15.18. PROBLEMS

15-1 Do cost overruns just happen, or are they caused?

15-2 Cemeteries are filled with projects that went out of control. Below are several causes that can easily develop into out-of-control conditions. In which phase of a project should each of these conditions be detected and, if possible, remedied?

1. Customer's requirements not understood

2. Project team formed after bid was prepared

3. Accepting unusual terms and conditions

4. Permitting a grace period for changing specifications

5. Lack of time to research specifications

6. Overestimation of company's capabilities

15-3 Below are several factors that can result in project delays and cost overruns. Explain how these problems can be overcome.

1. Poorly defined milestones

2. Poor estimating techniques

3. A missing PERT/CPM chart

4. Functional managers not having a clear understanding of what has to be done

5. Poor programming procedures and techniques

6. Changes constantly being made deep in the project's life cycle

15-4 Under what circumstances would each of the figures in Chapter 13 be applicable for customer reporting? In-house reporting? Reporting to top-level management?

15-5 What impact would there be on BCWS, BCWP, ACWP, and cost and schedule variances as a result of the:

1. Early start of an activity on a PERT chart?

2. Late start of an activity on a PERT chart?

15-6 Alpha Company has implemented a plan whereby functional managers will be held totally responsible for all cost overruns against their (the functional managers') original estimates. Furthermore, all cost overruns must come out of the functional managers' budgets, whether they be overhead or otherwise, not the project budget. What are the advantages and disadvantages of this approach?

15-7 Karl has decided to retain a management reserve on a $400,000 project that includes a $60,000 profit. At the completion of the project, Karl finds that the management reserve fund contains $40,000. Should Karl book the management reserve as excess profits (i.e., $100,000), or should he just book the target profit of $60,000 and let the functional managers "sandbag" on the slush fund until it is depleted?

15-8 ABC Corporation has recently given out a nine-month contract to a construction subcontractor. At the end of the first month, it becomes obvious that the subcontractor is not reporting costs according to an appropriate WBS level. ABC Corporation asks the subcontractor to change its cost reporting procedures. The subcontractor states that this cannot be done without additional funding. This problem has occurred with other subcontractors as well. What can ABC Corporation do about this?

15-9 What would be the result if all project managers decided to withhold a management reserve? What criteria should be used for determining when a management reserve is necessary?

15-10 Alpha Company, a project-driven organization, pays its department managers a quarterly bonus that is dependent on two factors: the departmental overhead rate and direct labor dollars. The exact value of the bonus is proportional to how much these two factors are underrun.

Department man-hours are priced out against the department average, which does not include the department manager's salary. His salary is included under his departmental overhead rate, but he does have the option of charging his own time as direct labor to the projects for which he must supply resources.

What do you think of this method? Is it adequate inducement for a functional manager to control resources more effectively? How would you feel, as a project manager, knowing that the functional managers got quarterly bonuses and you got none?

15-11 Many executives are reluctant to let project managers have complete control of project costs because then the project managers must know the exact salaries of almost all project personnel. Can this situation be prevented if the contract requires reporting costs as actuals?

15-12 How can a country's inflation rate influence the contractual payment policy?

15-13 Consider a situation in which several tasks may be for one to two years rather than the 200 hours normally used in the work-package level of the WBS.

1. How will this affect cost control?

2. Can we still use the 50/50 rule?

3. How frequently should costs be updated?

15-14 By now you should be familiar with the various tools that can be used for planning, controlling, scheduling, and directing project activities. Table 15-11 contains a partial list of such tools and how they relate to specific project management functions. Complete the table (using the legend at the bottom) to indicate which are very useful and which are somewhat useful.

Obviously there will be some questions about what is very useful and what is somewhat useful. Be able to defend your answers.

Table 15-11. PROJECT PLANNING, CONTROLLING, AND DIRECTING

15-15 Complete the table below and plot the EAC as a function of time. What are your conclusions?

Cumulative Cost, in Thousands				Variance $
Week	BCWS	BCWP	ACWP	Schedule	Cost	EAC
1	50	50	25
2	70	60	40
3	90	80	67
4	120	105	90
5	130	120	115
6	140	135	130
7	165	150	155
8	200	175	190
9	250	220	230
10	270	260	270
11	300	295	305
12	350	340	340
13	380	360	370
14	420	395	400
15	460	460	450

15-16 Using the information in Chapter 12, problem 12-18, complete Table 15-12.

