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Project Management Achieving Competitive Advantage 4th Edition Pinto Solutions Manual
Project Management Achieving Competitive Advantage 4th Edition Pinto Solutions Manual
Project Management Achieving Competitive Advantage 4th Edition Pinto Solutions Manual
CHAPTER EIGHT
PROJECT PROFILE
Top-Down Budgeting
Bottom-Up Budgeting
Activity-Based Costing
Summary
Key Terms
Solved Problems
Discussion Questions
Problems
Case Study 8.1: The Hidden Costs of Infrastructure Projects – The Case of Building
Dams
Internet Exercises
Notes
TRANSPARENCIES
3. LACK OF DEFINITION
4. SPECIFICATION CHANGES
5. EXTERNAL FACTORS
Months
Name Hours Needed Overhead Personal Time Hourly Rate Total Direct Labor
Charge Rate Cost
DISCUSSION QUESTIONS
8.1 Describe an environment in which it would be common to bid for contracts with low
profit margins. What does this environment suggest about the competition levels?
Low barriers to entry, a lack of economies of scale, easier access to technology and, often
times, powerful buyers commonly characterize an environment with very low profit
margins. The relative ease of competing in such industries increases competition levels
both domestically and internationally.
8.2 How has the global economy affected the importance of cost estimation and cost
control for many project organizations?
8.3 Why is cost estimation such an important component of project planning? Discuss
how it links together with the Work Breakdown Structure and the project schedule?
Cost estimation, if done correctly, enables a firm to determine if the project will be
profitable, if the company can afford the project, and if the project is worth pursuing in
general. It also provides the company with a cost range for bidding (in the case of a
customer-oriented project). With respect to Work Breakdown Structure and project
schedule, cost estimation is important because it leads to budgeting of monetary and other
resources (both material and human). These allocations must coordinate with the Work
Breakdown Structure and project schedules prepared by management to figure out if the
required resources will be available as needed.
8.4 Imagine you were developing a software package for your company’s intranet. Give
examples of the various types of costs (labor, materials, equipment and facilities,
subcontractors, etc.) and how they would apply to your project.
8.5 Give reasons both in favor of and against the use of personal time charge as a cost
estimate for a project activity.
Using a personal time charge can create a more accurate assessment of time by including
a reasonable amount of downtime in estimates of work time. By using the personal time
charge, a company can be better compensated for its labor resources, as all time
(productive or not) spent on a particular job is a use of human/intellectual resources.
However, this charge may appear unwarranted from a customer’s perspective. The
personal time charge allows time for unproductive breaks. Customers will most likely be
reluctant to pay for unproductive time, resulting in payment disputes.
This is a personal example question and should only be applied to students with some
project experience.
8.7 Suppose your organization used function point analysis to estimate costs for software
projects. How would the expertise level of a recently hired programmer affect your
calculation of their function points on a monthly basis when compared to an older,
more experienced programmer?
Function point analysis assumes that there are differential challenges with software
functions depending upon the resource. A newly hired programmer might rate more of
the functions to which he or she is assigned as “Higher Complexity,” which would add
extra hours to the time (and therefore, cost) estimates. Complexity estimates determine
the costs of variance program features, so the more seasoned and expert the programmer,
the lower the overall cost of the sequence.
8.8 Put yourself in the position of a project customer. Would you insist on the cost
adjustments associated with learning curve effects or not? Under what circumstances
would learning curve costs be appropriately budgeted into a project?
As a customer, the student may not accept fees when the repetitive work (that accounts
for the learning curve) is a routine job for the supplier. The reason for this is that the
student would be paying for learning effects from which others would reap the benefit.
Also, learning effects associated with new employees would be unreasonable to include
in project billing. On the other hand, if the repetitive work/learning curve effects were
project or customer specific, then budgeting the costs into the project would be
appropriate.
8.9 Consider the common problems with project cost estimation and recall a project with
which you have been involved. Which of these common problems did you encounter
most often? Why?
This is a personal example question and should only be applied to students with some
project experience.
8.10 Would you prefer the use of bottom-up or top-down budgeting for project cost
control? What are the advantages and disadvantages associated with each approach?
Top-down budgeting would be preferred because it more often results in better cost
control. It also draws on experience of top management for reasonable project estimates
(e.g., historical costs, etc.). However, these advantages come at a cost. Top-down
budgeting can result in friction between top, middle, and lower level managers as the
approach results in a zero-sum game (i.e., what one manager receives, another loses).
