Genesis is engaged in supply of PCs to the home market and in development of software. During the past year, project costs of the company have tended to go beyond projections and have become a matter of grave concern. The project management team has been given the task of analysing the situation and devising measures to control costs.
This report contains a detailed analysis of the problems facing the company and provides recommendations to bring project costs under control. It is structured into separate sections and after beginning with a small introductory write up, takes up the various factors involved in project cost control, along with recommended measures and suggestions.
Genesis Computers is in the business of selling and maintaining personal computers for home use. The company also develops software solutions for its clients. The customers of the company buy PCs, as well as bespoke software. Clients can be segregated into customers who buy computers, customers who buy software and those who buy both. All customers are provided with free warranty periods for both hardware and software. Many of them prefer to enter into annual maintenance contracts at the end of the warranty period. In consonance with customer expectations, Genesis sells only branded computers. In addition to PCs, some customers also need printers and scanners, which the company provides. As the market of the company is limited to customers who need PCs for home use, the number of computers sold to individual clients remains restricted. Some clients who run small businesses from their homes occasionally place larger orders, along with bespoke software.
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The company is experiencing overruns in project costs. Cost escalations are occurring regularly in both hardware and software components, with resultant erosions in profitability, delays in project completion and decrease in customer satisfaction. It has now become imperative to ensure that cost budgets are maintained and customer expectations with regard to quality and delivery met appropriately. It is the objective of this assignment to investigate the reasons for cost overruns and develop appropriate measures to control identified problems. Consideration has to be given to the small size of the company. The recommendations should thus be simple, logical and convenient to implement.
2. Cost Overruns
Measures to control project costs need to account not only for the costs incurred for procurement of hardware and development of software, but also for those incurred for maintenance and rework during the warranty period. Apart from these expenses, project costs need to incorporate all direct or indirect expenses attributable to the project. As warranty costs for hardware are protected by back to back arrangements with hardware vendors, this assignment will focus on the other cost elements involved in project execution.
Cost control must necessarily be a multi disciplinary exercise. This fact needs to be conveyed to all departmental heads and their cooperation obtained. It needs to be recognised that cost reduction exercises that happen without the full cooperation of all departments will probably be stillborn and doomed to failure.
a. Estimation and Quotations:
In many cases the genesis (!) of cost overruns lies in improper preparation of estimates and quotations. Preparation of estimates is often the preserve of sales and marketing functions. The sales department in Genesis reports directly to the CEO and its eagerness to clinch deals occasionally results in inadequate cost estimation and low quotations. It is recommended that the estimating exercise be converted into a multidisciplinary function for an initial period of six months. During this period managers from projects, procurement, software development, finance and sales departments should take part in the estimation function. Managers drafted for this exercise will need to be informed of the urgency of the exercise, the necessity of carrying out detailed estimation exercises and the need for speed in preparing estimates. It must be ensured that sales response times do not get diluted due to the necessity of carrying out estimation exercises. It is also essential to ensure that the procedure for estimation be in line with the methodology used by the company for preparing project budgets. The estimation exercise, while incorporating direct and indirect costs, must provide for accurate forecasting of time required for software development. It needs to be emphasised that most software development costs are functions of time and labour and the underestimation of time is a causal factor behind preparation of incorrect estimates and subsequent overruns.
The budgeting exercise takes place only after receipt of the order; with budgets sometimes being very different from original estimates. It is important to prepare the budget, de novo, after receipt of the order on the basis of the order specifications for hardware and software. The hardware requirements and prices agreed upon need to be checked with procurement prices to ensure the presence of determined margins. A software development process consists of specific steps e.g. analysis of software, elements, architecture, implementation, testing, documentation, training, support and maintenance. The budgeting process must necessarily account for the time required for separate processes, incorporation of buffers and slacks, application of accurate costing rates and incorporation of other direct and applicable indirect costs, including the apportionment of overheads.
