Friday, December 31, 2004


PMI had release their third edition guide book. It took them 2 1/2 years to finally complete it and got it published and delivered to PMI members.

For those who are going for their PMP certification after October 2005, they will have to master the new guidebook elements.

There are many changes made as compared to the 2000 Edition. Changes to the standard affect the structure, content and language of the PMBOK Guide. While the Knowledge Areas remained as nine, seven new processes were added and two previous processes were deleted. The new processes are:

Develop Project Charter (Section 4.1)
Develop Preliminary Scope Statement (Section 4.2)
Monitor and Control Project Work (Section 4.5)
Close project (Section 4.7)
Create WBS (Section 5.3)
Activity Resource Estimating (Section 6.3), &
Manage project team (Section 9.4).

In addition, PMI renamed 13 Processes, presumably for greater clarity. I am not sure if members felt the same.

Going through all the Chapters in the new PMBOK, I gather, many of those who are going for their certifications after October may feel the text structure tougher than previous version.

Although, the chapters and processes may be new, but actually, they are not. What had been added was basically an expansion of the write up and segregating them into new processes to provide clarity.

Personally, I suggest that those who wants to get their certification may consider to do it before October 2005 which will still be based on the PMBOK 2000 Edition, which to me, is much simpler, easier to understand and apply and readable to non-Americans.

From my own analysis, I would prefer the 2000 Edition although the new Edition provides more detailed information. To me, those information are necessary, but unfortunately are expressed in a language to cater for generic project management industries. In fact, the language is so "American" and it will take those who are weak in the American English and its Jingo to have insights to its intended meaning and expression.

The Project Integration Management Knowledge Area are much better than the previous. It has more detailed discourse and provides an extensive description of integration from the Project Management Process groups perspective. This is an area I felt was worth all the efforts taken by PMI.

IN Project Scope Management, Project Initiation was rewritten and moved to Project Integration Management. I would have thought that it was more appropriate to add a new chapter for Project Initiation Management as the subject matter and its various processes are extensive in real life and is thus not appropriate to be only a small sub-section of Project Integration Management. In fact, Initiation could not be considered as a whole process within Integration as only after the project award and project charter would integration to the 9-knowledge areas and the processes group be effectively propounded. This, I hope PMI would reconsider. For example, in the construction industry, the contractors would be sourcing for projects, tendering for projects, getting information such as feasibility study, market study, financial analysis and potential buyers' background information - all these activities are presumably within the Project Initiation Management. Then, when they were awarded the project, a project charter will then be forwarded to the project manager appointed, to authorize him to use organizational resources to organize and implement the project.

With the mandate, the project manager would then need to, first get the full contract documents (which he may not get them all), visit the project site (assuming he was not involved during the tender stage; such as the cases in Malaysia), and begin the Scope Planning exercise. Unfortunately, project charter in construction projects are mostly informal, unwritten, largely word of mouth from the project sponsor. The project manager will have to assume his authority (based on his past working experience with his organization, of which PMI now call it "Organization Process Assets and based on the "Enterprise Environmental Factors" to begin the planning process. Due to a lack of structured framework in scope planning, project managers will have little knowledge of the organizational resources that will be made available to him and what are the constraints he would be facing, such as - What would be the financial outlay & amount of financial working capital allocated for the project, how would be the appointment of sub-contractors (many of whom will be existing sub-contractors who are well entrenched into the system of cronyism and nepotism), what are the tolerance and thresholds levels in areas such as risk management planning, scheduling (what resources will be available if the sub-contractors have yet to be appointed and the Nominated Sub-contractors are unknown) and cost management (is it top-down budgeting: "Do it and complete the project at $xxx,xxx no matter what)?

Project Time Management would surely ranked as one of the best chapters in the PMBOK as they are clear, concise and pragmatic. The only weak area here is the lack of information as to critical path methodology and Monte Carlo Simulations which are worded in the tools and technique but with little information to readers. The reader at such, will need to read up more books to explore the usage of such tools, the interactions and integrations of these tools into the schedule, cost and risk management system. Tho' textbooks may provide the knowledge exploration, somehow, it is written in an academic language and contextual form that makes non-academic practitioners difficult to understand.

Project Quality Management chapters are almost identical to previous version. This is the Knowledge Area which I felt is too simplified and lack depth. The chapter maintain the 3-major processes, that is, Quality Planning, Perform Quality Assurance and Perform Quality Control. Personally, I would have it expanded into 5-Major Processes: Quality Management Planning, Quality Assurance Planning, Perform Quality Monitoring and Assurance, Perform Quality Control and Quality Audit.

The main problem in quality management is that the project quality plan is written in a language and documented in such manner that only a few of the project team members can understand. The performers of project activities are largely skilled and unskilled workers who may not be able to read those documents (worse, if they are not given one). At such, it is necessary to translate those quality plan into systematic action plan consisting basically flow charts and graphics, of which the workers will be able to understand and apply. This step, I called it "Quality Assurance Planning", which has not being practiced in the construction industry (probably, this step may not be necessary for IT Industry as the team players are trained in their own project language).

Project Risk Management and Project Procurement Management are similar to the previous edition, which I believe should have provide more indepth knowledge of the tools and techniques to be used. There were some graphics and metrics shown in the guidebook which are not user friendly. This is largely due to the fact that PMBOK Guide is generic, and at such, not specific industry friendly. For example, in Project Risk Management, the useful tool is Monte Carlo Simulation and there isn't any information and details as to how that tool can be used and applied during the risk quantification process.

Overall, with due respect to PMI, I would prefer the PMBOK 2000.

Tuesday, May 18, 2004

Globalization & Challenges of Project Management

“Globalization refers to all those processes by which people of the world are incorporated into a single world society, global society” [Albrow, Martin. 1990. Introduction: Globalization, Knowledge And Society. London: Sage].

Globalization, according to Robertson is “ the crystallization of the entire world as a single place. Globalization is the compression of the world as well as the intensification of consciousness of the world as a whole” [Robertson, Ronald. 1990. mapping The Global Condition: Globalization As The Central Concept. Theory, Culture And Society 7].

During the period between the 1980’s and the 1990’s, the pace of business in Malaysia and other East Asian countries were fast and furious. The rate of growth that companies could achieve was astonishing and seems “ miraculous”. During these boom times (1989 – 1997), many middle size Malaysian companies have grown into large conglomerates because the owners have seized every opportunities available simply because the opportunities were available and they were tempted to bullishly inflate their business size, even thought the business opportunities may not match their fields of expertise. Many entrepreneurs simply jump into business every each way as opportunities comes abegging and not much thought was placed on the overall synergies of the business. Many of these conglomerates have grown exceptionally big, grossly diversified and unfocused, and as a result, they were too poorly managed, lack structure, lack transparency, and are devoid of internal checks and accountability. The structures of these conglomerates are at best, chaotic.

In those good times, we often read of those companies expanding at an accelerated and uncontrolled pace. These companies took excessive risks but they were justified by excessive returns during those period. Poor utilization of resources is camouflaged with high rates of turnover. When business is booming, companies focus on sales volumes of trade. In those frenzy mood, management were no longer sensitive to increased operating costs, expenses and wastages. Productivity and efficiency drops drastically, but this weaknesses are obscured by higher sales volume. In such times of boom, CEO’s and senior management often develop a euphoria regarding their business success and they get carried away and were obsessed with issues regarding corporate images, and personal images. They start by opening more branches; elaborated renovations and many even purchase or build new buildings for their headquarters. They make commitments in fixed assets, which tie the company in great financial obligations for which they would have to service the huge debts in the next few decades. Their overhead expenses are growing faster than their sales performance and profits. Suddenly in 1997, there was the sound of crash landing, the East Asian economic crisis, which caught every enterpreneur by surprise. By then it was too late to back track as they had jump into the deep pit, an abyss.

What really contributed to the financial crisis in the East Asian economies was indeed due to the bubble economy, extremely high growth rate caused by the Governments push for greater privatisation through external borrowings which was unsustainable, and it was further aggravated by the liberalization and globalization of economies.

No century in human history has experienced so much social transformations and such radical changes as the 20th. Century. CHANGE is threatening. There is no right way and there is no learning without mistakes. There are stages to transformation. Although an organization may skip over one, inevitably it realizes it must retrace its steps to cover the missing ground. Everyone must accept the premise that fundamental change is necessary.

"In a rapidly changing business world, nothing stays constant even a short while. The worlds around us have changed fundamentally and that attitudes to the cost as well as the benefits of business activities and economic growth had undergone a profound transformation. The underlying causes which reflect turbulence in the economic, technological, political and social environments, ‘Triggers For Change’"(Peter Drucker). There are so many external factors that can suddenly present themselves and make a company less competitive or drive a firm out of business if they do not adapt and respond to the changes. Companies that are merely focusing on cost cutting without doing anything new or innovative to win new business will achieve their self-fulfilling prophecy of reduction and diminishing themselve into extinction. According to Abraham Lincoln, “the dogmas of the quiet past are inadequate to the stormy present. The occasion is piled high with difficulty, and we must think anew and act anew. We must disenthrall ourselves”.