15-17 On June 12, 2002, Delta Corporation was awarded a $160,000 contract for testing a product. The contract consisted of $143,000 for labor and materials, and the remaining $17,000 was profit. The contract had a scheduled start date of July 3. The network logic, as defined by the project manager and approved by the customer, consisted of the following:

Activity	Time (Weeks)
AB	7
AC	10
AD	8
BC	4
BE	2
CF	3
DF	5
EF	2
FG	1

Table 15-12. PROJECT COSTS

On August 27, 2002, the executive steering committee received the following report indicating the status of the project at the end of the eighth week:

Activity	% Complete	Actual Cost	Time Remaining (Weeks)
AB	100	$23,500	0
AC	60	19,200	4
AD	87.5	37,500	1
BC	50	8,000	2
BE	50	5,500	1

The steering committee could not identify the real status of the project from this brief report. Even after comparing this brief status report with the project planning budget (see Table 15-13), the real status was not readily apparent.

Management instructed the project manager to prepare a better status report that depicted the true status of the project, as well as the amount of profit that could be expected at project completion. Your assignment is to prepare a table such as Table 15-12.

15-18 The Alpha Machine Tool Project

Acme Corporation has received a contractual order to build a new tooling machine for Alpha Corporation. The project started several months ago. Table 15-14 is the Monthly Cost Summary for June, 2002. Some of the entries in the table have been purposely omitted, but the following additional information is provided to help you answer the questions below:

1. Assume that the overhead of 100% is fixed over the period of performance.

2. The report you are given is at a month end, June 30, 2002.

3. The 80/20 sharing ratio says that the customer (i.e., Alpha) will pay 80 percent of the dollars above the target cost and up to the ceiling cost. Likewise, 80 percent of the cost savings below the target cost go back to Alpha.

4. The revised BCWS is revised from the released BCWS.

5. The ceiling price is based on cost (i.e., without profit).

Answer the following questions by extracting data from the Alpha Machine Tool Project's monthly summary report.

What is the total negotiated target value of the contract? What is the budgeted target value for all work authorized under this contract? What is the total budgetary amount that Acme had originally allocated/released to the Alpha Project? What is the new/revised total budgetary amount that Acme has released to the Alpha Project? How much money, if any, had Acme set aside as a management reserve based upon the original released budget? (burdened) Has the management reserve been revised, and if so, by how much? (burdened) Which level-2 WBS elements make up the revised management reserve? Based upon the reviewed BCWS completion costs, how much profit can Acme expect to make on the Alpha Project? (Hint: Don't forget sharing ratio) How much of the distributed budget that has been identified for accomplishment of work is only indirectly attributed to this contract? (i.e., overhead) Answer the Following Questions for Direct Labor Only Of the total direct effort budgeted for on this contract, how much work did Acme schedule to be performed this month? How much of the work scheduled for accomplishment this month was actually earned (i.e., earned value)? Did Acme do more or less work than planned for this month? How much was the schedule variance (SV)? [$ and %] What did it actually cost Acme for the work performed this month? What is the difference between the amount that Acme budgeted for the work performed this month and what the actual cost was? (i.e., CV) [$ and %] Which WBS level-2 elements are the primary causes for this month's cost and schedule variances? How much cost variance has Acme experienced to date? [$ and %] How much schedule variance has Acme experienced to date? [$ and %] Is the cost variance improving or getting worse? Is the schedule variance improving or getting worse? Does it appear that the scheduled end date will be met? What is the new estimated burdened cost at completion? How much profitability/loss can Acme expect from the new estimated cost at completion? If Acme's final burdened cost for the program was $3,150,000, how much profit/loss would it experience?

__________ __________ __________ __________ __________ __________ __________ __________ __________ __________ __________ __________ __________ __________ __________ __________ __________ __________ __________ __________ __________ __________ __________

Table 15-13. PROJECT PLANNING BUDGET

								Week
Activity	1	2	3	4	5	6	7	8	9	10	11	12	13	14	15
AB	2000	2000	3000	3000	4000	4000	3000
AC	3000	3000	3000	4000	4000	4000	4000	2000	2000	1000
AD	5000	5000	6000	4000	4000	4000	3000	1000
BC								3000	4000	4000	5000
BE								6000	6000
CF												2000	3000	3000
DF									3000	3000	3000	4000	4000
EF											2000	2000
FG															3000
Note: Table 15-13 assumes that percent is linear with time and nonlinear with cost.

