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Why is it that many organisations look to solve problems by finding a new program/tool without looking at the fundamentals of the problems they are trying to solve? I’ve been at the forefront of many Project Delivery and Project Controls program implementations and there are some very good tools out in the marketplace. However from experience it is rare to see one that has been implemented fully and successfully to its full capabilities. Surely, with the quality of programs and resources out in the marketplace it should be a simple matter to implement a new tool within an organisation? Certainly if you listen to the sales representatives, these tools will solve all your problems and do wondrous things – yet the outcome rarely lives up to the expectations. So why is this?
Lack of understanding and definition of the problem and expected outcomes
My favorite quotation is from Edward Deming “Without data you’re just another person with an opinion”, yet every day managers make decisions based upon what they believe is the truth rather than on fact. When it comes to Project Controls systems, metrics such as the size and type of projects currently undertaken, the duration, the control methodology (Earned Value, Agile, Prince2), current tools and processes used and their effectiveness, type of clients and markets are all essential in understanding where we are now.
Getting input from subject matter experts and end users can aid in defining the root cause issues and give management better clarity as to the problems they need to solve. For example, if Project Managers, Project Leaders or Project Directors do not understand basic performance metrics, (what they mean and how to use them) to control the outcomes of the projects, how can anyone expect a program or tool to make a significant impact? Are there processes for controlling scope, collecting time and schedule data and physical progress, and if so, are the people responsible for using them making the best use of the information? Do we have meaningful Work Breakdown Structure (WBS) and Organisational Breakdown Structures (OBS) that allow visibility of data to enable decision making? Who are the ultimate users of the project data and how does this data integrate with enterprise level reporting and other company systems and requirements? How do these issues affect the profitability of the projects and what are the steps to resolving these problems?
This level of clarity and definition at an identifiable, measurable level can lead to more effective systems and solutions overall and a good tool then becomes an integral part of that system to meet the expectations of solving these problems.
Lack of supporting processes, systems and procedures
A tool is a repository for data that can be accessed to assist in the decision making process. Therefore the quality of the data along with the processes and procedures that collect the data are as important or even more important that the tool. After all, if you are doing things ineffectively, then the software will only make you more efficient at doing ineffective things. Again this comes down to understanding how information currently flows within your business and understanding how the structure, quality and timeliness of the data flow will affect how the tool is utilised. Data is at the core of any system. It’s the commonality of that data that allows for the integration of information throughout the various systems within the company to allow informed decision making.
From the project level up, cost management procedures and processes are a fundamental tool in controlling costs on projects. Management and control of project scope, tracking of commercial changes and trends, identification and management of risk are all essential to the successful delivery of projects.
When common definitions and procedures are joined with a standard tool kit, accuracy of information and confidence in decision making is increased. This information can be aggregated across projects to provide actionable intelligence and visibility across portfolios of work, or within business units.
Applying common coding across corporate systems from finance, estimating, project management, and resource management enables data to be exchanged. This allows greater integration of information to enable better visibility and control throughout the organisation. A project cost management tool, for example, should not be used for financial reporting, however the data used and generated can be used for financial functions. Rather than make one tool solve all the problems, a correct and common coding system can allow data to be accessed across the business by multiple systems and tools for various purposes.
Common coding structures include OBS, CBS or WBS, Discipline, resource and commodity coding. Understanding how data will be collected and used is essential to any system. A cost system needs the ability to collect and manage data at a lower level than say a finance system, however both systems are reliant often on the same data. Allowing cost structures that support the functionality of controlling cost on a project in a meaningful way, based on how the project is being delivered, rather than being dictated by a financial requirement is essential. Yet the needs of the financial requirements such as asset based costing or project profit recognition cannot be ignored. The importance of common coding structures cannot be disregarded as they form not only the means to control and deliver projects but the basis of communication and data flow between various stakeholders – both internally and externally.
Lack of mandate and buy in
There are often many reasons why the adopting of a new tool fails. All employees must believe in the strategy, supporting program and software and be educated in not only the usage but the underlying reasons for using the tool. Implementing the tool in stages, rather than an all at once approach will allow small successes to generate bigger outcomes. Appropriate training and support is critical, as is ensuring that there are correct processes and procedures in place, and used, to support the flow of accurate data into the tool. With any new tool, it does comes down to the end user. Ensuring that person is at an appropriate level of experience, not only to technically use the tool, but also to understand Project Controls methodology and use the tool to generate meaningful analysis to provide strategies to control the outcome of the project. Too many times I’ve seen a high end Project Controls tool used by a junior engineer to “do a bit of project controls” and the end result is that the tool is not effective. This leads to a poor perception of what the tool can actually do and ultimately lack of adoption on other projects.