From the crisis, we have learned that the old way of doing business is no longer an alternative. Everyone must be aware of the situation everyone is trying to do something – often anything – for survival. No society in history has faced these challenges. But equally new are the opportunities of the knowledge society. Access to the acquisition of knowledge is by learning, which will become the tool available to acquire the skills, technologies and knowledge. The knowledge society will inevitably become far more competitive. Knowledge has become the key resources – for a nation’s economic strength as well as its military strength. Knowledge is not tied to any country and it is portable. It can be created everywhere, fast and cheap. But knowledge is constantly changing. Knowledge always makes itself obsolete within a short period of time. For this reason, the acquisition of knowledge through learning can no longer stop at any age. “Life-long learning” will increasingly be a requirement for any knowledge worker.

Every country, every individual and every business have to take into serious consideration its competitive standing in the world economy and the competitiveness of its knowledge competencies.

Project management is ideally positioned to meet many of the challenges confronting global business enterprises. The compression of the product life cycle and the project life cycle is perhaps the most prodigious force driving changes in the process of managing projects. Due to the intensified global competitiveness, there is a need for sustained innovation and process improvement of which these activities are being represented in a projects environment. As projects become the focal point of business, organizations will naturally adapt and change to support more effective project management.

Project management philosophy and techniques are based on the ideas of performing to maximum potential within the constraints of limited resources. Thus, it is obvious that project management will offer the logical and attractive method for increasing profitability in the business. At such, the rise of project management as a profession is likely to be a key element to the continued development and industrial expansion in Malaysia and around the world.

According to Clifford Gray (Project Management – The Managerial Process, McGraw Hill, 2000), "the organizational culture of most successful firms of the future will be one that support flexibility, places a high importance on projects, and maintains a sustained effort to learn and improve processes." The challenge is to adopt and commit a culture that supports continuous improvement, renewal, and organizational learning.

Monday, May 17, 2004

Project Quality Management

The advent of the globalization of the market economy has been described as “the customer’s victory.”(Dupuy, 1999) We have moved from an economy where products were scarce to one where products are plentiful and customers have just too many choices. This has led to the need to develop our capacity to listen and to learn, to become learning organizations. “Learning and listening (in our organizations) is a set of behaviors, of arrangements, of co-operative efforts…” (Dupuy, 1999) To ensure success, organizations need to embrace a single quality philosophy, its management needs to lead and embrace quality, exudes quality leadership, provides systems and structures needed to suit quality objectives, provide training to employees and empower them in quality initiatives, and ensures the existence of a quality values system that are developed into a living culture within the organization.

Quality is defined as “The totality of features & characteristics of a product or services that bears in its ability to satisfy explicit & implicit needs.” (BS 4778; ISO 8402 Standards). Dr. JM Juran defines quality as, “The fitness for purpose,” and Philip Crosby defines it as, “Conformance to requirement.”

According to quality guru Dr. Armand V Feigenbaun, the author of ‘Total Quality Control’, “Quality is the total composite product and service characteristics of marketing, engineering, manufacture and maintenance through which the product and service in use will meet the expectations of the customer.” To the industry, "quality" is an essential component of the organizational approach and philosophy to management. Quality system management underpins the product and the marketing programmes to provide goods or services that satisfies the customers, and at the same time provides shareholders return on investment.

James Houghton, the Chairman of Corning Glass described quality as "...knowing what needs to be done, having the tools to do it right, then doing it right - first time."

The guiding philosophy for quality is performance improvement and continuous improvement. The key to quality is its people and the processes. The primary barrier to success is the appalling stupidity of most managers about people and their lack of competency in handling processes that causes wastages, scraps, reworks and warranty claims. Central to the quality philosophy is the people that function within social, economic and organizational systems and that, with a well-design processes, the people within can achieve the results envisaged. Programs for improvement that fail to take those interactive systems into consideration, in planning and in execution, are doomed to failure or to trivial results. Quality is impossible without well trained people and a good understanding of the processes that bring about results.

A commitment to quality management cannot be expressed through charades, which encourages form over substance, and mean nothing. Quality management cannot be reduced to recursively trivial plan, which are relevant only to the performing organization, but irrelevant to the real customers; the ultimate reason why the company survives, and why the organization and its people exist.

All efforts at performance improvement, for purposes of quality, must be defined in terms of the customers. Efforts labeled quality improvement that cannot be linked to the ultimate customers and end-users, are 'much ado about nothing' and are, at best, trivial imitations of quality management. In the service industry, the processes of service delivery must be designed into the service delivery system so that the results are achieved the first time.

Quality improvement mythology holds that efforts at performance improvement, aimed at quality, are doomed to failure, unless upper management is behind all the efforts. According to Dr. Joseph M. Juran, in his assessment, 80% of quality problems are caused by upper management. Good intentions and sheer determination are not a guarantee of success in implementing total quality management system in the company. Total Quality Management System and its success cannot just come from raw enthusiasm of the participants, which is its management and workers.

To be successful, a Quality Management System must aim to improve product quality within design, manufacturing and customer service. It must also include the suppliers, vendors’ distributors and retailers. We should expect everyone with whom we do business to implement a company wide quality control programme which emphasizes continuous improvement of quality and productivity. Such a programme should demonstrate a management philosophy that reflects:

i. Top management commitment to quality as a business strategy

ii. Management’s involvement and providing a work system and an environments which will result in promoting employee involvement in both quality and productivity

iii. Teamwork approaches to problem solving and process control using statistical methods.

No longer can successful organizations focus inward on their own capabilities and processes; they must understand the complex relationship they have with their stakeholders and co-operate with them to develop new products and continuously improve their products and services according to changing demands and technological potential. Understanding Customers’ need include the gathering of service quality information to identify what is working well and what isn’t, and to increase our knowledge of customer requirements. Assessment of current processes and our ability to meet customers’ expectations will also be needed if these new measures are going to change the quality of our service capabilities.

Once we have gained an understanding of customer needs, we will then need to listen to the voices of our internal customers – our employees. If caring to succeed with customers is going to permeate our very culture, we need to provide organizational systems that engage our people in planning how to meet these expectations, focusing on performance and knowing how to measure it, and help employees develop the new knowledge and skills it will take to be successful. The design and implementation of customer-focused, strategic planning processes that involve staff in learning and caring about customer needs, current dissatisfactions with the system, and future priorities, will be the key to increasing employees’ commitment to engage in challenging efforts that can have the most important strategic impact on outcomes for customers.

To succeed in this new culture, management and its people must be guided by their organization’s infrastructure and support systems to focus on continuous quality improvement. If systems are not in place to support a culture, employees will not be able, willing, and committed to transform their work efforts as needed by changing customer demands. As we begin gaining the skills to assess needs, listen to, and co-operate with our customers in designing our services and products according to their constantly changing needs and expectations, we need to learn how to re-engineer and improve processes that we use to produce desired results. Let’s become a learning organization - experimenting, seeking new ways and new methodologies, and designing our organizational systems that involve, engage, develop, and increase the commitment of our people, our partners and our customers to design the future we want and need.

Sunday, May 16, 2004

Financial Management & Project Cost Management

Financial management is instrumental in identifying the need, determining the timing, and negotiating with potential sources of outside capital. Decisions to whether to engage in short-term or long-term borrowing are dependent on cash flow expectations, capital structure determination, and the cost of capital employed. To discharge this function effectively, managers must maintain close contact with financial markets and be sensitive to macroeconomic development that may influence the availability and cost of capital to be acquired.

Finance is also the focal point for information requested by creditors, lenders, and stockholders regarding the financial posture of the organization. Accuracy, timeliness, and tactfulness are the primary characteristics required for these activities.

The role of finance, particularly in the areas of scorekeeping and capital utilization are all-pervasive and impacts on the managerial discretion of non-finance activities. Therefore, all managers must develop an understanding of the objectives, tools, and functions of finance.

A matter of immediate concern for all managers is an appreciation of the purpose, underlying assumptions, and interpretation of the budgeting process. The ability to present a case for a budget and to discuss it, and to provide the data required for top management’s approval is a prerequisite for organizational survival. Any major allocation or request for funds will require forecast of benefits.

Effective financial management must take into account the needs and concerns of those who supply capital to the organization – lenders and stockholders. The observe is also true: effective lending and investment requires a thorough understanding of the tools and practices of financial management. In assessing the desirability of a loan to a potential borrower, or the injection of capital by stockholders, the funders must assure themselves of the viability and financial potential of the enterprise or a project. Analysis of past financial statements, prevailing financial plans, and control procedures will provide the much relevant information. By understanding the financial language, tools and procedures, investors can place themselves in the decision and information framework of corporate management, thereby gaining a better appreciation of the risks their capital is exposed to and the returns they may realize.

