PM685 - Kwon


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PM685 - Kwon

  1. 1. The Project’s Success leads to Business Success.<br />A Study on Calculating the Optimal Contingency and Management Reserves for Project Budget <br />(프로젝트 예산 편성을 위한 적정 예비비 산정에 관한 연구)<br />Kwon, HyukChun CPA / PMP<br />November27th,2009<br />
  2. 2. Problem Background<br />Background<br /><ul><li> Project Management?</li></ul> The Application of Knowledge, Skills, Tools andTechniques to Project Activities to meet Requirement.<br />UAA MSPM<br />Personal<br />Knowledge<br />Skills<br />Techniques<br />Tools<br />Experiences<br />Theory<br />Application<br />Business<br />
  3. 3. Project Management<br />Background<br /><ul><li> Project </li></ul>Temporary, Unique<br /><ul><li> Project Triple Constraints </li></ul>Scope, Time, Cost <br /><ul><li> Project Cost Management</li></li></ul><li> Budget<br />Background<br /><ul><li> Why Accurate Budget ?</li></ul>Estimate, Predict the Budget What a Project will Cost. <br /><ul><li> Loss Business</li></ul> Opportunities<br /><ul><li> Budget > Cost </li></ul>Surplus Fund <br /><ul><li> Stop Project
  4. 4. Budget < Cost </li></ul>Lack of Fund <br /><ul><li> Add more Fund
  5. 5. Impact Financing Plan</li></li></ul><li> Budget / Cost<br />Background<br /><ul><li> Budget : The Sum of Resources Monetary Value </li></ul>Specification<br />(Quality)<br />Project<br />Resources<br />Scope<br />Quantities/<br />Time<br />Work Package<br />∑<br />=<br />Budget <br />Unit Price<br />˟<br />Activity<br /><ul><li> Budget : Plan, Estimate, Predict
  6. 6. Cost : Sumof Expenses, Result </li></ul>WBS<br />
  7. 7. The Factors to Change the Budget<br />Background<br />
  8. 8. The Study Approach <br />Background<br />
  9. 9. Theory<br />Theory<br />UAA, MSPM<br />PMBOK Guide, Text Book, Case Study<br />
  10. 10. The Factors to affect Project Risk <br />Theory<br />Uncertainty <br /> (Known, Unknown, Identified, Not Identified)<br />* External<br />Environment<br />Stakeholders<br />Project<br />Team Members<br />* Internal<br />Project Boundary<br />Human Resources<br />
  11. 11. Internal Factors – Human Resource <br />Theory<br />* Stakeholder’s Risk Tolerance <br />Risk Tolerance Line<br />Probability<br />Impact<br />* Team Member’s<br /><ul><li> Experience Level
  12. 12. Required Skill (Tech, Leadership, Communication …)
  13. 13. Knowledge, Competency, Ability</li></ul>-> Refer to NASA Cost Estimating Hand Book Volume 4<br />
  14. 14. Cost /Time / Scope / Risk <br />Theory<br />Budget without Risk<br />Scope with Risk<br />Scope without Risk<br />(Scope Management)<br />Cost <br />Management<br />Budget with Risk<br />Resources<br />Risk Management<br />Scope<br />(WBS)<br />Resource Management<br />Time<br />Time Management<br />
  15. 15. Risk / Budget<br />Theory<br />(Net Cost)<br />(Contingency Reserve)<br />(Allowance)<br />(Management Reserve)<br />(Point Estimate)<br />PMI Global Congress North America 2007<br />
  16. 16. Budget<br />Theory<br />Resources<br />Allowance (Unknown Knowns) <br />Contingency Reserve<br />(Known Unknowns)<br />Net Cost (Known Knowns) <br />Management Reserve<br />(Unknown Unknowns)<br />Uncertainty(Risk)<br />Time<br />Point Estimate<br />Budget Base Line<br />Total Project Budget<br />
  17. 17. Contingency & Management Reserve<br />Theory<br />Management <br />Reserve<br />Contingency<br />Reserve included<br />From PMBOK Guide, page 170 <br />
