Cost and Value Management in Projects
Project manager's guide to achieving cost efficiency and value optimization—thoroughly updated with new cases, examples, and problem sets
The newly revised and updated Second Edition of Cost and Value Management in Projects provides project managers with a thorough understanding of the various dimensions of cost and value in projects, along with the factors that impact them and the managerial approaches for achieving cost efficiency and value optimization. Whereas most cost management books discuss the topic from a tactical perspective, such as through the use of simple budgeting or Earned Value Analysis, this Second Edition addresses cost from a strategic perspective, examining project management decision areas that have the potential to enhance value and providing an integrated framework for managing cost.
The Second Edition includes updates to key topic areas such as project benefits realization, updated end-of-chapter exercises such as discussion questions and problem sets, updated case studies, and new spreadsheet analytic techniques and examples.
Written by two highly qualified authors with significant experience in the field, Cost and Value Management in Projects includes information on:
Value management through value planning, engineering, and analysis from the perspective of projects, and best practices on how to avoid common pitfalls in managing cost and value Organization strategy and project selection, organization structure and culture, project definition (and contracts), and estimating project times and cost Developing project plans and schedules, managing risk, scheduling resources and cost, reducing project duration, leadership, performance measurement, and project closure Attainment of value in complex environmental settings and benefits of effective project management
Cost and Value Management in Projects is an essential resource on the subject for stakeholders at all corporate and government levels, including executives measuring performance, middle level corporate managers, project and team managers, engineers, project team members, and business consultants, along with students in related programs of study.
About the Authors xiii Introduction to the Second Edition xv 1 Introduction to the Challenge of Cost and Value Management in Projects 1 1.1 Importance of Cost and Value Management in Projects 2 1.2 Keys to Effective Project Cost Management 7 1.3 Essential Features of Project Value Management 9 1.4 Organization of the Book 11 Chapter Summary 20 References 21 2 Project Needs Assessment, Concept Development, and Planning 23 2.1 Needs Identification 25 2.2 Conceptual Development 29 2.3 Project Feasibility 32 2.3.1 Five Areas of Project Feasibility 32 2.3.2 Benefits of Conducting a Project Feasibility Study 33 2.4 The Statement of Work 34 2.5 Project Planning 37 2.6 Project Scope Definition 38 2.6.1 Purpose of the Scope Definition Document 38 2.6.2 Elements of the Scope Definition Document 39 2.6.3 Project Scope Changes 42 2.7 Work Breakdown Structure 43 2.7.1 Types of Work Breakdown Structures 44 2.7.2 Work Breakdown Structure Development 46 2.7.3 Coding of Work Breakdown Structures 49 2.7.4 Integrating the WBS and the Organization 49 2.7.5 Guidelines for Developing a Work Breakdown Structure 52 Chapter Summary 53 Discussion and Review Questions 53 References 53 3 Cost Estimation 55 3.1 Importance of Cost Estimation 58 3.2 Problems of Cost Estimation 60 3.3 Sources and Categories of Project Costs 64 3.4 Cost Estimating Methods 66 3.5 Cost Estimation Process 75 3.5.1 Creating the Detailed Estimate 76 3.6 Allowances for Contingencies in Cost Estimation 78 3.7 The Use of Learning Curves in Cost Estimation 81 Chapter Summary 85 Discussion and Review Questions 86 References 87 