Financial Planning

Financial planning is a reasoned approach to allocating economic resources to maximize the satisfaction one gets from life. A financial plan or budget is a convenient decision-making tool, which is based on the fundamental economic principles of scarcity, choice and opportunity cost. In the absence of a financial plan, impulse buying may make it difficult to "make ends meet" no matter the level of income.

It is important to realize that every purchase involves cost (opportunity cost). Maximizing satisfaction depends on an analysis of the costs and benefits of purchases. Equipped with an understanding of the financial planning process, students are better able to adapt to ever-changing economic conditions.

One of the key functions of financial management is the allocation of existing resources with the expectation of reaping benefits in the future. The relationships between investment and returns are asymmetrical. While the costs of existing resources are expended with certainty, the benefits anticipated from the investment are not guaranteed. Thus returns may deviate from expectations and such deviation serves as the definition of uncertainty or risk.

The most carefully planned programs face great uncertainties as to the potential outcome of the course of events envisioned during the investment phase. Each of the events would have implications on the cash flow and profit. Planned benefits are uncertain and may deviate either direction from those assumed initially. Since risk cannot be avoided, it must be treated explicitly in the financial planning process. This can be accomplished by stipulating a range of likely outcomes, varying these stipulations, and observing the changes that occur in expected benefits as the assumptions are altered.

With the development of mathematical programming techniques and the availability of computers, econometric forecasting techniques have gained considerable acceptance. These forecast predict the stability of certain economic relationships and the ability to capture these relationships in mathematical terms. Before the forecast can be generated, certain assumptions regarding political events, tax legislature, demographic factors, technological developments, and consumer behaviors must be incorporated into the forecast, explicitly or implicitly. The cost of developing an econometric forecast is relatively high which preclude most small businesses from developing their own capability in this area. Alternatively, small corporations may procure these programmes from external source, but the reliability and accuracy, and the assumptions incorporated into the system may be improper and unrealistic. another less sophisticated technique, which can be used for forecasting, is the judgmental forecast, displaying in quantitative terms (such as GDP, interest rate, employment data).

Once a sales forecast is presented, company support plans can then be developed. The financial plan will then translates all these support plans into monetary terms, identify the source of fundings, and present an approach for the raising of capital from external source, if so required.

Project Cost Management

Project Cost Management includes the processes required to ensure that the project is completed within the approved budget (PMBOK, PMI, 2000). The major processes are: Resource Planning, Cost Estimating, Cost Budgeting and Cost Control. Project Cost Management is primarily concerned with the cost of the resources needed to complete project activities.

The principle objectives of which profit-oriented business organization tend to pursue are wealth enhancement, maximization of profit, maximization of return on investment of shareholders and satisfying stakeholders. Though wealth enhancement may not be a perfect description of what businesses seek to achieve, it is almost certain that wealth is something which business cannot ignore. A particular business only has a certain amount of wealth (capital) and it will take only a limited number of “wrong” decisions to see the business collapse. Therefore, business needs decisions such that it would be worth more as a result of the decision. When valuing businesses, managers need to take into account future profitability, both long-term and short-term, and the risk attached with the investment

The important issue for the success of an organization is not to whom specific responsibilities have been assigned, but rather that these functions are addressed in a timely fashion and are handled effectively. The functions of finance should be handled in accordance with the goal and objectives of the organization. In a profit-oriented enterprise, this goal should be maximization of the wealth of the shareholders.

Cost is often measured in monetary terms. The success of projects is judged by the efficiency with which we achieve the project objectives and that efficiency is assessed by measuring against two constraints – Cost & Time. In assessing the project duration, the duration of individual activities and resource usage have been optimized and further reduction of project duration must increase the direct cost of the project due to overtime and uneconomic use of the plants and machineries.

Cost Estimates

Estimating is never simple. Project managers must recognize that time, cost and resource estimates must be accurate if project planning, scheduling, and controlling are to be effective. At the work package level, the person most familiar with the task should make estimates. The line supervisors who are responsible for getting the job done and who are experienced and familiar with the work should be asked to develop the estimates at this level. The advantage is that the line supervisors will be responsible to ensure that the work activities as estimated by them would be achievable.

There are two practical problems in estimating. First, you are simply too optimistic. It is human nature at the beginning of a new project to ignore the difficulties and assume best-case scenario - in producing your estimates (and using those of others) you must inject a little realism. In practice, you should also build-in a little slack to allow yourself some tolerance against mistakes. This is known as defensive scheduling.

Second, you will be under pressure from senior management to deliver quickly, especially if the project is being sold competitively or the project is fast track as specified within the terms and conditions of contract.

Historical estimates has some inherent danger because they assume the past represents the future and may miss uncertainties that are associated with the new task. Any time estimates should reflect efficient methods for the resources normally available. Estimating of time must consider if normal time is calendar days, working days, weekends, mandays and hours. Many schedules developed by project managers are over optimistic (or faulty) because they do not take into considerations public holidays and other non-working days. Therefore, in developing the schedule, project managers are advise to formulate the project calendar to take into consideration the possible non-working days and other risks associated with schedule (workers can be sick, take leave, or raining days). Unfortunately, padding carries a price. While increasing the allowed time will reduce schedule risk, we will also increase the possibility of an increase in the budgeted cost – this is the time/cost trade-off. The objective of all planning should be to develop a “realistic plan” and if padding is required, it must be done on a “task-by task” basis. There will always be some variation in working times, caused by external factors outside the control of the project team.

Several types of estimates are required as a project evolves. They are:
 Conceptual Estimates,
 Detailed Estimates and
 Definitive estimates.

Conceptual Estimates (preliminary estimates) are generally made in the early phases of a project, during the pre-tender stage. The estimates tell an owner whether a project is economically feasible.

Detailed Estimates, commonly called “quantity take-off” where quantities are then multiplied by selected unit costs, and the resulting sum represents the estimated direct cost of the facility. The addition of indirect costs – plant & equipments, overheads, profit, escalation costs and contingencies will develop the total estimated project cost. The contractor’s bid estimate is his foundation for a successful project. He must bid competitively to win a tender and yet make a profit.

Definitive Estimates are prepared after the project has achieved substantial progress and the major works has been more or less confirmed, and is unlikely to have further changes. These estimates will forecast the final project cost with little margin for error.

Cost Budgeting

Project Cost Budgeting involves allocating the project cost estimate to individual work items. A properly constructed budget must be capable of being baselined and used as the basis for performance measurement and control. It must reflect the way that resources are applied to achieve planned objectives over time. It must be structured in relation to the build-up of estimates, and to the collection of actuals. In converting an estimate to a control budget, two important differences should be considered. First, the organization and the categorization of costs suitable for preparing an estimate are often not compatible with realistic field cost control. Second, estimates must deal in averages, whereas tighter standards are sometimes desirable for control purpose.

In building the project budget we should consider providing certain buffer of extra money. Padding is a standard procedure in managing any project. There is no way that every risk can be fully calculated or anticipated. By assuming that the project might run over budget, we could have a cushion against unexpected incidents or cost overruns. As a project manager, you must have as much direct control of your budget as possible if you are going to be held accountable for the project outcome.

A properly constructed budget must be capable of being baselined and used as the basis for performance measurement and control. It must reflect the way that resources are applied to achieve planned objectives over time. It must be structured in relation to the build-up of estimates, and to the collection of actuals. The budget assumes special importance in project environments as the only basis against which to measure achievement.

Project operating budget is developed initially from the original project budget approved at the conceptual stage. Once the key stages of the project have been identified and the logic developed, the budget can be divided and apportioned to each stage. Operating budget is derived from the work breakdown structure, initially focused on the key stages of the plan. Cost for each key stages are assessed based on the level of details developed and identified at the time. As we layer the plan progressively, the operating budget for each key stage is developed. As the detailed budget for each key stage is derived, we must compare the total with the project budget and analyze the variance. Any negative deviations must be subject to close scrutiny and action planning to determine what action, if any, be taken to contain the situation. Operating budget may include costs divided into the following types: -

1. Capital Costs

 Usually associated with purchased items that can be depreciated.
 Capital costs can be determined with reasonable accuracy from tender and quotations and allowances made for inflationary effects.

2. Revenue Costs

Written off as running costs of the project, i.e. all except the people cost and contract.
The revenue costs are often derived by a rule of thumb based on factors such as length of the project and the number of people involved.

3. People Costs

Measured as time and converted to a charge rate for costing, often with normal working hour and overtime working rates. The people costs are attributed to the project in a variety of ways from zero through to accurate analysis; based on an individual’s actual cost plus an overhead charge to cover fixed costs of the organization.