Bottom-up budgeting has the benefit of being detailed from the very beginning. Costs can
be directly tied to WBS and individual tasks. Unfortunately, this process can be time
consuming and removes control from top management, which may lead to variances from
strategic goals of the project.
8.11 Why do project teams create time-phased budgets? What are their principle
strengths?
Time-phased budgets all teams to match the project schedule with the project’s budget.
They can also identify milestones for completion of work and budget expenditures. This
enables teams to see when and where money was spent. This creates a better idea of
where variances occurred and creates better control mechanisms. Moreover, time-phased
budgets result in better documentation for future project planning.
8.12 Project contingency can be applied to projects for a variety of reasons. List three of
the key reasons why a project organization should consider the application of
budget contingency.
First, changes in scope and specifications can occur, creating increased costs. Secondly,
rework and interaction fees can be difficult to predict in the initial planning stages. For
example, a project may require communication between departments or office branches,
which may lead to travel and coordination costs that are unseen prior to implementation
(e.g., shipping, etc.). Lastly, uncertainty (especially related to the environment or politics)
is a known complication of project work. Changes can occur that restrict the use or
availability of resources, which may cause delays in production or create the need for
additional accommodations.
CASE STUDIES
Case Study 8.1: The Hidden Costs of Infrastructure Projects – The Case
of Building Dams
A fascinating study that was recently completed by a research group at Oxford University
(headed by Professor Bent Flyvbjerg) found that many developing countries engage in
large infrastructure projects under the assumption that these are the key to future
economic success. A particular case in point is building large scale dams. Demand for
electricity has gone up dramatically, particularly in third world countries that are assumed
could benefit greatly from the hydropower generated by dams. Flood control, crop
irrigation, transportation, and other reasons support the idea that large dams are a
universal benefit. However, research suggests that the enormous costs of dam projects are
such that countries simply cannot afford them. Close analysis of benefits and drawbacks
shows that rarely do countries and contractors take a hard look at the “real” costs of large
infrastructure projects like dams; if they did, they would be much more wary of engaging
in these projects. This case concludes with some alternatives, such as the policy pursued
in Norway of smaller, more eco-friendly dam projects that can produce needed energy
but are affordable and environmentally sound.
Questions:
1) Given the history of large cost overruns associated with megadam construction,
why do you believe they are so popular, especially in the developing world?
One obvious answer is the prestige they offer, especially in regard to presenting evidence
of development and improvement to the national economy. Some developing countries
pursue them as a sign of international legitimacy. There is also the darker reason that
large projects offer the opportunity for large-scale graft and corruption, as has been
rumored with the Sochi Olympics construction projects.
This question works well for setting up an in-class debate between groups. The best
approach is to first assign students to teams and have them research this question so they
come prepared with actual evidence, rather than simple opinion. There are multiple
arguments on both sides of the debate, and a thorough response should consider both the
benefits and drawbacks of such massive construction projects, though the current longer-
term evidence suggests that they are more a curse than a benefit.
The Boston “Big Dig” is a class case of a project that was a monumental failure in terms
of cost and duration estimation, as well as a continued problem from a quality
perspective. The project was initiated with very questionable estimates for the expected
costs, became a “white elephant” in the Boston area, and finally staggered to completion
after several years and billions of dollars over budget. This case analyzes the narrative of
the development of the “Big Dig” and also looks at several of the chief culprits in its
failure, including the general contractor, whose lack of oversight led to cost-cutting and
poor quality, the local and state agencies, who routinely looked the other way and were of
almost no help with oversight, and the contractors themselves, who used shoddy practices
and fraudulent bookkeeping to keep costs down and profits high. The case has been
updated to include the tragedy that occurred in 2006 when ceiling bolts gave way in a
tunnel and killed a commuter passing underneath. This is a great case for general class
discussion, to consider the role that each of the major stakeholders played in the project.
Questions:
This question asks us whether or not the standard rules of oversight apply to special
projects, sometimes termed “prestige projects,” such as the “Big Dig,” the Channel
Tunnel, and the Sydney Opera House. The issue is whether we willingly should ignore
standard estimation and oversight procedures due to the special nature of these projects.
As there is no obvious right or wrong answer, the question leads to good discussion of the
benefits and drawbacks of these types of project.
