Estimator Career
    Development Guide
    Volume 5 Knowledge Management
    Volume 6 Reference
  • 31. Cost Risk Approaches
    Literature
    Review
    • Analytic Approach
    • 32. Simulation Approach
    • 33. Hybrid Scenario Based Approach
    • 34. Integrated Risk Management
    Step 1. Generate / Obtain Point Estimate
    Step 2. Quantify Cost Estimating Uncertainty
    Step 3. Quantify Technical Risk
    Step 4. Quantify Correlation
    Step 5. Run Simulation
    Step 6. Assess Risk Dollars/ Unallocated Future Expense
    Step 7. Allocate Risk Dollars to the WBS
  • 35. Unallocated Future Expense(UFE)
    Literature
    Review
    • Unallocated Future Expense (UFE):
    The Difference between the Confidence Level Amount and the Funded Amount.
    Probability
    Budget Baseline
    Estimated total Budget
    • Heldby the Project to be allocated to WBS
    • 36. Held by the Program(Mission Directorate):
    Contingency Reserve
    Management Reserve
    Cost
    Point Estimate or Sum of Most likely WBS Element Costs
    Confident level 70%
    Unallocated Future Expense(UFE)
  • 37. Allocating “Risk Dollars” Back to Individual Cost Elements – Stephen A. Book
    Literature
    Review
    WBS-Element Triangular
    Cost Distribution
    Merge WBS-Element Cost Distribution
    Probability
    A.
    Most Likely Total Cost
    Most likely
    +
    Confident Level (70%)
    B.
    +
    Cost
    UFE
    C.
    Point Estimate or Sum of Most likely WBS Element Costs
    +
    To be allocated in proportion to their Riskiness.
  • 38. Summary of Literature Review
    Literature
    Review
    WBS Elements
    Tree Point Estimate
    • To be allocated in proportion to their Riskiness.
    • 39. More Cost Risk, More Risk Dollar
    • 40. More Uncertainty, Wider Range of Cost
    Distribution
    • Allocation method
    - Confident level
    - Standard Deviation
    - Risk Response Plan
    Define Point Estimate
    Define Confident Level
    Calculate Needs
    Allocate Risk Dollars
  • 41. Summary of Literature Review
    Literature
    Review
  • 42. NASA Cost Estimator Career Development Guide.
    Literature
    Review
    • Responsible : The NASA Office of Human Capital Management
    • 43. Table of Contents
    • 44. Cost Estimator Career Development Philosophy
    • 45. Leadership Development Philosophy
    • 46. Minimum Actions to Ensure Effective Career Development
    • 47. Career Directions and General Career paths
    • 48. General and Technical Competencies
    • 49. Attitude
    • 50. Training and Development Experiences
    • 51. Certification and Continuing Professional Education
    • 52. Individual Development Planning
  • Survey Result
    Survey
    • 10 Questionnaires
    • 53. WhatReserves they use?
    - Contingency Reserve or Management Reserve or both
    • How to Calculate the Reserves Amount ?
    • 54. Open Survey (Thru PMPCafe)
    • 55. 59 Respondents
  • Survey Result
    Survey
    Q1. Which Project Category do you handle ?
    10%
    9%
    32%
    Total59
    49%
  • 56. Survey Result
    Survey
    Q 2. Do you estimate the Contingency Reserve andManagement Reserve in
    your project budget?
    32 %
    Total59
    68 %
  • 57. Survey Result
    Survey
    Q 3. Howto calculate the reserve amount in project budget?
    8 %
    32 %
    Total59
    31 %
    24 %
  • 60. Survey Result
    Survey
    Q 4. Have you done your project within the budget including reserves?
    24 %
    32 %
    Total59
    44 %
  • 61. Survey Summary
    Survey
    • NoCases to use both Contingency and Management Reserve.
    Use Management Reserve only
    • Use Three Point Estimate ?
    - Never Use 63% (37/59)
    - Occasionally use 37% (22/59)
    • Use Monte Carlos Simulation (Crystal Ball or @Risk) ?
    - Never use 86% (51/59)
    - Occasionally use 14% (8/59)
  • 62. Case Study
    Case Study
    “ Construction Project for Production Base in Vietnam”
    Developed by D Construction Co. Ltd.
  • 63. WBS
    Case Study
    Project
    Electrical
    Works
    PM
    Civil Works
    Mechanical Works
    Architecture
    Works
    # 1. On-Shore
    Works
    # 3.Power
    Plant
    # 6. Facilities
    # 8. Electric
    Equipments
    # 2. Off-Shore
    Works
    # 4.Utilities
    House
    # 7. Machines
    # 9 Cabling
    # 5. Main Office
    PM
    Omit PM for easy calculation of the budget
  • 64. Case Study - Select Base Estimated Cost
    Case Study
    • Example : “Case Study” Project
    • 65. Assumption : Base Estimate Cost 1,250 does not include contingency (but include
    technical/commercial allowances)
    • MEAN = (L+M+H)/3, Weighted avg= (L+4*M+H)/6
  • Select Base Estimated Cost
    Case Study
  • 66. Risk Register
    Case Study
  • 67.
    • Allocation of the Contingency Reserve
    Case Study
    #1
    #2
    #3
    #4
    100%
    1,352
    260
    260.0
    19.2%
  • 68. Calculate total amount of identified
    Risk dollars required.
    Case Study
    • Analysis the Risk Probability and Impact
    WP : Work Package
    • Calculate Cost by Decision tree and HDP method
  • Define a WBS-elements “Need”
    Case Study
    • Calculate allocated amount by Decision tree and HDP method
  • Allocate Risk dollars to WBS-Elements
    Case Study
    • Allocated Risk dollars amount to Work-Packages
    • 69. Budget Base Line
    Base Estimate 1,250 (2.22%)
    Contingence Reserve + 260
    Budget Base Line 1,510 ( 19.6%)
  • 70. Allocate Risk dollars to WBS-Elements
    Case Study
    • Contingency Reserve of WBS-Element
    (19.6%)
    WP : Work Package
  • 71. Define Management Reserve
    At Confidence level.
    Case Study
    • 50% is the Confidence level of this project.
  • Determine Management Reserve
    Case Study
    • 50% is the Confidence level : $ 1,741
    • 72. Management Reserve
    Risk dollar amount at Confidence level – (Base Estimate + Contingence Reserve)
    $ 1,741 - $ 1,510 = $ 231 (15.3 % of the Budget Base line)
  • 73. Summary
    Case Study
    Contingency Reserve
    Management Reserve
    Base Estimate
    Budget Baseline
    Total budget
  • 74. Summary
    Case Study
  • 75. Conclusions / Recommendations
    Conclusion
    • Move from Deterministic Point Estimates to Probabilistic
    Estimates.
    • Generate a Point Estimate
    • 76. Budget based upon a Quantification of all the Risks.
    • 77. Define Confidence Level
    • 78. Allocate Risk Dollars as Reserves
    • 79. Develop Human Resource Management
  • Q & A
    Thank You!
    UAA MSPM Hyukchun Kwon, CPA/PMP