4. Contract Costs

Costs derived from valid tenders and quotations that form the basis of an official order or contract. The contract costs are derived from tenders and quotations called for all external supplies. We must check the validity of all prices quoted and preferably request such prices to be given with sufficient validity to avoid having to rebid.

5. Contingencies or Reserve

Additional funding held separate to the main budget for unforeseen events and to cover the uncertainties in the original estimates. Project contingencies is a reserve set aside by management with strict controls to ensure additional monies can be injected into the budget when problem occurs.

Cost Control

Effective control of cost gives the opportunity to forestall inevitable cost escalation, foresee potential problems and take advantage of possible savings. Cost is best controlled at source and designed into the project, not inspected in after the event. This allows us to resolve problems before they occur and to respond quickly to those that do occur.

Project Cost Control includes monitoring cost performance, ensuring that only appropriate project changes are included in a revised cost baseline, and informing project stakeholders of authorized changes to the project that will affect costs. It must be remembered that cost, time and specification are inextricably linked. Most massive overspends on projects are caused by over-runs in time or unclear and ever changing specifications. Effective control of specification and time can make the cost control task much simpler.

Several tools and techniques assist in project cost control. There must be some change control system to define procedures for changing the cost baseline. Another tool for cost control is performance measurement. The Earned Value analysis is especially useful for cost control as it helps to determine what is causing the variance and to decide if the variance requires corrective action. Computerized tools such as project management software and spreadsheets are often used to track planned cost vs. actual costs and to forecast the effects of cost changes.

Pitfalls in Costing

Trevor L. Young listed some of the common pitfalls in costing the work, which include: -

1. Misrepresentation of the scope of work statement;
2. Poorly defined scope;
3. Lack of standards and specifications;
4. Poorly defined work schedules;
5. Omissions in the WBS;
6. Poor assessment of individual skills and work rates;
7. Ignoring cost escalations and inflation effects;
8. Avoidance – especially bought-out services leading to guessing.

Friday, May 14, 2004

Variations and Claims

The term Variation is used to describe any difference between the circumstances and/or content of the contract works as carried out, compared with the content and/or circumstances under which the works are described in the contract documents as intended to have carried out. Any change shall entitles the contractor to an adjustment of the contract price. A change is implied by the actions or omissions of the contracting parties.

Usually, contract does have a clause empowering the contract administrator to issue instructions for change, and employers does have a right to make any change covered by the clause for which he is willing to pay and, if necessary, grant more time.

A sound understanding of why change occurs is important in relation to the circumstances leading to and impacts on time and cost. The starting point is to decide what precisely is the extent of the work, which the contractor has undertaken to perform under the original contract. The significance of change must be considered in relation to whether the effect of change is:

 Discrete to the change itself
 Has consequences beyond itself
 Requiring action to minimize its effect, whether there are choices available and which one is appropriate, and
 Who needs to know about it?

A starting point in consideration of whether there is a change is: “what is the necessary and implicit work which the contractor is required to do under the contract and upon what basis can that work be varied?”

“Variation” in the PAM 1998 Form contract covers five main areas. Clause 11.1(i) to (v) intend a tangible change in the works. Clause 11.1(vi) excludes any default and/or breach of contract by the contractor from being a variation. This clause relates to changes in the obligations or restrictions imposed by the employer in the contract with regards to matters connected with the manner the work is constructed. It sets out situations where the employer may affect the contractor’s activity under the contract on the project. Clause 11.2 of the PAM 1998 Form goes on to provide that no variation shall “vitiate the contract”. The purpose of the statement is to ensure that the ordering of substantial variations will not entitle the contractor to treat the contract as at an end and claim to be paid on a “quantum meruit” basis rather than in accordance with the contractual terms. It is only “the works” as described in the contract documents that may be altered or modified. The architect’s power does not extend to ordering additions or substitutions that would require the contractor to execute work clearly not contemplated by the contract.

Wednesday, May 12, 2004

Project Performance Reporting

Information is a valuable resource. Every manager needs to know that he is acquiring, producing and using information wisely and effectively in support of the organization’s goals and objectives. Managing information requires the imposition of order, structure and discipline within a strategic direction. Information management is aided by the availability of technologies, methodologies, and development tools.

The availability of new and modern Technology has vastly increases our ability to access resources, both those we own and control and those outside of our own sphere of influence. As information management becomes more important every day, managers will need to ensure that people within the organization get the information they need to do their job effectively. Competitive advantage of organizations is very much governed by the effectiveness with which we manage these information resources.

The project management information system (PMIS) contains the intelligence essential to the effective planning, organizing, directing, and control of the project. All too often projects are characterized by too many data and not enough relevant information on where the project stands relative to its schedule, cost and technical performance objectives as well as the project’s strategic fit in the parent organization’s strategies.

Information is essential to the design and execution of decisions allocating resources in the management of a project. Decisions coming out of the planning and control of the project must be based on timely and relevant information. Project managers and his team members require information by which intelligent decisions can be made and executed effectively. Information flow is a critical consideration in the speed and eloquence with which the efficient and effective use of resources is carried out in meeting the purpose of the enterprise.

The objectives of an information system is to provide the basis to plan, monitor, integrate project evaluation, and to show the interrelationships among cost, schedule, and technical performance for the entire project and for the strategic direction of the organization. In addition, information should provide a prospective view to identify project problems before they occur, so that they can be avoided or their impact minimized. Information is also required by the project team to continuously monitor, evaluate, and control the resources used on the project. There is also a need by senior management to be kept informed of the status of the project. The hardest part of any management job is not having all the necessary relevant information, yet having the responsibility of making the ‘right decision’.

In the construction industry, it is important that project information is shared between the project stakeholders so as to promote trust, empathy, and more mature relationships amongst them. Sharing of project information is one of the more important dimensions of keeping the team members working together cohesively and concurrently in the utilization of the project resources. Such sharing also facilitates the building of networks with the stakeholders through continuous interpersonal contact and dialogue.

Information provides the intelligence for managing the project. Information must be processed so that decisions can be made and executed. Information is essential to promote understanding, establish project objectives and strategies, develop mechanisms for control, communicate status, forecast future performance and resources, and changes recognized. Information is needed to prepare and use the project plan, develop and use budgets, create and use schedules, and lead the project team to a successful conclusion of the project. The project planning function establishes a structure and a methodology for managing the information resources which encompass defining, structuring, and organizing project information, anticipating its flow, reviewing information quality, controlling its use and source, and providing a focal point for the project’s information policies.

All companies have an integrated information system which includes estimating, job costing, accounting, payroll, and scheduling. A management information system is integrated by means of a cost code of accounts.

A project cost system must interface with accounting systems and report cost of material, labor, equipment and machineries (including overhead cost). The objective of a cost system is to track and forecast costs for comparison against budget. A material management system tracks materials from the requisition stage through to surplus disposal stage. Scheduling require several levels of reporting to meet the needs of the management hierarchy and therefore should be capable of the “roll-up” techniques. A scheduling system must be capable of scheduling all the activities, identify critical activities, level resources, progress tracking, and be produced graphically.

Reporting and feedback must be accurate and timely if it is to be effective for control purpose. Feedback must occur to the project team as well as management level. Management level reporting, that is for owners, contractors and project management teams, must provide statements of accomplishments versus planned cost and schedule objectives, forecast final costs and completion period. It should also review current and potential problems and indicates action taken to overcome the effects of the problems.

Weekly or monthly meetings are held to assess the progress on work. The review meetings are aimed at translating latest work status and critical problems into specific action plan. Weekly or bi-weekly (perhaps monthly) reports with information on the actual and ‘forecast to complete’ quantities of work serve as the agenda for the review meetings. By analyzing the actual manpower, material distribution, and equipment usage, the allocation and availability of resources can be adjusted.

Computer programs for project planning and control have been available for a long time. A software package must be able to meet the needs of a project. There are numerous commercial software packages available. Although most project management software programs can run on the basic PC computer system, users of programs with graphical user interfaces often require a more powerful system.

Monday, May 10, 2004

Sub-Contracting & Nominated Sub-Contracts

Most standard forms of contract contain provisions, which grant the employer the right to nominate sub-contractors for certain works or supplies. This usual procedure is for the architect to negotiate terms with the sub-contractor and on settlement of the terms of the sub-contract, the main contractor is directed to enter into the sub-contract with the selected sub-contractors. This was basically devised to afford the employer a means of controlling the quality of work covered by the sub-contract while at the same time ensuring that a competitive price is secured for the said works.