3A Appendix to Chapter 3: Forecasting Methods for Cost and Value Management 89 3A.1 Categories of Forecasting in Project Management 90 3A.2 Forecasting Methods for Projects 91 3A.3 Time Series Analysis 91 3A.4 Linear Regression Analysis 92 3A.4.1 Evaluating the “Fit” of the Regression Line 96 3A.4.2 Limitations in Forecasting Using Linear Regression 99 3A.4 Forecasting the Project End Conditions 102 3A.5 S- Curve Forecasting 102 3A.6 Technological Forecasting 109 Chapter Summary 110 Discussion and Review Questions 111 References 112 4 Project Budgeting 113 4.1 Issues in Project Budgeting 114 4.2 Developing a Project Budget 115 4.2.1 Work Breakdown Structure (WBS) 117 4.2.2 Issues in Creating a Project Budget 117 4.3 Approaches to Developing a Project Budget 118 4.3.1 Top- down Budgeting 118 4.3.2 Bottom- up Budgeting 120 4.3.3 Preparing the Project Budget 123 4.4 Activity- based Costing 124 4.4.1 Steps in Activity- based Costing 124 4.4.2 Cost Drivers in Activity- based Costing 124 4.4.3 Sample Project Budget 1 125 4.4.4 Sample Project Budget 2 125 4.5 Program Budgeting 126 4.5.1 Time- phased Budgets 127 4.5.2 Tracking Chart 127 4.6 Developing a Project Contingency Budget 128 4.6.1 Allocation of Contingency Funds 129 4.6.2 Drawbacks of Contingency Funding 130 4.6.3 Advantages of Contingency Funding 131 4.7 Issues in Budget Development 132 4.8 Crashing the Project: Budget Effects 132 4.8.1 Crashing Project Activities— Decision Making 133 Chapter Summary 138 Discussion and Review Questions 138 References 138 5 Project Cost Control 141 5.1 Overview of the Project Evaluation and Control System 142 5.1.1 Project Control Process 142 5.2 Integrating Cost and Time in Monitoring Project Performance: The S- Curve 144 5.3 Earned Value Management 148 5.4 Earned Value Management Model 149 5.5 Fundamentals of Earned Value 151 5.6 EVM Terminology 152 5.7 Relevancy of Earned Value Management 153 5.8 Conducting an Earned Value Analysis 154 5.9 Performing an Earned Value Assessment 156 5.10 Managing a Portfolio of Projects with Earned Value Management 160 5.11 Important Issues in the Effective Use of Earned Value Management 161 5.12 Benefits of EVM 164 5.13 EVM Using Microsoft Project 165 5.13.1 Step 1. Enter Resources in the Resource Sheet View 165 5.13.2 Step 2. Assign Resources to Tasks 166 5.13.3 Step 3. Save the Project Baseline 168 5.13.4 Step 4. Record Project Actuals 169 5.13.5 Step 5. Review the EVA View and Reports 169 5.13.6 Step 6. Calculate Schedule Performance and Cost Performance indices 172 5.13.7 Summary: Earned Value Management in Six Easy Steps 173 Chapter Summary 173 Discussion and Review Questions 174 References 174 6 Cash Flow Management 177 6.1 The Concept of Cash Flow 178 6.2 Cash Flow and the Worth of Projects 183 6.2.1 The Time Value of Money, and Techniques for Determining It 184 6.2.2 Applying Discounting to Project Cash Flow 185 6.3 Payment Arrangements 190 6.3.1 Cost- Reimbursable Arrangements 191 6.3.2 Payment Plans 192 6.3.3 Claims and Variations 194 6.3.4 Cost Variation Due to Inflation and Exchange Rate Fluctuation 197 6.3.5 Price Incentives 198 6.3.6 Retentions 199 Chapter Summary 201 Discussion and Review Questions 201 References 202 7 Financial Management in Projects 203 7.1 Project Financial Management 204 7.2 Project Accounting 205 7.3 Financing of Projects Versus Project Finance 206 7.4 Principles of Financing Projects 207 7.5 Types and Sources of Finance 208 7.6 Sources of Finance 210 7.7 Cost of Financing 211 7.8 Project Finance 212 7.9 The Process of Project Financial Management 214 7.9.1 Conducting Feasibility Studies 214 7.9.2 Planning the Project Finance 214 7.9.3 Arranging the Financial Package 215 7.9.4 Controlling the Financial Package 215 7.9.5 Controlling Financial Risk 216 7.9.6 Options Models 217 