Clearly, there is very little to recommend the “Big Dig” from any of the standard success
criteria. If the tunnel system had performed adequately, perhaps a case may have been
made that eventually it would be seen as a success in spite of terrible cost and schedule
overruns. However, once the ceiling tiles starting falling and actually killed a passerby,
the charge could be made that the project failed on all possible levels of project success.
3) What are the lessons to be learned from the “Big Dig” project? Was this a failure
of project estimation or project control by the contractors and local government?
This question has no obvious answer and students should bring in evidence to support
either position. Overall, based on the Project Management Research in Brief case in the
chapter, Flyvbjerg’s research argues that large capital projects are rife with the potential
for fraud and have to be evaluated carefully on that score. The Project Management
Research in Brief vignette makes a nice supplement to answering this question.
PROBLEMS
8.1 Calculate the fully loaded cost of labor for a project team member using the following
data:
Hourly rate: $35/hr.
Hours needed: 150
Overhead rate: 55%
Solution: The formula for calculating fully loaded cost of labor is:
Hourly rate Hours needed Overhead charge Total direct labor cost
($35) x (150) x (1.55) = $8,137.50
8.2 Calculate the fully loaded cost of labor for your Project Engineer using the following
data:
Hourly rate: $40/hr
Estimated hours of work: 120
Overhead rate: 65%
Personal time: 15%
Solution: The formula for calculating fully loaded labor costs is:
Hourly rate Hours needed Overhead charge Personal time Fully loaded labor cost
($40) x (120) x (1.65) x (1.15) = $9,108.00
8.3 Calculate the direct cost of labor for the project team using the following data. What
are the costs for the individual project team members? What is the fully loaded cost
of labor?
Solution:
8.4 Assume that overhead is charged on a flat-rate basis. Each member of the project is
assigned an overhead charge of $150/week. What would the fully loaded cost of labor
be for an employee, given that she is assigned to the project for 200 hours at
$10.50/hour?
Solution:
The hours that the employee works (200 hours) would equate to 5 weeks, thus the
calculation would show:
Hourly rate Hours needed Overhead charge Total direct labor cost
($10.50) x (200) + $750 = $2,850
8.5 Calculate the fully loaded labor costs for members of your project team using the
following data. Who is the most expensive member of your team? What proportion of
the overall fully loaded cost of labor is taken up by this individual?
Solution:
The fully loaded costs are embedded in the table in the right hand column. The most
expensive resource for this project is Todd. His labor costs are approximately 44% of the
total fully loaded labor cost for the project.
8.6 Using the following information about work package budgets, complete the overall
time-phased budget for your project. (All cost figures are in $ 000’s.) Which are the
weeks with the greatest budget expense?
Task Budget Week 1 Week 2 Week 3 Week 4 Week 5 Week 6 Week 7 Week 8
A 5 3 2
B 8 1 4 3 1
C 12 2 7 3
D 7 3 3 1
E 14 5 5 2 2
F 6 1 2 3
Plan 52 4 8 13 12 6 3 4 3
Cumulat 4 12 25 37 43 46 50 53
ive
Solution:
The plan and cumulative time-phased budget totals are shown in the bottom two rows of
the table. The weeks with the biggest planned expense are Week 3 ($13,000) followed by
Week 4 ($12,000). The total cumulative budget for the project is $53,000.
8.7 Given the following information, complete a time-phased budget for your project.
(All cost figures are in $ 000’s.) What are weekly planned and cumulative costs for
the project?
Staffing 5 4 1
Blueprinting 8 1 6 1
Prototyping 12 2 8 2
Full Design 24 4 10 10
Plan 5 9 13 12 10
Cumulative 5 14 27 39 49
Solution:
The plan and cumulative time-phased budget totals are shown in the bottom two rows of
the table. The total cumulative budget for the project is $49,000.
For the problems 8.8 through 8.10, refer to the chart of learning curve coefficients
(unit and total time multipliers) shown below.
8.8 It took MegaTech, Inc. 100,000 labor-hours to produce the first of several oil-drilling
rigs for Antarctic exploration. Your company, Natural Resources, Inc., has agreed to
purchase the fifth (steady state) oil-drilling rig from MegaTech’s manufacturing yard.
Assume that MegaTech experiences a learning rate of 80%. At a labor rate of $35 per
hour, what should you, as the purchasing agent, expect to pay for the fifth unit?