Considerable difficulties have been encountered with the system of nominated sub-contractors. Firstly, it has proven difficult to make main contractor accountable for the actions of the sub-contractors since it is often presumed that the main contractor has very little control over the sub-contractors’ work. The common standard forms apparently accept this rationale and frequently provide that in the event of delay on the part of nominated sub-contractor, the main contractor shall be given an extension of time; a situation which leaves the employer without any remedy for a breach on the part of the sub-contractor (see: Westminster City Council v J. Jarvis & Sons Ltd and Anor (1970) 1 All E.R. 943). The employer if further exposed to claims for delay if there is late nomination or if the original nomination have fallen out for same reason fails to renominate (see: North West Metropolitan Regional Hospital Board v T.A. Bickerton & Sons Ltd. (1970) 1 All E.R. 1039).

However, under the PAM 1998 Form, a contract may require the main contractor to be responsible for a nominated sub-contractor in such a manner as to reimburse the employer for any loss and expense arising out of a default on the part of the nominated sub-contractor.

The payment of nominated sub-contractors is effected by including the value of their works in a payment certificate issued to the main contractor. Since there is no privity of contract between the sub-contractor and the employer, the employer, in the absence of any provision in the main contract cannot elect to pay the sub-contractor direct (see: Milestone & Sons Ltd v Yates Brewery (1938) 2 All E.R. 439).

A number of recent cases concern the situation where an architect may have nominated a sub-contractor on certain terms, but the main contractor, instead purport to enter into the sub-contract on terms different from those on which the nomination was placed in the first place. If the sub-contractor thereupon proceed on the terms offered, the latter set of terms would apply in lieu (see: Modern Buildings wales Ltd v Limmer & Trinadad Co. Ltd (1975) 2 All E.R. 549; A. Davies & Co. (shopfitters) Ltd. V William Old Ltd (1969) 67 L.G.R. 395).

Sub-contracting work give rise to many problems, whether or not the sub-contractor involved is nominated or appointed by the main contractor. The basic principle is that the main contractor is responsible for the acts and defaults of his sub-contractors so far as the employer is concerned.

If the main contractor is sued by the employer in respect of alleged defects in workmanship, materials or goods and claims that these are the responsibility of a sub-contractor, nominated or otherwise, he can bring the sub-contractor concerned into the legal proceedings as a third party, claiming indemnity from the sub-contractor in respect of the changes which he may be ordered to pay the employer and for his own costs. The fact remains however, that if the third party proceedings, the sub-contractor disputes liability; it is the main contractor to prove the case against him. Once liability has been established (or admitted) then the amount of any compromised settlement is relevant evidence of the damages recoverable against the defaulting sub-contractor.

Saturday, May 08, 2004

Construction Contracts

A contract is an agreement between two or more persons (individuals, businesses, organizations or government agencies) to do, or to refrain from doing, a particular thing in exchange for something of value. Contracts generally can be written, using formal or informal terms, or entirely verbal. If one side fails to live up to his/her/its part of the bargain, there's a "breach" and certain remedies for solving the differences are available. The terms of the contract - the who, what, where, when, and how of the agreement - define the binding promises of each party to the contract. A contract requires an offer (example: tender, quotation or purchase order) to be made by one party and to be accepted by the other party. The acceptance must take place before the offer lapse or before it is withdrawn. If a period of validity is stated in the offer, it will lapse at the end of the validity period. The parties of a contract must have a capacity to contract, and the objects of the contract must be legal.

The tender submitted for a project represents the contractor’s offer to carry out the works and, therefore, on general principles, the tender must set out in very definitive and unambiguous terms the particulars of the contractor’s offer.

A contract is only brought into existence when the offer has been accepted unconditionally. If the offeree suggests any new terms and purports to accept the offer on those new terms, then, there is no acceptance, unless fully agreed and accepted by the offerer.

The Articles of Agreement forming the beginning of the contract document paves the way to the formal opening parts and recitals of the contract form and must be fully and properly completed. It comprises the date of the agreement, the names of the respective parties, the places of business or registered address, and a short description of the works to be completed with reference to the contract bills, drawings and specifications. It further introduces the employer, the contractor and the key personnel in the contract, specifies the scope of works, and the consideration payable and contains the operational definitions of the important terms and expressions used in the contract. The dates of commencement of work and completion will need to be filled.

The contracting parties are identified in the recitals of the contract form, which normally are the principle employer and the main contractor. The recitals are introductory to the operative clauses. The recitals include a brief description of the works to be constructed. They indicate the documents which are to be included as the contract documents. The recitals also state that the employer has caused drawings and bill of quantities “showing and describing the work to be done to be prepared by or under the direction of his named architect. They also state that a fully priced copy of the bills (contract bills) has been supplied by the contractor to the employer. The recital recognizes the standard procedure of examining the successful tenderer’s priced bills. This means that when the articles of agreement are executed, an employer (or his appointed agents) will have the priced bills in his possession

The law relating to construction contract stems from the general law of contract. All the elements of a simple contract must be present and the general rules of performance and discharge of contract apply to a construction contract.

Contracts generally can be written, using formal or informal terms, or entirely verbal. If one side fails to live up to his/her/its part of the bargain, there's a "breach" and certain remedies for solving the differences are available. The terms of the contract - who, what, where, when, and how of the agreement - define the binding promises of each party to the contract.

A contract requires an offer (example: tender, quotation or purchase order) to be made by one party and to be accepted by the other party. The acceptance must take place before the offer lapse or before it is withdrawn. If a period of validity is stated in the offer, it will lapse at the end of the validity period. The parties of a contract must have a capacity to contract, and the objects of the contract must be legal. For a contract to be valid, each side must have the capacity to enter into it. If the other side is to be held to the contract, you must give up something in exchange. This is called consideration. No side can have a free way out or the ability to obtain something of value without providing something in exchange. Money is the most common form of compensation, but it can also be property, giving up a right or valid claim, making a promise to do or not to do something, or anything of value.

When you ask someone to do something, or offer to see someone for a price, you are making an offer. An offer is the first step in forming a contract. The middle step is the other party's acceptance of the deal. The last step is performance -- where you each live up to your side of the bargain. Words, gestures, or actions can signal an offer to enter into a contract and an acceptance.

Key Elements of a binding contract

Competent Parties - For a contract to be valid, each side must have the capacity to enter into it. Most people and companies have sufficient legal competency. A drugged or mentally impaired person has impaired capacity and chances are a court may not hold that person to the contract. Minors (e.g., usually those under eighteen) cannot, generally, enter into a binding contract without parental consent, unless it is for the necessities of life, such as food, clothing, or for student loan contracts.

Consideration - If the other side is to be held to the contract, you must give up something in exchange. This is called consideration. No side can have a free way out or the ability to obtain something of value without providing something in exchange. Money is the most common form of compensation, but it can also be property, giving up a right or valid claim, making a promise to do or not to do something, or anything of value. Agreeing to perform an illegal or illicit act is not consideration and the contract is void.

Mutual Assent or Meeting of the Minds - This means that each side must be clear as to the essential details, rights, and obligations of the contract. Putting the deal down on paper prior to signing it goes A long way to avoid future misunderstandings and disputes. Meeting of the minds sometimes can be expressed by words spoken or gestures made or can be inferred from the surrounding circumstances. There is no meeting of the minds if:

o One side is obviously joking or bragging,
o There is no actual agreement (i.e., the farmer who is selling a gelding and the buyer thinks the horse is a brood mare), or
o Both sides have made a material mistake as to the terms or details of the contract.

The performance of a contract

Performance is actually completing the deal according to the terms given in the contract. For example, you want to buy that Proton Wira at your local dealer's sale. Your dealer, Mr. X, offers to sell you that car if you pay him $50,000. After a bit of bargaining, you agree to the terms and get the car at a reduced price of $49,500, signing on the dotted line. A contract has been accepted. Mr. X, your car dealer, will deliver the car and then you pay him the balance due. The dealer’s delivery of the car and your payment of $49,500 are the performance of the contract. Both parties must live up to their end of the bargain in the contract to have closure. In other words, until both parties have properly performed under the contract, the contract remains open.

Under Clause 1.1 of the PAM 1998 Form of contract, the contractor is obligated to provide materials, goods and standards of workmanship of the quality and standard in every respect to the reasonable satisfaction of the architect. The contractor is not responsible for the suitability of the materials and goods specified, but he is required to comply completely with the contract documents in providing those materials, goods and standards of workmanship.

Tendering Process

Contracting process is normally divided into two phases: Contract Formation and Contract Administration. Contract formation consists of taking and analyzing the proposals and signing a contract. Contract administration consists of working with the contract until project completion and satisfying all the term and conditions.

At the tender stage, it is important to study the requirements to appreciate the basis of the tender and ascertain the manner in which the risks are to be priced or distributed. In essence, a tenderer is often required to quote an amount for carrying out the works upon the terms and conditions stated. When contracting, the parties are then obligated to abide by the terms and conditions thereof.

The contract itself sets out the scope of work and responsibility for the execution of the work. It also assigns and limits the risk sharing for the contracting parties. The project manager is responsible for the administration of the contract after it has been signed. Often, the project manager is the prime contact person between the contractor and the owner or his representative (consultants/ architect).

