Project Cost Controls

EVM Explained: Variance

“If you keep going at this speed, you’re going to be late!” That’s my simplistic real-life analogy of earned value management. It’s a simple bit of math that we all do in our heads anytime we’re trying to get somewhere or finish something.  If you gave yourself an hour to get there and after a half-hour you’re still less than half-way, you’re going to be late.  It’s that simple. As simple as it is, it requires us to know quite a bit of information about the current situation in order to calculate late vs. on-time.  Just like EVM, you need to know 3 key elements to make the calculation: Your speed Remaining distance to go Remaining time left Cost Variance If you know those 3 values, you can not only calculate whether or not you’re going to be late, but you’ll also know how late.  In earned value management, the “how late” answer would be called Variance. Whether we’re talking about time, cost or hours, variance is determined by knowing three things about your project: Your budget How much of that budget you’ve spent so far (actual) How much work has been completed (as a percent) To save you from having to read it here, you can have a look at this site to get the details on the math for calculating variance (and any other earned value metrics). Depending on your preference, variance can be expressed as a whole number or as a percent. Most people tend to speak about variance in percent terms since it gives you a sense of the magnitude.  For example, “we’re 17% over budget.”  It’s key to point out that that would be a

What is the Cost of Inaction?

Businesses suffocating from internal systems they've grown out of should have a close look at what it's costing them to delay improving things The Pain of Same vs. The Pain of Change It’s common for organizations to simply cope with their current solutions and avoid or delay required technology upgrades. This delay is typically rooted in a fear of the effort and disruption the change may cause – the easy route is to hesitate and avoid the pain of change. The cost of inaction is the business and opportunity costs associated with organizations not deploying necessary technology and other business-innovation improvements to match the complexity of their business. To be clear, these are businesses that have recognized that they’re struggling with their current solution, and they’re aware that they need to do something, but they nevertheless postpone it for one reason or another. At some point, of course, any growing business will be forced to make a switch. All too often, that tipping point comes long after the pain of same has outweighed the pain of change. It's about Money The thing is, it’s not just about pain. It’s also about money. And it’s about opportunity. You have to ask yourself, what are you leaving on the table by not taking action? What is it costing you to hesitate? If you were to take the plunge and upgrade your software and underlying processes to something that was built to match the complexity of your business, what would that cost you, and when would you see a return on that investment? To help you get an answer to that, we’ll need to first quantify your situation by using a few key metrics. To

Good Cost Code Planning can Save You from a Project Disaster

A few weeks ago, a peer of mine and I had a working lunch with another colleague. A highly experienced cost engineer professional, well-versed in the challenges of project cost control, and well-respected in her industry. With the three of us all having our feet in the project cost management world – our colleague from a practical perspective and we from the technology perspective – the discussion inevitably turned to the challenges of effective project cost control.  For us on the “solutions” side, we wanted to hear her take on the golden question - “What is essential for managing and controlling project costs effectively?  Is it accurate estimating?  Is it complete and timely capture of actual cost data?  What about proactive change management?  And what about the effective use of earned value management in project controls?” Now, obviously all of these are vital to controlling construction project costs and providing insight into just how well a project is really performing; so we were very interested in her perspective.  So, imagine our surprise when our esteemed colleague put down her fork, turned to us and said, with absolute conviction – “It starts with the project cost codes.” Cost codes are essential to providing the correct aggregation of actual project cost information to its correct place in the budget; which then provides project management and cost engineers with accurate budget vs. actual reporting required to run a project to a successful conclusion.  Makes total sense.  And with the provision of codes just about everywhere in most construction project management software solutions, using cost codes effectively in a project shouldn’t be much of an issue.  Right? But, as she went on to elaborate, it became

Statistics show 88% of Spreadsheets have errors. Do yours?

