Managing cost models, baseline budgets and more

The SWWE Branch were very pleased to welcome Ewan Glen and Dr Paul Wood from APM’s Planning Monitoring and Control SIG on Tuesday 4th April 2017 to talk about a much-requested topic of budget and cost controls. Ewan and Paul work for BMT HiQ Sigma and have many years of experience in the field.

Ewan introduced the evening by putting cost modelling into the context of the project life cycle. Cost models look at whole life costs across the whole life cycle of a product, from definition through to disposal and are an essential element of any business case decision.

Paul discussed the role of cost modelling. Cost estimating is used to determine and communicate a realistic view of the likely cost outcome, which can form the basis of the plan for executing the project. A cost model can be a simple excel spread sheet or a specialised parametric tool. Cost models need inputs which can include data, costs, schedule, risks and can provide outputs as such discounted cash flow, output costs, cost drivers, ‘S’ curves and confidence limits.

Organisations need this information to inform business investment decisions, using tools such as investment appraisals and cost benefit analysis to develop robust business cases. It can help understand the required budget and cost drivers and avoid bad headlines such as overspending projects like the Scottish Parliament building. Paul also argued that it is needed to inform a project’s Performance Management Baseline (PMB).

The cost model process was discussed, including top down, bottom up, Monte Carlo simulation, confidence limits and correlation. Challenges to robust cost modelling include getting good data, being careful of estimates based on estimates (actuals from the PMB process would be better on future projects), and lack of 3 point estimates. Things to avoid are bolting risks on at the end, determining the schedule later, costs in the wrong year and changes to the schedule not being reflected in the model.

Ewan discussed the Performance Management Baseline (PMB), which is defined as the time-phased budget plan against which project performance is measured. It covers the project life cycle and is based on the scope of work as described by the work breakdown structure (WBS), with a budget for each WBS element. It includes risk and is aligned to cash flow.

The process starts with defining the scope and structures as the WBS and OBS, assignment of responsibilities and an iterative loop of estimating, developing the network, analysing and optimising, before sign off and most importantly communicating it! Key enablers include stakeholder, risk, assumptions and requirements management.

Challenges for achieving a robust PMB include realism, securing critical resources, quality of estimates, available cash flow, project interdependencies, supplier interfaces and expectations of stakeholders.

Managing the project against the PMB requires good change management to understand the impacts of scope and other changes and to update the model. Monitoring actual data against the estimates and adjusting. Monitoring risks and the impact of mitigation and used of contingency. This informs learning from experience which enables the cost models to be validated and revised and business case / benefit confirmation.

Ewan explained that it was typical that cost modelling and the PMB were developed separately and that communication between teams can be poor, even if they are on the same floor plate. The benefits of working together include better stakeholder understanding and reduced engagement time, better communication, reduced planning overheads, shared assumptions and data, moving to a shared culture with a single goal, lessons learned and the cost models directly linked to the schedule. The two processes are closely aligned and there is opportunity to share resources, data, reduce costs and improve communication. Working together the teams can understand the actual impact of changes on costs and schedule and manage the impact on the project.

Cultural change is needed to overcome people issues around ego, lack of training, poor communication and personality clashes which can get in the way of working together to understand and manage project change to be able to deliver a successful project. Too often, even in open plan offices there are barriers and poor communication between the risk, cost, EVM and schedule teams. This does not help achieved a successful project.

In summary, project management requires the integration of all project disciplines to work effectively together to ensure that project objectives and benefits are delivered to stakeholder satisfaction. Project management processes, tools and techniques are undertaken by people and it is therefore people, their skills, attitudes and behaviours that ultimately drive project success. Project failure has been found to be driven by poor communication between people and the key message from tonight is the need for good communication and integration between teams.

Martin Gosden
SWWE Branch Chairman