Likewise, upper management needs to support and mandate the tool as well as the processes and practices behind it. This becomes a critical management and communication issue. Do managers understand the performance metrics on the project and how to use the data in a meaningful way? Are they asked to justify their project performance with project reviews and performance targets? Are project leaders/ divisional leaders reviewing project statistics within these targets? A lot of companies have good project delivery procedures in place, however they are often not mandated or used. Without giving management a reason change then they will continue along the same path of least resistance and ultimately no change will be effective.
So why do these tools fail…because they are just that – tools. Like any tool in placed in the wrong hands or used the wrong way they will be seen as ineffective and no longer used. Cost systems, rely on supporting processes and methodology to feed data into the tool which can be analysed. There are some exceptional project delivery tools and programs in the marketplace. Supported by strong underlying practices, processes and people they can make a difference to both projects and the organisations using them.
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Many years ago I worked on an EPCM project for a major Tier 1 client. Like most companies we were always told that we had to keep the client happy. Client satisfaction was key! One particular young engineer took this to heart. If the Client’s team wanted some minor design change he was happy to oblige, after all they were the Client. The trouble was, once the package was released to market for tender, the bids came in at more than double the estimated price. Worse still this particular Contract was time sensitive meaning the Client would lose significant revenue for every day the contract was delayed. Re-scoping the work and sending the package out for rebid was out of the question and the client had to award the package and accept the higher cost. To say the client was a little unhappy was definitely an understatement.
So was this young engineer solely to blame? Absolutely not. In fact nobody had really explained change management to him or gave him any understanding of the commercial impacts of the decisions he was making. A design change notice form existed, however neither the engineer nor any of his supervisors or managers adhered to change process to identify and quantify what was happening on the project. In fact I’d be surprised if he even knew what the defined project scope was. Unfortunately we focus on the technical training of our personnel however rarely is any thought given to project management and/or commercial training. We are told to innovate, provide technical solutions and keep the client happy but we are not told how to commercially assess the impact of these changes and how to manage these changes through the commercial bounds of the contract.
The reality is that this happens every day on projects. Scope creep is a reality and the impact to cost, time and company reputation is something that can and should be avoided. By ensuring that everyone on the team is aware of exactly what the scope of work is and by having a robust change management process to capture deviations from this scope, management has far greater visibility and control over the delivery of the project and the ultimate cost and time outcomes of the project.
We have all had situations where the client has asked for something different or additional work however there is nothing worse than giving the client and invoice and hearing him say “if I knew it was going to cost this much I would never have done it”. Nothing sours a company client relationship more and it can be so easily avoided. A change notice detailing out additional cost and time impacts gives the client the ability to make an informed decision. Additionally trending delays, changes and events which impact your ability to deliver may either result in a formal delay claim at a later date. These changes also give visibility to management to understand what is happening on the project and how this can affect time and cost. Innovation in design is a major focus of design teams but any innovation outside of current scope needs to have a cost benefit analysis done followed by formal change process to ensure that the client is aware of full impact of this innovation.
I have heard lots of reasons why managers don’t follow a formal change process. Sometimes this is due to lack of knowledge and understanding, or lack of communication. I heard that “we don’t want to the swamp the client with lots of paper work” or “we don’t want to be overly contractual”. The truth is that a formal change process will protect you commercially. Change notices let management and the clients know what is happening on the project and they can either knowingly approve (knowing the full cost and time impact) any changes or stop them before they impact the project. Present an invoice to a client where Changes in scope have not been formally approved and there is a real risk that you may not get paid.
Commercially, there is only one person who has authority to spend additional client money. It’s not the Design Managers, not even the Project Manager. It is the Client Representative, whose name is on the Commercial Agreement. Believe me, he wants to know as much as you what is happening on the project. After all he’s received budget approval and signed a Contract for your company to build and deliver a defined scope. He doesn’t want to have to go back to his board and seek approval for additional funds only to deliver something different from what they wanted in the first place. Operations and site personnel will always want more bells and whistles; however the company who is managing the funding has to balance practicality with budget constraints.
In my opinion, communication, good processes and training is the key to having your team more commercially focused. Project team members today are potentially the project managers of tomorrow and good practices and learning experiences can help you to develop more rounded commercial and risk aware teams.