  18. 18. Contingency Reserve Process<br />Theory<br />Plan Risk Management<br />Risk Management Plan<br />Risk List / Description <br />Identify Risks<br />Risk Description / Probability / Impact Matrix<br />Perform Qualitative Risk Analysis<br />Planning Process<br />Risk Description / Probability / Impact / Amount<br />Perform Quantitative Risk Analysis<br />Risk Resister(Updates)<br /><ul><li> Budget & Schedule activity for</li></ul> Responses<br /><ul><li>Contingency Reserve</li></ul>Plan Risk Responses<br />Monitor & Control Risks<br />Estimate Costs <br /><ul><li> PMBOK Guide, Risk Management Process</li></li></ul><li>Management Reserve Process<br />Theory<br />Risk Resister<br /><ul><li> Budget & Schedule activity</li></ul> for Responses<br /><ul><li> Contingency Reserve</li></ul>Scope Baseline<br />Project Schedule<br />Human Resource Plan<br />Basis of Estimates<br /> Estimate Costs<br />Planning Process<br />Determine Budget<br />Cost Performance Baseline<br />Project Funding Requirement<br /><ul><li> Management Reserve</li></ul>EVM<br />(Earned Value Management)<br />Control Costs<br /><ul><li> PMBOK Guide, Cost Management Process</li></li></ul><li>Literature Review<br />Literature<br />Review<br /><ul><li>NASA Cost Handbook 2008
  19. 19. Dr. Stephen Book</li></ul> - Allocating “Risk Dollars” back to Individual Cost Elements<br /><ul><li> Paul Garvey</li></ul> - Cost Risk Analysis without Statistics<br /><ul><li> Michael W. Newell, Marina N. Grashina</li></ul> - The Project Management Question and Answer Book <br /><ul><li> Dr. Prasanta Kumar Dey</li></ul> - A Combined Analytic Hierarchy Process and Decision Tree<br /> Approach<br /><ul><li>Others </li></li></ul><li> Solution Approach/Methods/Techniques<br />Literature<br />Review<br /><ul><li> Decision Making Tools
  20. 20. Three Points Estimate</li></ul> AHP(Analytic Hierarchy Process) / Ph. D Thomas L. Saaty<br /> HDP (Hierarchical Decision Process) Ph. D Jang W. Ra<br /><ul><li>Normal Distribution @risk, Crystal Ball
  21. 21. Decision Tree Analysis
  22. 22. Confident Level</li></li></ul><li>Three Points Estimate<br />Literature<br />Review<br /><ul><li> Base Estimate or Point Estimate Cost.*</li></ul>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 ; <br /><ul><li> Three Point Estimate</li></ul>Reserves ?<br />Point Estimate<br />(Most likely)<br />Probability<br />Budget <br />Low<br />High<br />Cost<br />Cost Account(Work-package)<br />* Cost Risk Analysis Without Statistics.<br /> - Paul R. Garvey<br />
  23. 23. AHP(Analytic Hierarchy Process) /<br /> HDP (Hierarchical Decision Process) <br />Literature<br />Review<br /><ul><li> Three basic principles of the AHP/HDP
  24. 24. Hierarchical Representation and Decomposition
  25. 25. Priority Discrimination and Synthesis</li></ul> (Pair-wise comparison)<br /><ul><li> Logical Consistency</li></li></ul><li>High-Volume Coil Winding machine<br />Future capability<br />Management Requirement<br />Safety<br />Net present worth<br />Upgrade existing<br />Machine<br />New semiautomatic<br />Machine<br />Fully automatic<br />Machine<br />AHP/HDP<br />Literature<br />Review<br /><ul><li> Example</li></ul>Goal<br />Criterion/ Factors<br />Alternatives<br />
  26. 26. Coil Winding machine<br />Future <br />Mgmt <br />Safety<br />Net <br />Upgrade<br />New <br />Fully automatic<br />AHP/HDP<br />Literature<br />Review<br />Net : Safety = 3:1<br />Net : future = 6:1<br />Net : Mgmt = 7:1<br />Safety: Fut = 5:1<br />Safety:Mgmt = 2:1<br />Fut : Mgmt = 1:3<br />
  27. 27. Normal Distribution @risk, Crystal Ball<br />Literature<br />Review<br /><ul><li> Monte Carlo Simulation</li></li></ul><li> Decision Tree Analysis<br />Literature<br />Review<br /><ul><li> Incorporate the cost of each choice, the probabilities of each </li></ul> possible scenario , and rewards of each alternative logical path.<br /><ul><li> EMV(Expected Monetary Value)</li></li></ul><li>Confidence Level<br />Literature<br />Review<br /><ul><li> Appropriate level of Confidence