TN = T1C
Solution:
The table lists the fourth unit learning curve coefficient as .596, assuming a learning rate
of 80%. Using the formula, to produce the fifth unit takes:
TN = T1C
T5 = (100,000) (.596)
= 59,600 hours
= $2,086,000
8.9 Problem 8 identified how long it should take to complete the fifth oil-drilling
platform that Natural Resources plans to purchase. How long should all five oil-
drilling rigs take to complete?
Solution:
We can look at the total time column in the table associated with a learning rate of 80%.
The multiplier is listed as 3.738. Using this value, the total time necessary to complete the
five rigs is calculated as:
T5 = (100,000) (3.738)
8.10 Suppose that you are the assigning costs to a major project to be undertaken this
year by your firm, DynoSoft Applications. One particular coding process involves
many labor-hours, but highly redundant work. You anticipate a total of 200,000
labor-hours to complete the first iteration of the coding and a learning curve rate of
70%. You are attempting to estimate the cost of the twentieth (steady state) iteration
of this coding sequence. Based on this information and a $60 per hour labor rate,
what would you expect to budget as the cost of the twentieth iteration? The fortieth
iteration?
Solution:
T20 = T1C
= (200,000) (.214)
= 42,800 hours
T40 = T1C
= (200,000) (.150)
= 30,000 hours
The costs for the 20th and 40th iterations are found as:
8.11 Assume you are a project cost engineer calculating the cost of a repetitive activity
for your project. There are a total of 20 iterations of this activity required for the
project. The project activity takes 2.5 hours at its steady state rate and the learning
rate is 75%. Calculate the initial output time for the first unit produced, using the
learning curve formula:
Yx = aXb
where:
Yx = the time required for the steady state, x, unit of output
a = the time required for the initial unit of output
X = the number of units to be produced to reach the steady state
b = the slope of the learning curve, represented as: log decimal learning rate/log 2
Solution:
Use the formula to first determine the slope of the learning curve (log decimal learning
rate/ log 2):
b = log 0.75/log 2
= -.2877/0.693
= -.415
a = 8.667 hours
8.12 As the manager of the IT group at your insurance firm, you have been asked to
develop a cost estimate for upgrades to the computerized accident-reporting and
claims adjustment system you have in place. Your system is basic, without many
features, but it needs some general modifications, based on complaints from
customers and claims adjusters at your firm. You know that your programmer is
capable of handling 3 function points in a person-month and your programmer
makes $60,000, so her cost is $5,000 per month. The costs for the project are based
on the following requirements:
Complexity Weighting
Function Low Medium High Total
Number of Inputs 1 _____ 2 _____ 3 _____
= = =
Number of Outputs 2 _____ 6 _____ 10 _____
= = =
Number of 10 _____ 15 _____ 20 _____
Interfaces = = =
Number of Queries 3 _____ 6 _____ 9 _____
= = =
Number of Files 1 _____ 3 _____ 5 _____
= = =
a. Calculate the total estimated number of function points for this project.
b. What is the total expected cost of the project?
Solution:
a. Because we know the estimated complexity for each of the software functions that
must be coded and the number of screens for each function, the calculation is
relatively straightforward: multiplying, we find that the total function points for this
project are estimated to be 220.
Complexity Weighting
b. Your programmer can complete 3 function points per month, so the total number of
person-months needed to complete the project is: 220/3 = 73.33. We multiply this
value by the cost per programmer per month of $5,000 to estimate the total cost for
this project as $366,667.
8.13 You work at a regional health care center and have been asked to calculate the
expected cost for a software project in your organization. You know that
historically your programmers can handle 5 function points each person-month and
that the cost per programmer in your company is $4,000 per month. The project
whose costs you are estimating is based on the following requirements:
Input 8 Low
Output 6 Low
Interfaces 15 High
Queries 5 High
Files 25 Medium
Further, you know that the complexity weighting for these functions follows a
Complexity Weighting
a. Calculate the total estimated number of function points for this project.
Solution:
a. Because we know the estimated complexity for each of the software functions that
must be coded and the number of screens for each function, the calculation is relatively
straightforward: multiplying, we find that the total function points for this project are
estimated to be 414.
Complexity Weighting
b. Each resource can complete 5 function points per month, so the total number of
person-months needed to complete the project is: 414/5 = 82.80. We multiply this value
by the cost per programmer per month of $4,000 to estimate the total cost for this project
as $331,200.