Table 15-14. MONTHLY COST SUMMARY—JUNE 2002

15-19 Calculate the total price variance for direct labor and the labor rate cost variance from the following data:

	Direct Material	Direct Labor
Planned price/unit	$ 10.00	$ 22.00
Actual units	9,300	12,000
Actual price/unit	$ 9.25	$ 22.50
Actual cost	$86,025,00	$270,000

15-20 One of your assistant project managers has given you an earned value report that is only partially complete. Can you fill in the missing information?

(All numbers are in thousands of dollars)

15-21 The following problem requires an understanding of the WBS, the cost account elements, and cost control analysis. Assume that all costs are in thousands of dollars.

Given the partial WBS shown below, what is the total cost for the WBS element 4.0? Assume that the costs provided are direct labors costs only and that the overhead rate is 100 percent.

Which of the following is the value of WBS element 4.0?

1. $60.0

2. $30.0

3. $24.0

4. $54.0

Using the data in Figure 15-28, and the actual costs given below for WBS elements 5.1 through 5.4 and elements 4.1 and 4.2, answer the questions shown below:

	Actual Costs
E-1-5.1	$1.0
E-1-5.3	$1.5
E-2-5.2	$1.0
E-2-5.4	$2.0
E-3-5.1	$1.0
E-3-5.3	$2.5
E-4-5.3	$3.0
E-4-5.2	$3.5

Figure 15-28. Exhibit of cost accounts.

WBS element 5.1	$__
WBS element 5.2	$__
WBS element 5.3	$__
WBS element 5.4	$__
WBS element 4.1	$__
WBS element 4.2	$__
Functional element E-1	$__
Functional element E-2	$__
Functional element E-3	$__
Functional element E-4	$__
Functional element D-1	$__
Functional element D-2	$__

15-22 Companies usually estimate work based upon man-months. If the work must be estimated in man-weeks, the man-month is then converted to man-weeks. The problem is in the determination of how many man-hours per month are actually available for actual direct labor work.

Your company has received a request for proposal (RFP) from one of your customers and management has decided to submit a bid. Only one department in your company will be required to perform the work and the department manager estimates that 3000 hours of direct labor will be required.

Your first step is to calculate the number of hours available in a typical man-month. The Human Resources Department provides you with the following yearly history for the average employee in the company:

• Vacation (3 weeks)

• Sick days (4 days)

• Paid holidays (10 days)

• Jury duty (1 day)

1. How many direct labor hours are available per month per person?

2. If only one employee can be assigned to the project, what will be the duration of the effort, in months?

3. If the customer wants the job completed within one year, how many employees should be assigned?

15-23 In a status report, executives want to know not only where we are today, but also where we will end up. Calculating where we will end up financially is not as easy as it sounds. Selecting the wrong formula can leave the executives and customers with a faulty impression.

There are several formulas available for the calculation of the estimated cost at completion (EAC). For simplicity, consider the following three formulas:

1. EAC = (ACWP/BCWP) × (budget at completion)

2. EAC = [(ACWP/BCWP) × (BCWS for work completed and in progress)] + (planned or revised planned costs of work packages not yet begun)

3. EAC = (actual to date) + (all remaining work, including work in progress, to be completed at the planned or budgeted costs)

   1. Using the table below, determine the value of EAC for each of the three formulas. Assume that A, B, and C are the only work packages in the project, and BCWS(Total) is the total value for PV for each work package rather than PV for the reporting period. Use the following formula for calculating EV:

      EV = [% Complete] × BCWS(Total)

      Activity	% Complete	BCWS(Total)	ACWP
      A	100	1000	1100
      B	50	1000	800
      C	0	1000	0

      
      

   2. Considering only activity B, if the reason for the cost overrun is attributed to a one-time occurrence, which of the three formulas would be best to use?

   3. If the reason for the overrun in activity B is because of the higher than expected salaries of the assigned employees and these same employees will be assigned to activity C as well, which of the three formulas would be best to use?