A project setup workshops or kick-off meetings held at the start of the project can clearly communicate to the team how the project is intended to be delivered, what scope the client is paying for, who are the key team members delivering the project, key risks, key dates and commercial obligations. A contract summary sheet detailing key information such as company and client representatives, key dates and milestones can simplify the understanding of the key elements of the contract and are more accessible to team members who don’t want to wade through the full commercial agreement. Likewise a Scope book or Scope document detailing exactly what the client is paying should be available to all package managers and their teams ensures team members are fully aware of what they are required to deliver. It is important that any lack of clarity of scope is resolved with the client and detailed.
Having a well managed project controls system ensures that you have a detailed project baseline and that deviations in both time and cost are identified and variances analysed and communicated. This includes a robust change management process to capture trends and changes in scope.
The project team are integral to capture changes happening on the project. They are, after all, at the coal face of the project and are aware of what is happening in their area. Therefore it makes sense to make these team members aware of the commercial impacts of these changes.
So at the end of the day what happened to this young Engineer? Was a training program put in place for him and his managers? Was a lessons learnt don’t and mitigation processes put in place for the future. The sad thing is the answer was no to all of this. There were no internal repercussions and the learning opportunity from of all of this was wasted. However the company found going forward it was no longer on the preferred company list of bidders for the clients. In trying to keep the client happy they had done the exact opposite. Now that is the real story and a prime example of the true impact of commercial ignorance on your project.
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Over the years I have seen many articles, discussions and questions about Earned Value Management (EVM). What is it, how valuable is it as a management tool, how do you use it? Often the explanation can be quite complex. As is usual for experienced project managers or project cost practitioners we often talk in technical terminology. Terms such as Cost Performance Index (CPI), Cost Variance (CV), To Complete Cost Performance Index (TCPI), Schedule Performance Index (SPI), Schedule Variance (SV) and the myriad of other indices that can be used are expounded and discussed with complex looking formulas. However I think to the average Project Manager or project professional who is new to the concepts of Earned Value (EV), this can be very confusing. Moreover, by the use of these acronyms and the focus on the calculation of the indices, I believe the essential meaning of what EVM stands for and its objective can often be overlooked.
Understand that EV is a tool that is used to provide meaningful measures to allow the Project Manager to easily determine the state of the project and instigate control measures to control or manage the project The data that it provides allows us, as Managers, to get a clear assessment of the state of the project, mitigate risks whilst driving performance to keep the project on track.
In itself, EVM is a simple concept. It is a means of linking the physical work we complete back to a baseline budget as a measurement of how we are performing. In simple terms - what were we supposed to do (Baseline), what are we doing now (Actuals and Progress), how does that compare (EV indices and variances), and how does that affect where we will finish (Analysis).
Without bringing physical progress into the picture we are left to compare actual spend against budget. This is a fairly common methodology, however it is somewhat one dimensional. Take a scenario, for example, where a project is halfway through in time and had spent 50% of the budget. It would be easy to assume that the project was on track and be expected to be completed within budget. However what only completed 40% of the work had been physically completed? Then we have a very different picture. Now we can see that we have only “earned” 40% of our budget, yet we have over run on our costs to achieve this. This now means we are likely to finish over budget unless corrective action is taken. Additionally had we planned to be 50% complete at this time and were only 40% complete, then the project is behind on time and therefore likely to finish later than anticipated. This is the essence of EVM.
By converting these calculations to indices it becomes easy to run down your Work Breakdown Structure (WBS) and quickly identify the areas where an anomaly is happening. In this way it becomes easier to manage the project by exception and direct focus to areas where slippage is occurring.
Understand that the individual indices are a guide only to quickly determine variances and are meant to be used in conjunction with other project indicators and requires further analysis. There may be several reasons why a particular code has a low CPI (underperforming) or low productivity. It could be that they are truly underperforming, and that a mitigation strategy needs to be put in place – but it could also mean that that the baseline was incorrect and that the physical progress measurement does not truly reflect physical effort, or that the project is using cheaper resources that spend more hours but save in cost, or it could mean there is additional scope that has not been change managed yet. Regardless it is a cause for further analysis to determine what is truly happening. Understanding the root cause of variance is essential to develop an appropriate corrective action plan.
This brings us to the crux of EVM – generating performance metrics and reports is not the end of the process. EVM is a tool to identify variances, and as such these metrics are the start of the process of analysis and mitigation. These metrics are a tool for control and like any tool, there needs to be clear operating instructions to use it correctly. In project terms, this means that there are a few fundamentals that must be correct in order to get the most out of this methodology.