The best thing about Excel is that it’s so flexible. The worst thing about Excel is that it’s so flexible. With enough effort and programming, people can bend and twist Excel into doing almost anything. The challenge with that, as many people know, is that lurking inside every spreadsheet are errors that elude the creator. Some errors can be minor, but many errors are much greater in magnitude and can lead to executives making critical decisions based on bad math. Numerous studies on spreadsheet errors have been undertaken over the past 5 years which indicate that an alarming rate of errors exist in business-critical spreadsheets. Consider this blurb from the 2009 University of Hawaii paper on “What we know about spreadsheet errors”: In general, errors seem to occur in a few percent of all cells, meaning that for large spreadsheets, the issue is how many errors there are, not whether an error exists. These error rates, although troubling, are in line with those in programming and other human cognitive domains. In programming, we have learned to follow strict development disciplines to eliminate most errors. Surveys of spreadsheet developers indicate that spreadsheet creation, in contrast, is informal, and few organizations have comprehensive policies for spreadsheet development. Although prescriptive articles have focused on such disciplines as modularization and having assumptions sections, these may be far less important than other innovations, especially cell-by-cell code inspection after the development phase.   To put it another way, on average, a spreadsheet will contain 1 error for every 20 cells that contain data. Cell errors are bad enough. What about the errors that are introduced from copying data from one spreadsheet to the next? It’s pretty common to have multiple spreadsheets

What is SaaS and What’s in it for You?

Ever wondered what SaaS really means? SaaS means “Software as a Service” and is both a licensing model, as well as a software product delivery model. SaaS is not that new, but it is becoming more popular as cloud-based applications are flourishing. It might seem new to some, since it's a departure from the more traditional “On-Premise” software applications. So what is it then? Put simply, SaaS is a distribution method where software applications are made available over the web and cloud by a software vendor. All the infrastructure, equipment, maintenance and other IT-related costs are covered by the vendor as part of the SaaS license fee. Companies can free themselves from any software to install or hardware to buy or maintain – all they need is an internet connection, and the software is there all the time. In addition to the convenience of accessing the software application over the web and cloud, SaaS also differs in its pricing model. On-premise software is typically purchased through a Perpetual License, which means buyers own licenses of that version of the software. They also pay 20% to 30% per year in maintenance and support fees on top of the license purchase. SaaS, on the other hand, allows buyers to pay an annual or monthly subscription fee, which typically includes the software license, support, product upgrades and all other fees.  With SaaS pricing, the customer is not burdened with a heavy front-loaded cost.  With traditional On-Premise perpetual license, the buyer takes on a great deal of risk and has to cross their fingers that it’s all going to work. With the SaaS pricing model, the costs are spread out over time, and the vendor is more on the

The Future of SAGD

How can we Make SAGD more Profitable and Sustainable? Large SAGD projects in the Alberta Oil Sands have suffered an unfortunate reputation for cost overruns, delays and productivity issues over the past ten years.  These results have thrown the whole industry into question as to whether SAGD is a viable and investible solution for extracting bitumen from this oil-rich area of the country. Despite the criticisms and skittish investment community however; these challenges have invited a tremendous amount of analysis and an industry-wide awareness of the need to innovate new technology to prove it as a viable and sustainable solution. In this article, I’ll have a look at some of the lessons learned in recent years and a number of recommendations as to how we can apply better techniques and technology to make it a practical, sustainable alternative that we can all feel proud to be a part of.     SAGD stands for Steam Assisted Gravity Drainage and it is a common and growing technology in Alberta and worldwide to extract heavy oil that is deep below the earth’s surface. Invented in the 1970s, SAGD is relatively new to the oil industry, and has only been utilized in large-scale commercial projects over the last 15 to 20 years. This slow adoption rate was due to a number of barriers that SAGD projects presented.  It was not until horizontal drilling techniques were perfected, for example – and the price of oil was high enough – for SAGD to become a feasible option for oil producers.  Nevertheless, even with these barriers lifted, oil producers continue to struggle to try to make SAGD a practical solution going forward. The sheer size of these projects poses a broad

Are we nearing the end of Cost Reimbursable?

Get Ready for Convertible Price Projects   When we see quotes like this from the Globe and Mail, “Investors are increasingly applying pressure on oil companies to trim their investments in oil sands projects,” it becomes clear that a change in how we do business in Alberta is on the horizon.  If the investment community is losing faith in our ability to extract oil at a reasonable and predictable cost, our industry is in serious jeopardy. There is a shift underway. Cost overruns on construction projects aren’t uncommon of course, and the oil and gas industry in Alberta has not been an exception. It has in fact shown to have one of the worst records for budget overruns of any energy geography in the world. There are a number of underlying challenges that have contributed to this unfortunate track record; but one of the primary culprits has to do with the predominantly cost-reimbursable contract culture that exists in Alberta. This culture creates a challenging environment for projects to stay on budget. The nature of these contracts suggests that there is compensation for all costs incurred plus a rate uplift, with little to no risk absorbed by the contractor for when projects are extended or when they aren’t executed at maximum efficiency.   When the cost-risk is so lopsided like that, the owners face having to bear all the added cost of any inefficiencies, productivity issues and errors that occur with any contractor or engineering firm on the project. There can be dozens of contractors and engineering firms (EPCM) on a project, and with the way contracts are currently structured, everyone just passes their problems up the food chain (even the best, most efficient contractors).  Nobody’s