During the tendering process, the interested contractor will normally determine which portion of work it plans to build with it’s own workforce, and which portion they planned to sub-contract out. The contractor will then prepare a detailed estimate cost of the work with the assistance of the potential sub-contactors input. Quotations for materials and equipments are also solicited early in the bid period. Nearing the bid time, the contractor would have completed a detailed estimate of its own direct and indirect costs and anticipated profit. It would have also received preliminary prices from sub-contractors and major suppliers. The contractor would normally then add some markup on the cost quoted by the sub-contractors and suppliers, and the total prices would be summed up as the proposed contract sum.

Pricing Methods

Construction contract is part of a commercial plan, but it may also be defined as a legally binding document. All contracts should contain terms about prices and payment. Terms about price tell us the sum that the contractor is to receive. Terms about payment tell us about the timing of the payment or series of payments, the methods by which the money is to be transacted from the owner to the contractor.

The price in a contract usually includes everything that is required to achieve the performance of the works to be carried out. Estimators have to take into account all matters which may affect the price, and they should bear in mind that if an error in understanding what is required results in the under-pricing of a tender or offer, this will not invalidate the offer, unless any subsequent event had altered the terms of the original contract agreement which is only known to one party but unknown to the other.

The terms of payment in construction contracts are not standardized conditions and vary from one contract to another. Generally, the terms of payment are of the following:

 Single payment or a series of payments
 Stage payments with set milestones and proportion
 Currency of payment
 Method of payment (cheque, bank draft or letter of credit)
 How each payment is to be secured in favor of the employer, if at all (security may be by way of bond or guarantee or by the passing of property in goods)

Payment terms are important to the buyer and the seller as they define how the money flows. Contractors normally do not want to finance projects for the owners, so their interest in regular payments is very keen. Normally, payments are invoice monthly or biweekly. Faster payment will help contractors avoid the high cost of financing the project.

Contract Type Selection

Contract type is an important consideration. Different types of contracts can be used in different situations. There are three broad categories of contracts:

1.Fixed Price or Lump Sum Contracts

2.Cost Reimbursable Contracts

3.Unit Price Contracts

1.Fixed Price or Lump Sum Contracts

This type of contract involves a fixed total price for a well-defined product or services. The buyer incurs little risk in this situation. If the product is not well defined, both the buyer and seller are at risk – that is the buyer may not receive the desired product or the seller may need to incur additional costs in order to provide it. Fixed Priced Contracts may also include incentives for meeting or exceeding selected project objectives such as schedule targets. For example, the contract could include an incentive fee paid for early product delivery. A Firm-Fixed Price (FFP) contract has the least amount of risk for the buyer, followed by a Fixed Price Incentive (FPI) contract.

2.Cost Reimbursable Contracts

Cost Reimbursable Contracts involve payment to the seller for direct and indirect actual costs. Direct costs are costs incurred for the exclusive benefit of the project (e.g. salaries of the full-time project staffs). Indirect costs, also called overhead costs, are costs allocated to the project by the performing organization as a cost of doing business (e.g. salaries of corporate office staffs, head office overheads). Indirect costs are usually calculated as a percentage of direct costs. This category of contract often includes fees such as profit percentage or incentives for meeting or exceeding selected project objectives such as schedule targets or total cost. Three types of Cost Reimbursable Contracts are:

i.Cost Plus Incentive Fee (CPIF)
ii.Cost Plus Fixed Fee (CPFF)
iii.Cost Plus Percentage of Cost (CPPC)

i.Cost Plus Incentive Fee (CPIF)

The buyer pays the seller for allowable performance costs along with a predetermined fee and an incentive bonus. If the final cost is less than the expected cost, both the buyer and the seller benefit from the cost savings based on a pre-negotiated share formula.

ii.Cost Plus Fixed Fee (CPFF)

The buyer pays the seller for allowable performance costs plus a fixed fee payment usually based on a percentage of estimated costs. This fee does not vary, however, unless the scope of the contract changes.

iii.Cost Plus Percentage of Cost (CPPC)

The buyer pays the seller for allowable performance costs along with a pre-determined percentage based on total costs. From the buyer’s perspective, this is the least desirable type of contract because the seller has no incentive to decrease costs. In fact, the seller may be motivated to increase costs, since doing so will automatically increase profits based on the percentage of costs. All of the risk is borne by the buyer.

3.Unit Price Contracts

This category of contract require the buyer to pay the seller a pre-determined amount per unit of service, and the total value of the contract is a function of the quantities needed to complete the work (e.g. $50 per hour for professional services; $180 per cubic meter of concrete). Unit Price Contracts can be viewed as high-or low-risk, depending on the nature of the project and other contract clauses.

Selecting the type of contract and the fee structure should occur during the formulation of the original contracting plan. Changes to the plan may occur as a result of additional ideas developed during the proposal and negotiation stages. It is important that there must be a clear statement as to the fee basis and payment terms in the final agreement.

Contractors who are doing lump sum contract; make a clear statement that all costs, overheads and profits for performing the scope of work are in the contract prices. A cost-plus contract should define in detail the allowable reimbursable costs such as overheads, labor rates, out-of-pocket costs, equipment rates, and the fee statement. These documents must form part of the contract documents rather then part of the text. Any incentives or penalty terms to the fee structure should be stated clearly and the formula for calculating them should be spelled out clearly.

Competitive Bidding

Competitive bidding on construction projects involves decision making under uncertainty where one of the greatest sources of the uncertainty for each bidder is due to the unpredictable nature of his competitors. Each bid submitted for a particular job by a contractor will be determined by a large number of factors, including an estimate of the direct job cost, the general overhead, the confidence that the management has in this estimate, and the immediate and long-range objectives of management. So many factors are involved that it is impossible for a particular bidder to attempt to predict exactly what the bids submitted by its competitors will be.

All other things being equal, the probability of winning a contract diminishes as more bidders participate in the competition. Consequently, a contractor tries to find out as much information as possible about the number and identities of potential bidders on a specific project. For certain segments, potential competitors may be identified through private contacts, and bidders often confront the same competitor's project after project since they have similar capabilities and interests in undertaking the same type of work, including size, complexity and geographical location of the projects.

Negotiated Contract

Negotiation is another important mechanism for arranging construction contracts. Project managers often find themselves as participants in negotiations, either as principal negotiators or as expert advisors. These negotiations can be complex and often present important opportunities and risks for the various parties involved. For example, negotiation on work contracts can involve issues such as completion date, arbitration procedures, special work item compensation, contingency allowances as well as the overall price. As a general rule, exogenous factors such as the history of a contractor and the general economic climate in the construction industry will determine the results of negotiations. However, the skill of a negotiator can affect the possibility of reaching an agreement, the profitability of the project, the scope of any eventual disputes, and the possibility for additional work among the participants. Thus, negotiations are an important task for many project managers. Even after a contract is awarded on the basis of competitive bidding, there are many occasions in which subsequent negotiations are required as conditions change over time.

In conducting negotiations between two parties, each side will have a series of objectives and constraints. The overall objective of each party is to obtain the most favorable, acceptable agreement. A two party, one issue negotiation illustrates this fundamental point.

Poor negotiating strategies adopted by one or the other party may also preclude an agreement even with the existence of a feasible agreement range. For example, one party may be so demanding that the other party simply breaks off negotiations. In effect, negotiations are not a well behaved solution methodology for the resolution of disputes.

The possibility of negotiating failures highlights the importance of negotiating style and strategy with respect to revealing information. Style includes the extent to which negotiators are willing to seem reasonable, the type of arguments chosen, the forcefulness of language used, etc. Clearly, different negotiating styles can be more or less effective. Cultural factors are also extremely important. Revealing information is also a negotiating decision. Some negotiators would readily reveal their reserve or constraint prices, whereas others would conceal as much information as possible (i.e. "play their cards close to the vest") or provide misleading information.

In light of these tactical problems, it is often beneficial to all parties to adopt objective standards in determining appropriate contract provisions. These standards would prescribe a particular agreement or a method to arrive at appropriate values in a negotiation. Objective standards can be derived from numerous sources, including market values, precedent, professional standards, what a court would decide, etc. By using objective criteria of this sort, personalities and disruptive negotiating tactics do not become impediments to reaching mutually beneficial agreements.

Design/Build Contracts

Some owners wish to delegate all responsibilities of design and construction to outside consultants in a turnkey project arrangement. A contractor agrees to provide the completed facility on the basis of performance specifications set forth by the owner. The contractor may even assume the responsibility of operating the project if the owner so desires. In order for a turnkey operation to succeed, the owner must be able to provide a set of unambiguous performance specifications to the contractor and must have complete confidence in the capability of the contractor to carry out the mission.