The baseline budget must be clearly defined and broken down in a manner to reflect how the work will be delivered. This will quite often mean extracting a tender estimate and reworking it until there is an adequate performance baseline. This stage is critical because it will be the yardstick that you will measure yourself against on the project. Breaking the work down into design work packages, construction packages and / or by discipline or commodity will allow the production of metrics to see how each area is performing and to produce targeted performance metrics for each package / team leader.
The method of obtaining physical progress must reflect the physical effort to do the work. Whether this be quantities installed, in the case of construction work, or deliverable milestone gates which is common to design work, or weighted activities, these physical gates need to reflect the effort and budget required to do the work. It should not, for example, reflect payment milestones, time based progress or an estimate of progress achieved.
Actuals and progress data must be collected in a timely matter. The essence of earned value management is to provide timely information to quickly identify variances and implement correct actions.
There also must be a mature change process in place in order to identify changes in scope or trends which may impact on cost of completion. Identification of changes in scope is critical. After all, EVM is all about comparing what we are supposed to do against what we are actually doing. If the initial scope (or what we are supposed to do) has changed then we must initiate a change process to capture this so we are constantly comparing our progress to a relevant baseline or approved budget.
In summary, EVM is a valuable tool for any project manager. Without it the focus of Project Management may drift from the overall health of the project and be lost in the day-to-day problems. Its strength lies in its ability to act as an early warning system and providing clear analytical data that allows the Project Manager to identify areas of concern. Linked with further analysis, it allows the root cause of problems to be identified which results in realistic corrective action plans being developed allowing the Project Manager to remain focussed on delivering the project.
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In my career, I’ve worked across multiple industries and companies and one thing that stands out is the confusion surrounding the function of Project Controls and what it is meant to achieve. There are Project Accountants, administrators or finance personnel who “do a bit of Project Controls” however, they are actually just producing monthly project financial reports, invoices and cash flows which are only some of the functions that Project Controls is meant to accomplish. In my opinion, the more important function of providing timely analytical information to manage and control the outcome of the project is not being provided.
Project Controls is not just a job title but a multi discipline project function encompassing project strategy, estimating, schedule, risk, contracts analysis, budget analysis and performance measurement. Effective Project Controls provides an early warning system on the project based on known and unknown parameters and allows for proactive and relevant decision making by management to affect the project outcome. In contrast, Project Accounting is a financial function to report project profitability and projected forecasts based on known information.
A person fulfilling all of the functions of Project Controls will use financial data as a metric (including cost and time) in conjunction with physical progress measurement to determine the real cost position on a project in relation to the original plan. This, along with identified trends, will help determine the estimate at completion project cost.
In Contrast, a Project Accountant will use financial data purely as an amount spent or incurred to date with the forecast completion cost generally being the budget (including variations) – or determined by predicted spend. A Project Controls person will, more importantly, use this data to highlight to management potential overruns before they occur and risks and potential mitigation in order to control the outcome. A Project Accountant would typically only report over runs as they occur.
Project Controls professionals are multi faceted and multi disciplined, delving into all aspects of the project, asking questions, seeking answers and analysing information. An effective Senior Project Controls professional is able to understand the potential impacts and risks on a project – from Commercial Terms, delivery delays, procurement lead times, schedule delays, design over runs, wet weather, scope creep and more. They should also be able to provide mitigation strategies to Project Management based on the identified risks. A Project Accountant however does not have or want this visibility as this is seen as Project Management’s responsibility.
We are all working in tough economic times. As project margins narrow, a trend is to remove dedicated Senior Project Controls professionals from projects or replace them with junior cost or finance personnel in order to reduce project overheads. With Project Managers forced to rely on gathering information and controlling the projects themselves along with all other aspects of Project Management, potential risks and over runs on projects are being identified later which makes it more difficult to mitigate the consequences. The potential outcome is greater damage to profitability and company reputation.
If your company is just interested in cutting costs then Project Accountants can provide the administration necessary for your project, but if you want administration as well as analysis of how your project is performing, an experienced Project Controls person will provide the necessary information and analysis that will pay their wages many times over in cost savings and assist in protecting your company from reputational loss and schedule slippage.
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If cash flow is the lifeblood of any business, why then do so many companies not focus on the basics of maximising cash inflows into their company. Understanding commercial terms and using them to your advantage as well as good administrative processes will increase the available cash to your business.
The best time to think about potential cash flow is before the Contract or Order is signed. During the negotiation stage, potential cash flow can be increased by ensuring payment terms are written in a way that is most beneficial to your business. The best case scenario is a situation whereby you are receiving payment before or slightly after you have to pay for associated expenses or costs.