  28. 28. Cover Unidentified Risk, Residual Risks, and Secondary</li></ul> Risks<br /><ul><li> Consider Risk Dollar amount beyond Budget Baseline
  29. 29. Executable within the Level of Confidence
  30. 30. Lessons learned : Historical Data, Performance</li></li></ul><li>2008 NASA Cost Estimating Handbook<br />Literature<br />Review<br />Table of Contents<br />Volume 1 Cost Estimating<br />Volume 2 Cost Risk<br />Volume 3 Economic and Supporting Analysis<br />Volume 4 NASA Cost Estimator Career<br /> Development Guide<br />Volume 5 Knowledge Management <br />Volume 6 Reference<br />
  31. 31. Cost Risk Approaches<br />Literature<br />Review<br /><ul><li> Analytic Approach
  32. 32. Simulation Approach
  33. 33. Hybrid Scenario Based Approach
  34. 34. Integrated Risk Management</li></ul>Step 1. Generate / Obtain Point Estimate<br />Step 2. Quantify Cost Estimating Uncertainty<br />Step 3. Quantify Technical Risk<br />Step 4. Quantify Correlation<br />Step 5. Run Simulation<br />Step 6. Assess Risk Dollars/ Unallocated Future Expense<br />Step 7. Allocate Risk Dollars to the WBS<br />
  35. 35. Unallocated Future Expense(UFE)<br />Literature<br />Review<br /><ul><li>Unallocated Future Expense (UFE):</li></ul>The Difference between the Confidence Level Amount and the Funded Amount.<br />Probability<br />Budget Baseline<br />Estimated total Budget<br /><ul><li> Heldby the Project to be allocated to WBS
  36. 36. Held by the Program(Mission Directorate): </li></ul>Contingency Reserve<br />Management Reserve<br />Cost<br />Point Estimate or Sum of Most likely WBS Element Costs<br />Confident level 70%<br />Unallocated Future Expense(UFE)<br />
  37. 37. Allocating “Risk Dollars” Back to Individual Cost Elements – Stephen A. Book<br />Literature<br />Review<br />WBS-Element Triangular<br />Cost Distribution<br />Merge WBS-Element Cost Distribution<br />Probability<br />A.<br />Most Likely Total Cost<br />Most likely<br />+<br />Confident Level (70%)<br />B.<br />+<br />Cost<br />UFE<br />C.<br />Point Estimate or Sum of Most likely WBS Element Costs<br />+<br />To be allocated in proportion to their Riskiness.<br />
  38. 38. Summary of Literature Review<br />Literature<br />Review<br />WBS Elements<br />Tree Point Estimate<br /><ul><li>To be allocated in proportion to their Riskiness.
  39. 39. More Cost Risk, More Risk Dollar
  40. 40. More Uncertainty, Wider Range of Cost</li></ul> Distribution<br /><ul><li> Allocation method</li></ul> - Confident level<br /> - Standard Deviation<br /> - Risk Response Plan <br />Define Point Estimate<br />Define Confident Level<br />Calculate Needs<br />Allocate Risk Dollars<br />
  41. 41. Summary of Literature Review<br />Literature<br />Review<br />
  42. 42. NASA Cost Estimator Career Development Guide.<br />Literature<br />Review<br /><ul><li> Responsible : The NASA Office of Human Capital Management
  43. 43. Table of Contents
  44. 44. Cost Estimator Career Development Philosophy
  45. 45. Leadership Development Philosophy
  46. 46. Minimum Actions to Ensure Effective Career Development
  47. 47. Career Directions and General Career paths
  48. 48. General and Technical Competencies
  49. 49. Attitude
  50. 50. Training and Development Experiences
  51. 51. Certification and Continuing Professional Education
  52. 52. Individual Development Planning</li></li></ul><li>Survey Result<br />Survey<br /><ul><li> 10 Questionnaires
  53. 53. WhatReserves they use?</li></ul> - Contingency Reserve or Management Reserve or both<br /><ul><li> How to Calculate the Reserves Amount ?