The basic structure of the bidding process consists of the formulation of detailed plans and specifications of a facility based on the objectives and requirements of the owner, and the invitation of qualified contractors to bid for the right to execute the project. The definition of a qualified contractor usually calls for a minimal evidence of previous experience and financial stability. In the private sector, the owner has considerable latitude in selecting the bidders, ranging from open competition to the restriction of bidders to a few favored contractors. In the public sector, the rules are carefully delineated to place all qualified contractors on an equal footing for competition, and strictly enforced to prevent collusion among contractors and unethical or illegal actions by public officials.
Detailed plans and specifications are usually prepared by an architectural/engineering firm, which oversees the bidding process on behalf of the owner. The final bids are normally submitted on either a lump sum or unit price basis, as stipulated by the owner. A lump sum bid represents the total price for which a contractor offers to complete a facility according to the detailed plans and specifications. Unit price bidding is used in projects for which the quantity of materials or the amount of labor involved in some key tasks is particularly uncertain. In such cases, the contractor is permitted to submit a list of unit prices for those tasks, and the final price used to determine the lowest bidder is based on the lump sum price computed by multiplying the quoted unit price for each specified task by the corresponding quantity in the owner's estimates for quantities. However, the total payment to the winning contractor will be based on the actual quantities multiplied by the respective quoted unit prices.

The contract price includes the direct project cost including field supervision expenses plus the markup imposed by contractors for general overhead expenses and profit. The factors influencing a facility price will vary by type of facility and location as well. Within each of the major categories of construction such as residential housing, commercial buildings, industrial complexes and infrastructure, there are smaller segments, which have very different environments with regard to price setting. However, all pricing arrangements have some common features in the form of the legal documents binding the owner and the supplier(s) of the facility. Without addressing special issues in various industry segments, the most common types of pricing arrangements can be described broadly to illustrate the basic principles.

All owners want quality construction with reasonable costs, but not all are willing to share risks and/or provide incentives to enhance the quality of construction. In recent years, more owners recognize that they do not get the best quality of construction by squeezing the last dollar of profit from the contractor, and they accept the concept of risk sharing/risk assignment in principle in letting construction contracts. However, the implementation of such a concept in the past decade has received mixed results.

In some projects, the contract provisions may allow the contractor to provide alternative design and/or construction technology. The owner may impose different mechanisms for pricing these changes. For example, a contractor may suggest a design or construction method change that fulfills the performance requirements. Savings due to such changes may accrue to the contractor or the owner, or may be divided in some fashion between the two. The contract provisions must reflect the owners risk-reward objectives in calling for alternate design and/or construction technology. While innovations are often sought to save money and time, unsuccessful innovations may require additional money and time to correct earlier misjudgment. At worse, a failure could have serious consequences.

A final important consideration in forming bid prices on the part of contractors are the possible special advantages enjoyed by a particular firm. As a result of lower costs, a particular contractor may be able to impose a higher profit markup yet still have a lower total bid than competitors. These lower costs may result from superior technology, greater experience, better management, better personnel or lower unit costs. A comparative cost advantage is the most desirable of all circumstances in entering a bid competition.

Friday, May 07, 2004

Roles & Responsibilities of Project Managers

It is the responsibility of the project manager to make sure that the internal and external customers are satisfied that the project is completed on time, within budget and in compliance with the quality standards specified. The primary responsibility of the project manager is to provide leadership in planning, organizing, and controlling the work efforts to accomplish the project objectives. He has to coordinate the activities of the various team members to ensure that they perform the right tasks at the proper time, as a cohesive group.

Effective project manager has strong leadership skills that will inspire the project team to succeed and also win confidence of the customers. He must have the ability to develop people, excellent communication skills, good interpersonal skills, and the ability to handle stress, excellent problem-solving skills and good time management skills.

Project manager must make the best use of the skills and abilities of their workforce by providing them with sufficient information so that they can develop a rational understanding of the tasks assigned to them. The skills that will make a good project manager together with the attributes and skills, which the project manager should develop to ensure the effectiveness of the project team, are as follows:

i. Leadership – project manager should be able to stimulate action, progress and change.

ii. Technological Understanding – project manager need to have an accurate perception of the technical requirements of the project.

iii. Evaluation and Decision Making – project manager should have the ability to evaluate alternatives and to make informed decisions.

iv. People Management – project manager should be able to motivate their team and have a constant personal drive towards achieving the project’s goals.

v. Design and Maintenance of System – project manager should be able to demonstrate their individual competence and have a complete working knowledge of the internal administration of the project.

vi. Planning and Control – project manager should be constantly monitoring progress against the plan and taking any necessary corrective action using modern planning and monitoring methods.

vii. Financial Awareness – project manager should be proficient in risk management and have a broad financial knowledge.

viii. Procurement – project manager should understand the basics of procurement and be able to develop the procurement strategy for the project.

ix. Communication – project manager should be able to express themselves clearly and unambiguously in speaking and writing and be able to do this in a wide range of situations and with a wide range of people.

x. Negotiation – project managers must be able to understand the contract that defines their project and should be able to manage subcontractors to ensure that the contractual terms are met.

xi. Legal Awareness – the project manager should have an awareness of any legal issues that could affect the project.

Strong leadership is an essential part of good project management. Project managers must provide leadership to their project team members, develop good relationships with key stakeholders, understand the business needs of the project, and prepare realistic project plans. Senior management must participate in the project by providing overall support and direction. Leadership is getting things done through others. It involves inspiring the project team members to work as a team, successfully implementing the plan and achieve the desired objectives of the project.

The project manager establishes the parameters and guidelines for what needs to be done, and the team members determine how to get it done. He creates the culture of task ownership and empowers individuals to own and control their own work task, accepting responsibilities and accountability for performing the work scope within budget and on schedule.

Project managers must have the ability to motivate team members and create a supportive environment by encouraging participation and involvement of all members, in which individuals work as part of a high-performing team and are energized to excel. He must set the tone for the project team by establishing an environment of trust, high expectations, and enjoyment.

Project managers need to communicate and share information with the project team and the customers. He needs to establish ongoing communication with the customers, and keeping them informed as well as providing timely feedback to the team and the customers. Communication needs to be timely, honest, and unambiguous. Effective communication established credibility and builds trust.

Throughout the project, the project manager will need to persuade and negotiate with the customer, the project team, and the upper management. A project manager needs good interpersonal skills to try to influence the thinking and actions of others. He needs to establish clear expectations of members so that everyone knows the importance of their role in achieving the project objectives.

A project manager also needs to be a good problem solver. Good problem solving starts with the early identification of a potential problem and then allowing time to develop a well thought-out solution. Visionary project manager possesses the ability to see the “big picture” and how potential solutions might affect other parts of the project, including relationships with the customer or upper management.

Another important aspect of the project manager is the ability to manage and control changes in order to minimize any negative impact on the successful accomplishment of the project objectives. Changes are going to occur in any project and project managers need to manage and control the changes. Changes may be trivial or may significantly affect the project scope, budget and schedule. At such, procedures and standards need to be established during the project commencement to provide directions and guidelines regarding how changes will be documented and authorized. This should include necessary communication requirements.

Thursday, May 06, 2004

Project Stakeholders

Project stakeholders are individuals and organizations who are actively involved in the project, or whose interests may be positively or negatively affected as a result of project execution or successful project completion.(PMBOK 2000)

The project management team must identify the stakeholders, determine what their needs and expectations are, and then manage and influence those expectations to ensure a successful project.

Successful projects have to meet all stakeholder expectation. All parties involved in a project have a vital interest in the project success – each has an essential contribution to make. The first step in this process is gaining agreement. The project manager, project team, functional managers, sponsor and the customer must all agree on the goals of the project. The project manager must then coordinate all these stakeholders in the process of guiding the project through its various stages.

It is important for project manager to perform a Stakeholder Analysis in order to help understand and meet stakeholder needs and expectations. The analysis will also help the project manager lead the execution of the project plan.

Stakeholder Analysis documents information such as:

 Key stakeholders’ names and organizations & their roles on the project;
 Unique facts about each stakeholders & their level of interest in the project;
 Key stakeholders’ influence on the project;
 Suggestions for managing relationships with each stakeholder.

Tuesday, May 04, 2004

Project Tasks & Action Plan

The project master plan must address how we plan, organize, and control all the work activities to meet our goals of finishing the work on time, within budget and conforming to the quality standards as specified. One important point before planning is that we do not want to do more than necessary to satisfy customer needs, since that is wasting money. On the other hand, we should not do less than necessary, or we may lose the customer.

Once the project manager and his team is chosen, the project team will face the most challenging part of project management: the planning and control phase, to bring the project to completion – on schedule, within budget and in compliance with the quality standards. What is needed is a good basic planning before commencing a project and the approach taken must allow management the flexibility to respond to, and even turn to advantage, the unexpected changes and events that will inevitably occur.