Chapter Summary 219 Discussion and Review Questions 220 References 220 8 Value Management 223 8.1 Concept of Value 224 8.2 Dimensions and Measures of Value 228 8.3 Overview of Value Management 229 8.3.1 Definition 230 8.3.2 Scope 230 8.3.3 Key Principles of VM 230 8.3.4 Key Attributes of VM 231 8.4 Value Management Terms 231 8.5 Need for Value Management in Projects 233 8.6 The Value Management Approach 234 8.6.1 Cross- functional Framework 234 8.6.2 Use of Functions 235 8.6.3 Structured Decision Process 235 8.7 The VM Process 235 8.8 Benefits of Value Management 237 8.9 Other VM Requirements 238 8.10 Value Management Reviews 239 8.11 Relationship Between Project Value and Risk 243 8.12 Value Management as an Aid to Risk Assessment 245 8.13 An Example of How VM and Risk Management Interrelate 246 8.14 Project Benefits Management 248 Chapter Summary 251 Discussion and Review Questions 251 References 252 9 Change Control and Configuration Management 255 9.1 Causes of Changes 256 9.2 Influence of Changes 262 9.3 Configuration Management 262 9.4 Configuration Management Standards 264 9.5 The CM Process 265 9.6 Role and Benefits of Configuration Management in Projects 267 9.7 Control of Changes 270 9.8 Change Control Procedure and Configuration Control 272 9.9 Responsibility for the Control of Changes 275 9.10 Crisis Management 276 9.11 An Example of Configuration Management 282 Chapter Summary 282 Discussion and Review Questions 283 References 283 10 Supply Chain Management 285 10.1 What Is Supply Chain Management? 286 10.2 The Need to Manage Supply Chains 288 10.3 SCM Benefits 289 10.4 Critical Areas of SCM 290 10.4.1 Customers 290 10.4.2 Suppliers 290 10.4.3 Design and Operations 291 10.4.4 Logistics 291 10.4.5 Inventory 292 10.5 SCM Issues in Project Management 292 10.6 Value Drivers in Project Supply Chain Management 294 10.7 Optimizing Value in Project Supply Chains 297 10.7.1 Total Quality Management 297 10.7.2 Choosing the Right Supply Chain 299 10.8 Project Supply Chain Process Framework 299 10.8.1 Procurement 299 10.8.2 Conversion 302 10.8.3 Delivery 303 10.9 Integrating the Supply Chain 303 10.10 Performance Metrics in Project Supply Chain Management 305 10.11 Project Supply Chain Metrics and the Supply Chain Operations Reference (SCOR) Model 308 10.12 Future Issues in Project Supply Chain Management 310 Chapter Summary 313 Discussion and Review Questions 313 References 314 11 Quality Management in Projects 317 11.1 Definition of Quality in Projects 318 11.2 Elements of Project Quality 319 11.2.1 The Project’s Product 320 11.2.2 Management Processes 326 11.2.3 Quality Planning 326 11.2.4 Quality Assurance (QA) 327 11.2.5 Quality Control 329 11.2.6 Corporate Culture 330 11.3 Total Quality Management in Projects 330 11.4 Root Cause Analysis 332 11.5 Quality Management System 333 11.6 Quality Management Methods for a Project Organization 334 11.6.1 The Six Sigma Methodology 337 11.6.2 The Six Sigma Model for Projects 338 11.6.3 Application of Six Sigma in Software Project Management 339 11.7 Quality Standards for Projects 340 Chapter Summary 342 Discussion and Review Questions 342 References 343 12 Integrating Cost and Value in Projects 345 12.1 The Project Value Chain 346 12.2 Project Value Chain Analysis 348 12.3 Sources and Strategies for Integrating Cost and Value in Projects 350 12.3.1 The Project’s Inbound Supply Chain 350 12.3.2 Project Design 351 12.3.3 Project Development 356 12.3.4 Project Delivery/Implementation 358 12.3.5 Costs of the Project Life Cycle Employing the LCC Model 362 12.4 Integrated Value and Risk Management 363 12.5 The Project Cost and Value Integration Process 367 Chapter Summary 369 Discussion and Review Questions 370 References 370 Index 373
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.