  54. 54. Open Survey (Thru PMPCafe)
  55. 55. 59 Respondents </li></li></ul><li>Survey Result<br />Survey<br />Q1. Which Project Category do you handle ?<br />10%<br />9%<br />32%<br />Total59<br />49%<br />
  56. 56. Survey Result<br />Survey<br />Q 2. Do you estimate the Contingency Reserve andManagement Reserve in<br /> your project budget?<br />32 %<br />Total59<br />68 %<br />
  57. 57. Survey Result<br />Survey<br />Q 3. Howto calculate the reserve amount in project budget?<br />8 %<br /><ul><li>Under5% : 7
  58. 58. 10 ~15% : 9
  59. 59. 16~30% : 3</li></ul>32 %<br />Total59<br />31 %<br />24 %<br />
  60. 60. Survey Result<br />Survey<br />Q 4. Have you done your project within the budget including reserves?<br />24 %<br />32 %<br />Total59<br />44 %<br />
  61. 61. Survey Summary<br />Survey<br /><ul><li> NoCases to use both Contingency and Management Reserve.</li></ul> Use Management Reserve only<br /><ul><li> Use Three Point Estimate ? </li></ul> - Never Use 63% (37/59)<br /> - Occasionally use 37% (22/59)<br /><ul><li> Use Monte Carlos Simulation (Crystal Ball or @Risk) ?</li></ul> - Never use 86% (51/59)<br /> - Occasionally use 14% (8/59)<br />
  62. 62. Case Study<br />Case Study<br />“ Construction Project for Production Base in Vietnam”<br />Developed by D Construction Co. Ltd.<br />
  63. 63. WBS<br />Case Study<br />Project<br />Electrical<br />Works<br />PM<br />Civil Works<br />Mechanical Works<br />Architecture <br />Works<br /># 1. On-Shore<br /> Works<br /># 3.Power<br /> Plant<br /># 6. Facilities<br /># 8. Electric<br /> Equipments <br /># 2. Off-Shore<br /> Works<br /># 4.Utilities<br /> House <br /># 7. Machines<br /># 9 Cabling<br /># 5. Main Office<br />PM<br />Omit PM for easy calculation of the budget <br />
  64. 64. Case Study - Select Base Estimated Cost<br />Case Study<br /><ul><li> Example : “Case Study” Project
  65. 65. Assumption : Base Estimate Cost 1,250 does not include contingency (but include</li></ul> technical/commercial allowances)<br /><ul><li> MEAN = (L+M+H)/3, Weighted avg= (L+4*M+H)/6</li></li></ul><li>Select Base Estimated Cost<br />Case Study<br />
  66. 66. Risk Register<br />Case Study<br />
  67. 67. <ul><li>Allocation of the Contingency Reserve</li></ul>Case Study<br />#1<br />#2<br />#3<br />#4<br />100%<br />1,352<br />260<br />260.0<br />19.2%<br />
  68. 68. Calculate total amount of identified <br />Risk dollars required.<br />Case Study<br /><ul><li>Analysis the Risk Probability and Impact</li></ul>WP : Work Package<br /><ul><li> Calculate Cost by Decision tree and HDP method</li></li></ul><li>Define a WBS-elements “Need”<br />Case Study<br /><ul><li> Calculate allocated amount by Decision tree and HDP method</li></li></ul><li>Allocate Risk dollars to WBS-Elements<br />Case Study<br /><ul><li> Allocated Risk dollars amount to Work-Packages
  69. 69. Budget Base Line</li></ul>Base Estimate 1,250 (2.22%)<br />Contingence Reserve + 260 <br />Budget Base Line 1,510 ( 19.6%)<br />
  70. 70. Allocate Risk dollars to WBS-Elements<br />Case Study<br /><ul><li> Contingency Reserve of WBS-Element</li></ul>(19.6%)<br />WP : Work Package<br />
  71. 71. Define Management Reserve <br />At Confidence level.<br />Case Study<br /><ul><li>50% is the Confidence level of this project.</li></li></ul><li> Determine Management Reserve<br />Case Study<br /><ul><li> 50% is the Confidence level : $ 1,741
  72. 72. Management Reserve</li></ul> Risk dollar amount at Confidence level – (Base Estimate + Contingence Reserve)<br />$ 1,741 - $ 1,510 = $ 231 (15.3 % of the Budget Base line) <br />
  73. 73. Summary<br />Case Study<br />Contingency Reserve<br />Management Reserve<br />Base Estimate<br />Budget Baseline<br />Total budget<br />
  74. 74. Summary<br />Case Study<br />
  75. 75. Conclusions / Recommendations<br />Conclusion<br /><ul><li> Move from Deterministic Point Estimates to Probabilistic</li></ul> Estimates.<br /><ul><li> Generate a Point Estimate
  76. 76. Budget based upon a Quantification of all the Risks.
  77. 77. Define Confidence Level
  78. 78. Allocate Risk Dollars as Reserves
  79. 79. Develop Human Resource Management</li></li></ul><li> Q & A<br />Thank You!<br />UAA MSPM Hyukchun Kwon, CPA/PMP<br />
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