   4. Considering only activity B, if the reason for the overrun is attributed to overtime and the overtime will continue but only through the completion of activity B, which of the three formulas would be best to use?

   5. Considering your answers to the above four parts, should a company be willing to change the formula for calculating EAC during the execution of the project as well as at each reporting period or gate review meeting?

15-24 Project managers must not only calculate variances but also determine the root cause of the variance. Some variances may be allowable while others must be explained together with a corrective plan for recovery.

In the table below, you must demonstrate your ability to calculate the cost and schedule variances as well as determine the root cause of the variances, if possible. Consider the following table, which shows a partial status report for a project composed of five work packages (i.e., activities):

Activity	BCWS	BCWP	ACWP	SV	CV
A	$800	$1000	$1100
B	1200	1000	900
C	800	1000	700
D	1200	1000	1100
E	1000	1000	800

1. Calculate the cost and schedule variances, in dollars, for each activity.

2. For each activity, which of the following could be the root cause reason for the variances? Select as many as you think may apply.

   • Accelerated schedule due to higher salaried personnel

   • Accelerated schedule due to overlapping of activities

   • Accelerated schedule due to overtime

   • Accelerated schedule due to additional resources

   • Slippage due to lack of resources

   • Slippage due to people working on other projects

   • Slippage due to mistakes

   • People are working but progress is poor

   • On schedule

   • On budget

   • Over budget

3. Management wants to know the status of the total project at level 1 of the WBS. Add up all of the activity cost and schedule variances to determine the level 1 cost and schedule variances. What are your conclusions?

4. Would your conclusions from part c above change if activities B and D were the only two activities on the critical path?

15-25 Sometimes, the root cause of a variance requires that variance analysis be performed in both hours and dollars. It is possible that calculating the variances in both hours and dollars is the only way to determine the root cause of a problem.

Problem: In Table 15-15, the cost and schedule variances are measured in fully burdened dollars for Cost Center 2834 only.

From Table 15-15, you are ahead of schedule and over budget. There could be several possible causes for this, including schedule compression, using higher salaried labor, overtime, additional resources, or other causes. How can we determine which of these causes is the real reason for the variances?

Table 15-16 shows the variance data in both hours and dollars.

1. Calculate the cost variances in both hours and dollars. Compare the results. What are your conclusions?

2. Calculate the planned fully burdened labor rate using BCWS (or BCWP).

3. Calculate the actual fully burdened labor rate using ACWP.

4. Explain the possible reasons for the differences in labor rates and how this affects your answer to part a.

5. Table 15-17 shows the departmental pay structure for Cost Center 2834. Determine the departmental overhead rate, in percent.

6. How does Table 15-17 affect your answer to part d?

Table 15-15. COST CENTER 2834, JUNE

Table 15-16. COST CENTER 2834, JUNE

BCWS	Dollars Hours	29,750 350
BCWP	Dollars Hours	34,000 400
ACWP	Dollars Hours	38,400 320
CV ($$$) = negative CV(hrs) = positive

Table 15-17. DEPARTMENTAL PAY STRUCTURE

Pay Grade	Title	Unburdened Salary	Burdened Salary
9	Engineering Consultant	$53/hr	$132.50
8	Senior Engineer	48	120.00
7	Engineer	39	97.50
6	Junior Engineer	34	85.00
5	Apprentice Engineer	29	72.50

15-26 Projects that span more than one year or cut across the date of corporate salary increases may require the use of forward-pricing rates. Forward-pricing rates are determined from economic data, industry surveys, and best-guess predictions.

As an example, consider Table 15-17 in the previous problem, which shows the salary structure for an engineering department. For simplicity, we shall make the following assumptions:

• Promotions and salary increases, including cost-of-living adjustments, are effective January 1 and are then held constant for the entire year.

• The overhead rate is 150 percent and fixed for the entire year.

• All projects are priced out using the salary of a pay grade 7.

• Most of the departmental workers are pay grade 7 employees.

Situation: Your company has just won a one-year contract. The contract was planned to start on January 1, 2006, and be completed by December 31, 2006. The work that was to be performed by this department was estimated at 1000 hours per month for the duration of the twelve-month project using pay grade 7 employees. The customer informs you that they wish to start the project on July 1 rather than January 1, and they assume that there is no financial impact on the total cost of the project.