The next stage is to allocate the tasks to different people in the team and, at the same time, order these tasks so that they are performed in a sensible sequence. Task allocation is not simply a case of handing out the various tasks on your final lists to the people you have available. The allocation of tasks should be seen as a means of increasing the skills and experience of your team - when the project is done, the team should have gained.

In simple terms, consider what each member of your team is capable of and allocate sufficient complexity of tasks to match that (and to slightly stretch). The tasks you allocate are not the ones on your finals lists, they are adapted to better suit the needs of your team's development; tasks are moulded to fit people, which is far more effective than the other way around.

Sometimes tasks can be grouped and allocated together. For instance, some tasks, which are seemingly independent, may benefit from being done together since they use common ideas, information, and talents. One person doing them both removes the start-up time for one of them; two people (one on each) will be able to help each other.

The ordering of the tasks is really quite simple; although you may find that sketching a sequence diagram helps you to think it through (and to communicate the result). Getting the details exactly right, however, can be a long and painful process, and often it can be futile. The degree to which you can predict the future is limited, so too should be the detail of your planning. You must have the broad outlines by which to monitor progress, and sufficient detail to assign each task when it needs to be started, but beyond that - stop and do something useful instead.

Once we have a clear understanding of the project, we can then describe it as a set of simpler separate activities. If any of these are still too complex for you to easily organize, you break them down also into another level of simpler descriptions, and so on until you can manage everything. Thus your one complex project is organized as a set of simple tasks, which together achieve the desired result.

The reasoning behind this is that human brain can only take in and processes so much information at one time. To get a real grasp of the project, you have to think about it in pieces rather than trying to process the complexity of its entire details all at once. Thus each level of the project can be understood as the amalgamation of a few simply described smaller units.

In planning any project, you follow the same simple steps: if an item is too complicated to manage, it becomes a list of simpler items. People call this producing a work breakdown structure (WBS) to make it sound more formal and impressive. Without following this formal approach you are unlikely to remember all the niggling little details; with this procedure, the details are simply displayed on the final lists.

One common fault is to produce too much detail at the initial planning stage. You should be stop when you have a sufficient description of the activity to provide a clear instruction for the person who will actually do the work, and to have a reasonable estimate for the total time/effort involved. You need the former to allocate (or delegate) the task; you need the latter to finish the planning.

WBS provides a tool for planning the work activities, including estimates the resources required, estimating the activity durations and costs. The basic aim of a WBS is to split the project into tangible deliverable items. The more work packages we split the project into, the more interfacing with other people, departments, functions or even companies there may be. However the less work packages there are, the harder it will be to budget and estimate resource requirements. It is advisable that a work package should not be more than 7 days of work (for a large project), otherwise, it will be difficult to assign resources, monitor progress and carry out performance measurement.

There are various ways in which people can be organized to work in projects, and the most common types of organizational structures are Functional, Projectized, and Matrix. The structure of the performing organization often constraints the availability of resources necessary for the project.

A good organizational structure conforms to the company’s business objectives. Once clear on the objectives, there are a number of identifiable factors that position a company on the continuum of organizations from functionally based to project based. Creating the ideal structure is likely to be difficult and will require extensive education and good human resource management.

a) Functional Organization

The functional organization is the traditional structure for a large organization bringing together people responsible for each function in the operation of the business. It is known as the Role Culture. The vast majority of people in industry work in such a structure. It relies heavily on systems and procedures, prevents cross-functional communication and is extremely slow to react to change. The organization breeds specialists rather than rounded general managers. The structure is usefully adopted for cost sensitive management of steady state production or technology led products where expertise is more important than timescales.

b) The Projectized Organization

In the Project-type organization, each project is operated like a mini-company. The Project Organization brings a clearer focus on definitive goals; these may be specific to the project rather than general company objectives. The project teams generally have a high commitment to the goals, the project has a flatter management structure than the parent organization and communication is generally excellent. The structure is responsive to all types of change and typically provides the customer with much better services. The organization is best utilized where change is continuous and timescales are fixed and probably tight.

c) The Matrix Organization

The Matrix Organization overlays the functional and the project structures in an attempt to obtain the advantages of both. It is also known as the Task Culture. The functional manager is responsible for the technological expertise and the allocation of his resource to a number of projects. The project manager is responsible for the specification, the time and the cost.

The Matrix structure can achieve the performance benefits of the project organization whilst achieving good resource utilization and giving the individual both an organizational home and a peer group with technological expertise. Its major disadvantage is that it is complicated and promotes conflict.

Many individuals have two bosses, their functional superior and the project manager. It is easy to lay out the theoretical responsibilities of the two however in practice they overlap and conflict. For the system to work effectively, senior management must define responsibilities and mechanisms for solving conflict at the outset of each project. The system brings with it an almost exponential increase in relationships, reporting and communication.

Common Project Pitfalls & Problems

Ned Robbins (Warwick University,2000) listed four fundamental areas as the reasons of projects failure: resource constraints, conflict in projects, unknown, and transience. According to Ned, the main problems are due to inadequate resources, unrealistic deadlines, unclear goals and direction, team members uncommitted, insufficient planning, communication breakdown, changes in goals/resources, and conflicts between functions or departments. Other factors are:

1. Underestimate of the technical difficulty.
2. Non-compliance with procedures.
3. Problems with software project.
4. Inability to control contractor’s work and failure to use specialist staff.
5. Weakness in contract arrangement.
6. Lack of effective planning and control.
7. Interruptions in funding.
8. Escalation in cost.
9. Changing in specification.

Jeffrey K. Pinto (1998) states that technology; configuration management and overlapping design and production are also factors that contribute to project failures. According to Pinto, inappropriate or unproven technology is one of the greatest source of problem in projects. Project managers should recognize that using unproved technology in their project will increase the likelihood of problems, delays, or overruns dramatically.

In the Malaysian construction projects, it is worrisome to find that many design engineers and architects, in their desire to explore new technologies and products (which they have not experience), were prepared to introduce the new technologies and product in their design drawings and specification. The result is that many of these projects ends up a failure, or were delayed dramatically. The experience was helpful as it provides knowledge of those technology usage, but loser was not the specifier and designer, but the owners who engage them, and probably, the contractors whose reputation were tarnished.

Poor control of changes is another major source of project difficulty. Changes often arise from design and poor change control system can cause serious damage to a project. Overlapping design and production, that is concurrent engineering describes implementation of technology before the design is stable and often lead to major cost overruns.

Kenneth G. Cooper described the four main sources of project failure:

 Failure 1: Failure to know what to expect, or Great Expectation.
 Failure 2: Failure to know what to watch, or half-Blank Tape Measures.
 Failure 3: Failure to know what to do (and to do it), or Counterintuitively counterproductive countermeasure).
 Failure 4: Failure to know what’s what, or Lessons Not Learned.

Failure 1 is due to changes, poor product definition, poor or inadequate budget, poor or over aggressive scheduling target (excessively overlapped work stages, schedule pressure, inefficient & costly resource use, and workers demoralized).

Failure 2 is the failure of project managers to take into account the quality of the work done, the release of incomplete or imperfect task products, or the amount of rework that will be required. Kenneth Cooper suggest that project manager can make improvement measure by:

 Acknowledging these weaknesses and set to reduce the disruption of these surprises.
 Actively sought out. Earlier discovery may feel unpleasant at the time is strongly encouraged.
 Prevented as much as possible, that is improving quality in the rework cycle.

Failure 3 is not knowing what to do as a manager of a challenging project or when faced with the prospect of an ongoing project’s missing its target. The prospect of poor management means that managers will seek preemptive or corrective countermeasures. In most cases, the countermeasures will be obvious, intuitive, accepted, almost second nature – and wrong.

Failure 4 is the failure to learn which is the most pervasive failure in all project management. The four different conditions that contributed to and perpetuated this failure is:

 Misguided belief that all projects are different and the lack of understanding of the common dynamics and phenomena shared by virtually all projects.
 Projects are time pressured - rushing to start, and rushing to finish.
 Limited span and career path of project managers.
 Lack of self-esteem in project managers.

According to Juran, a project is a problem scheduled for solution, and that we make the right solution to the wrong problem. To overcome this issue, project managers should write the project’s problem statement to reflect the project objectives.

James P. Lewis list the various causes of project failures:

a) Planning based on insufficient data.
b) A planning group performed planning (not the doer).
c) Project estimates are best guesses, made without consulting historical data.
d) Resource planning was inadequate.
e) People don’t see themselves as working on one team.
f) People are constantly pulled off the project or reassigned with no regard for impact.
g) The project plan lacks detail.
h) The project is not tracked against the plan.
i) People lose sight of the original goal.
j) Senior managers refuse to accept reality.
k) Ballpark estimates (estimates based on sketchy information) become official targets.