Project Cost Control
4.4 Cash Flow Calculation
4.4.4 Impact of Operation Efficiency
The operation efficiency is the responsibility of the owner because errors occur during operation either as a result of faulty design or they don’t meet the requirements of the owner and the required reliability. Errors usually lie between the owner and the engineering office.
The most common errors in industrial projects are due to the lack of choice of high quality equipment, which causes many problems and obsta- cles that affect the operation performance and, thereby, affect the overall revenue of the project. This is evident in Figure (4.9).
There is a last reason and an important element, which is the fact that operations need to have experienced and well trained staff, especially on the same type of operation.
Figure 4.8 Effect of project delay on the whole project.
Time delay
Time
Engineering phase Construction phase Start up
Cost, $ +
–
Operation
Maintenance & rehabilitation
Any slack in the preparation of competent leaders or high professional operators will have a negative impact on production and, thereby, will reduce the overall revenue of the project.
The following is the cost control questioner that presents the actual cases we face in projects and the same questions you will answer in the PMP exam. Please try to solve for the best answer and contact me or pres- ent them on my website.
Quiz
1. The client’s project manager asks you to provide a written cost estimate that is 30 percent higher than your estimate of the project’s cost. He explains that the budgeting process requires managers to estimate pes- simistically to ensure enough money is allocated for projects.
What is the BEST way to handle this?
• Add the 30 percent as a lump sum contingency fund to han- dle project risks.
• Add the 30 percent to your cost estimate by spreading it evenly across all project tasks.
• Create one cost baseline for budget allocation and a second one for the actual project plan.
• Ask for information on risks that would cause your estimate to be too small.
Figure 4.9 Effect of operation performance on the whole investment.
Maintenance & rehabilitation Time Operation
Engineering phase Construction phase Start up
Cost, $ +
–
2. You are in the middle of a new project when you discover that the previous project manager made a US $2,000,000 payment that was not approved in accordance with your company policies. Therefore, the project CPI is 1.2. What should you do?
• Bury the cost in the largest cost center available.
• Put the payment in an escrow account.
• Contact your manager.
• Ignore the payment.
3. A project manager for an offshore project is unsure how much cost con- tingency to add to the project. There is a 50 percent chance of a weather delay causing an impact of US $100,000 and a 20 percent chance of a delay in the testing center with a US $20,000 impact. How much should the cost reserve be?
• Less than $50,000
• More than $120,000
• Less than $20,000
• More than $54,000
4. You’ve just completed the initiating phase of a small project and are moving into the planning phase, when a project stakeholder asks you for the project’s budget and cost baseline. What should you tell her?
• The project budget can be found in the project’s charter, which has just been completed.
• The project budget and baseline will not be finalized and accepted until the planning phase is completed.
• The project plan will not contain the project’s budget and baseline; this is a small project.
• It is impossible to complete an estimate before the project plan is created.
5. An analysis shows that you will have a cost overrun at the end of the project. Which of the following should you do?
• Evaluate options to crash or fast track the project and then evaluate options.
• Meet with management to find out what to do.
• Meet with the customer to look for costs to eliminate.
• Add a reserve to the project.
6. A project is seriously delayed. Earned value analysis shows that the project needs to be completed ten percent faster than the work has been going. To get the project back on track, management wants to add ten people to a task currently assigned to one person. The project manager disagrees, noting that such an increase will not produce an increase in speed.
This is an example of:
• Law of Diminishing Returns.
• fast tracking.
• earned value.
• life cycle costing.
7. You are in a project startup. As a project manager you are invited to meetings with the project execution team. What should you include in these meetings that would have the biggest impact on the project?
• Review of the action item list
• Review of identified risks
• Assignment of tasks to team members
• Estimating costs
8. After analyzing the status of your project, you determine that the earned value is lower than the planned value. What should you expect as an outcome if this trend continues?
• The actual cost will be lower than planned.
• The estimate at completion will be lower than planned.
• The project will finish behind schedule.
• The project will finish below the original cost estimate.
9. A project manager has just been notified by the vendor that the cost increased.
What should you determine first as the project manager?
• If there is enough reserve to handle the change.
• If another vendor can provide it at the original cost.
• If another task can save money.
• If the task is on the critical path.
10. Which of the following sequences represents straight line depreciation?
• 200$, 200$, 200$
• 140$, 120$, 100$
• 160$, 120$, 100$
• 120$, 140$, 160$
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