c. Supply Chain Management:
Efficient control of costs relating to the hardware component in projects will be best served by improving the supply chain management of the machines, peripherals and accessories, traded by the company. Most projects contain both software and hardware elements. As such, they also have a delivery time framework that is in consonance with software development time. This factor, fortunately, provides enough time to the purchase department for procurement of hardware, even after receipt of the order. Genesis must take advantage of this slack in hardware procurement time to ensure minimum stocking and reduced inventory levels. The project managers need to coordinate with the staff of the procurement department and the vendors, thereby ensuring that while low inventories do not lead to delays in receipt of material, ordered supplies are received “just in time” to ensure timely delivery. Introduction of this practice will lead to reduction in inventory, freeing of inventory carrying costs, more careful buying and sharper project execution practices.
d. Project Monitoring and Execution:
Improvement in any aspect of project management; be it cost, delivery or quality, essentially starts with project managers. Each order, as soon as it is signed, must be allotted to a suitable project manager. The choice of project managers is important in order to ensure that chosen managers are competent enough to handle allotted projects and moreover, have enough time to devote to the execution of their projects. Overloading project managers or allotting projects to unsuitable managers is the surest way to invite problems in project execution. Improper project management can lead to costs going over budget or to late deliveries, with problems getting compounded when large number of projects come up for parallel execution.
There are three basic dimensions to successful project management, control of time, scope and cost. These dimensions work like three sides of a triangle, with a change in any one parameter affecting the other two.
Research shows that less than 10 percent of all projects are delivered to their original cost and schedule estimates. One reason associated with this failure rate lies in the tracking of effort and cost – estimates should be tracked over time comparing planned to actual outcomes.(McManus, 2006)
Project managers must control the scope and time of the project and ensure that they comply with originally laid out plans. It is generally seen that this approach, if implemented sincerely solves many of the problems that lead to cost overruns. Project managers are responsible for a number of issues, the main ones being planning, designing objectives, controlling risk, estimating and allocating resources, organising work, acquiring resources, assigning and directing activities, controlling execution, monitoring and analysing progress, implementing route corrections, ensuring compliance with cost, time, quality and delivery norms and managing issues. Execution of many software projects also involves the utilisation of outside experts who are paid in line with the time expended by them while working on the project. Outside experts need to be monitored with more care because of their distant location and other commitments.
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Specific attention needs to be given to monitoring the various phases of different projects. If estimation and budgeting are done with a fair degree of comprehensiveness and accuracy, proper monitoring and route corrections procedures help greatly in keeping projects on track. Project monitoring involves a number of variables. It is recommended, in the first instance, that all mangers use standard software like MS Project to monitor and control projects. In addition to use of standard project monitoring tools, monthly financial reviews also help in controlling project costs. It is recommended that these financial reviews should be regularly held and attended by project managers, finance personnel and the CEO. The focus of these reviews should be on cost and time overruns. These reviews will help enormously, not just in locating reasons for overruns but also in quantifying the costs that remain to be incurred. It is imperative that reporting of costing data, at this stage, should draw only upon the information available within the existing finance function. Changes in systems relating to collecting and recording of costing data should be looked at only after the present recommendations are implemented and followed, for at least one year. It would be premature to do otherwise.
3. Closing Review and Conclusion:
The conclusion of any project must necessarily be accompanied by a detailed closing review focussing on time, scope, cost, and customer satisfaction. The review should deal not just with negative variances but also with areas where good project execution practices have been able to achieve savings in time and costs. This will enable project managers to focus and localise practices that have worked favourably during project implementation.
The project management team must use these completed reviews as major information sources for designing project cost control measures. They must draw from the lessons learnt and conclusions reached to prepare a detailed manual outlining company practices for monitoring and controlling project costs. The CEO and the finance department should keep the issue of project cost control alive during the year and design a reward system for staff responsible for executing very successful projects.
It is suggested that these measures be implemented immediately and quarterly reviews be held thereafter to assess their effectiveness in achieving project cost control.
Ho, M, 2005, Managing Project Quality: Cost, Control and Justification, DM Review, Retrieved December 23, 2006 from www.dmreview.com/article_sub.cfm?articleID=1040055
Hormozi, A. M., & Dube, L. F. (1999). Establishing Project Control: Schedule, Cost, and Quality. SAM Advanced Management Journal, 64(4), 32.
Relkin, J, 2006, 10 ways to effectively estimate and control project costs, Tech Republic, Retrieved December 23, 2006 from articles.techrepublic.com.com/5100-10878-6078705.html
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