The Finance Department provides you with the forward pricing rate data in Table 15-18 and tells you that the overhead rate for 2007 is expected to increase to 155 percent. Is there a financial impact on the total cost of the project, and if so, how much of an impact?

Table 15-18. DEPARTMENTAL PAY STRUCTURE (dollars/hour)

		Salary
Pay Grade	Title	2006	2007[]	2008[]
9	Engineering Consultant	53	56	60
8	Senior Engineer	48	50	53
7	Engineer	39	42	45
6	Junior Engineer	34	36	39
5	Apprentice Engineer	29	31	34
[]

^[] Projected rates.

Table 15-19. PROJECT PRICING SUMMARY

15-27 Pricing out a customer's request for proposal is a trade-off between time, cost, and accuracy. If time and money are not an issue, then we could determine a very accurate bid. But if the company is reluctant to invest heavily in the preparation of the bid, care must be taken that there are no hidden costs.

Situation: You have been asked to price out a project for a customer, and this pricing is an activity with which you have very little previous experience. Table 15-19 shows the numbers that you arrived at in determining that a bid of $193,166 should be submitted.

Before a bid is submitted to a potential customer, the bid must be reviewed by a committee of senior managers that can question the validity of the numbers as well as look for "hidden" costs that may have been omitted. For each of the situations below, which line item in the pricing summary would most likely be impacted assuming that these hidden costs were not already included?

1. Management tells you that, during the execution of the project, the customer will want three interface meetings with the customer held at the customer's location. The Travel Group within your company informs you that airfare, ground travel, meals, and lodging are expected to be approximately $2000 per meeting.

2. One of the executives comments, "The shipping costs for the deliverables, including insurance, packaging, and handling, will be about $1000. I do not see this included in your summary."

3. The RPF for the project stated that the contract would be firm-fixed-price with a lump-sum payment at the end of the project after approval/acceptance of the final deliverables. The cost of capital is expected to be approximately $6000.

4. Engineering believes that the engineering hours in the summary could be low by about 10 percent if the risks in the estimates provided actually occur. The executives believe that a management reserve of 10 percent should be included in the summary costs.

5. Using the information in parts a through d above, what final price should be submitted to the customer?

15-28 A homeowner hires a contractor to build a four-sided square fence around his home. The homeowner provides the materials and the contractor supplies the labor. The contractor estimates each side will cost $2000 and require one week in duration.

At the end of week 1, the first side is completed at a cost of $2000. During week 2, the second side is completed but at a cost of $2400 because the contractor damaged a water line that the contractor had to repair. During week 3, the contractor completed only half of the fence for $1000 because it rained for the remaining half of the week.

At the end of week 3, the contractor must prepare an earned value measurement status report. Calculate the following:

BCWS: __________________________________________________

BCWP: __________________________________________________

ACWP: __________________________________________________

BAC: __________________________________________________

SV($): __________________________________________________

CV($): __________________________________________________

EAC = ([ACWP/BCWP] × BAC): __________________________________________________

ETC: __________________________________________________

VAC: __________________________________________________

% COMPLETE: __________________________________________________

% $$ SPENT: __________________________________________________

CPI: __________________________________________________

SPI: __________________________________________________

15-29 The data identified below was listed in a project's latest status report:

• BCWS = $36,000

• BCWP = $30,000

• ACWP = $33,000

• BAC = $120,000

• Original length of the project 10 months

Using these data, calculate the following:

1. What are the values for CPI and SPI?

2. What is the expected cost at completion (EAC)?

3. How much money will be needed from the time of the report to complete the project?

4. What is the cost variance at completion (VAC)?

5. Using SPI, what is the new expected length of the project?

15-30 In the problem in Figure P15-30, the 50% / 50% rule is being used to determine the project's status. Assume that all amounts are in dollars.

Assuming that ACWP = $40,000, determine BCWS, BCWP, BAC, SV, and CV.

15-31 In Figures P15-31A to P15-31C identify the status of part of a project using the graphical technique (i.e. S curves) rather that tables. For each of the three figures, select from one of the following fives choices as to what each figure illustrates:

1. Over budget

2. Under budget

3. Ahead of schedule

4. Behind schedule

5. Status cannot be determined

Figure 15-29. Figure P15-30