Time Phased Budgeting For Cash Flow Visibility and Risk Management

Why would I need to time-phase my project budget? The challenge with any project budget that doesn’t utilize the advantages of time-phasing, is that the project manager won’t know exactly when money is anticipated to be spent on the project. And neither will the CFO. Time-phased budgeting allows project managers to allocate costs for project activities over the anticipated timeline in which those expenditures are planned to take place. Not just by using any old guess as to when things might happen – or by using some uniform, evenly distributed pattern – but by actually using real contractual agreements as to when items are planned to be paid for.  By doing this, the project manager is then armed with an accurate timeline that predicts project spend patterns. Time-phased budgeting does more than just uniting the project schedule with the project budget. Of course, uniting the two is the first step in a time-phased approach to project budgeting. Without first merging the two, budget and schedule have no interconnection, and are left to float along independently. By subsequently time-phasing a project budget, you’re then armed with extended capacity to further refine exactly when, during the anticipated schedule, certain expenditures will take place. This delivers a more accurate representation of cash outflow so that appropriate project financial planning can be undertaken. You’re also much better able to monitor budget vs. actual costs as the project progresses so as to gain clear insight into potential cost overruns (or, under-runs) and other cost controls capabilities. It may not be immediately obvious why all this matters, but to get a good reading on that, it really boils down to two things: Managing project Cash Flow Powerful

Why EVM Matters

Earned Value Management? When asked about where their project stands against initial budget and schedule, most project managers will have a pretty good idea. They’d be able to tell you something like, “We’re running quite close to budget”, or “We’re almost half done”. However, without the tools and tracking to provide sufficient substance to those statements, gut-feel assertions like that are often dangerous guesses that can lead to cost overruns and delays. Earned Value Management provides the tools and techniques to tell a project manager where he or she really stands in their project. It can not only report on how much over/under budget or ahead/behind schedule a project is; it can also inform a PM as to how a project is trending, so as to better predict schedule and cost remaining to complete their project.  This provides the project manager a solid grounding on current status along with a good estimate of projected final results & timing. Armed with better analysis tools like this, the cost savings to projects – along with the improved communication and control – are clear incentives to look at adopting EVM in almost any project organization. Earned value management is much simpler than it sounds. It is simple because it’s something that we all do in everyday life – we just don’t usually use an elaborate name for it like EVM. Put simply, EVM is the technical term used for the process of getting quick and accurate answers to the “Where Am I At” questions on any project (construction, IT, or other). And we’re all continuously trying to assess where we’re at in most everything we do: whether it’s managing a complex construction project, or simply planning a birthday

Reduce Errors by Forecasting Regularly

Running forecasts on your project is an extremely powerful way to get critical insight into your project’s current status and projected final results.  Forecasts, however, do a lot more than that; especially if you run forecasts on regular intervals. Regularly forecasting is a key strategy for the project manager in any construction project. There are several reasons for this. First of all, entering percent complete on the tasks in your project is prone to some subjectivity and error. Regardless of how you go about determining percent complete – whether it’s pre-defined earning rules,  best-guess approach or team-based assessment – it’s practically impossible to know exactly how far along any task is. There are a number of techniques for mitigating the errors in applying percent complete – and we’ll talk about more of these in other articles – but one of these techniques lies is the power of executing forecasts on a regular basis. In 4castplus, forecasts are easy to do and provide a quick, high-value snapshot of where things are at right now in your project. What you may not have realized is that 4castplus also keeps a copy of all the information in your project as it was in that forecast period. So taking that snapshot means that all that information is preserved for historical reporting. If you run forecasts on, for example, a weekly basis, 4castplus will enable you run reports on the history of how your project progressed over time, on a week-by-week basis. Have a look at the screenshot below (click on it for a full view). It shows a summary-detail report that’s interactive for the user to click-through the forecast periods in a project. The detail report below shows all