Be careful of payment terms.as not every contract will have a standard payment period of 14 days or 30 days from the invoice date. Watch out for terms such as which specify additional timing parameters such as “Payment in 30 days after the month end in which it is received”. This could mean that if you send in your invoice on the first of the month, then you will not get paid for at least 60 days. If you do find yourself in this situation, bringing forward your invoicing by a couple of days will ensure earlier payment.
Negotiating reasonable Milestone payments can ensure that you get partial payment(s) of an agreed amount prior to the full works being completed. It is important to ensure that you are able to prove the milestone has been reached and invoice as soon as the target parameter has been reached. Milestones can include things such as commencement of work, provision of bank guarantees or plans, delivery or partial delivery of items and progress of work done.
After the contract or order is awarded it is easy to focus on the delivery of the order or Contract and often we forget about ensuring that our administrative procedures maximise cash flow. From experience, the following ways can help you to maximise cash flow opportunities:
Focussing on the successful delivery of a job or contract or order will improve and grow your reputation and your organisation. But attaining these goals without consistent cash flow to fuel your endeavours is like running a car without any fuel. Small changes and a focus on the administrative aspects and process within your organisation will allow your business to have the available cash continue to function and grow.
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Staff turnover is costly. The cost of replacing staff is not just restricted to paying out employee entitlements, advertising and recruitment costs and your time to shortlist and interview candidates. In fact, this is just a fraction of the true cost to your business and the impact to your bottom line through loss of productivity and ultimately profits.
The unfortunate reality is that a lot of businesses who are impacted the hardest by productivity issues and / or high staff turnover often do not seem have the skills and knowledge to either recognise the problem or implement solutions to drive change.
From engagement with small and medium business owners we have dealt with and discussions with other experts in the field there seems to be common drivers which can have significant impact on staff turnover. These include:
At this stage it is beneficial to identify somebody from within your leadership ranks who will have the responsibility to champion this issue though-out the business. Quantifying the direct and intangible costs of staff turnover, risks and opportunities will provide business owners and management teams with information as to the true impact to the business and the extent of commitment required to fix it.
Once this process is complete then begins the process of implementation of solutions to drive change within the organisation. This may even involve working with external expertise to assist with implementing and coaching key stakeholders to achieve the desired outcomes through new systems and processes. It should be noted that establishing key metrics is important so that the effect of these changes can be quantified and assessed for effectiveness.
Your employees are the most important resource that your company has. Engaging with them to identify problems and potential solutions, communicating plans for improvement and changes, rewarding innovation and positive change will engender the commitment of your entire team but make your company THE company that future employees will seek out. Not only will this result in a happy workforce and low staff turnover but in a positive impact to your company’s bottom line.
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So why is Change Management at the heart of every Project? It is because Change affects every aspect of a project. It is the communication and control tool that connects all project teams and all facets of the work and the engine room that drives the project forward to successful completion. Poor project execution and / or over runs in either time or cost can be a result of inadequate Change Management practices and lack adequate understanding of Change in a Project Team.
The Change process provides Project Management with notification of deviations to a project’s baseline scope, budget, schedule and/or execution plan. These deviations or changes, if not managed, can ultimately affect the overall cost and/or duration of a project. Without a regimented change management system, project management does not have the opportunity to make informed decisions or to implement measures to minimise or negate the impact of change.
Protecting your Commercial Position
As much as we try and lock down scope on a project, change is inevitable. Projects, by their very nature, are dynamic. The client changes his mind; wet weather causes delays; the ground conditions encountered are different from what the surveys said; schedule is modified to take advantage of opportunities and mitigate risks. The list is endless. The importance of change from a commercial perspective is that at every point, the person paying the bills and responsible for the successful execution of the project is informed and approves the Changes (and potential impacts) preferably before they happen.
Nothing sours a Client / Contractor relationship faster than unexplained cost over runs or time delays where the Client has no choice but to approve as the actions have already occurred. Present an invoice to a client where Changes in scope have not been formally approved and there is a risk that you may not get paid. A mature Change Management process not only protects your commercial position but provides a detailed (and approved) explanation of every change from the original project plan and scope and removes unnecessary and un-welcomed surprises at the end of a project.
Anatomy of a Change
So let’s look at a generic example. The Lead Engineer gets advice from the Contractor that there is a saving in mobilisation/demobilisation costs if the work is re-sequenced by the last sections of work being constructed first. The Lead thinks “Great – I save the project money”, but doesn't register a Change because in his mind, they are doing the same scope of work, just in a different order.
However, this is a change to the work methodology or construction plan and as such should be registered as a Potential Change. In a mature change process, the Lead would have immediately registered this change to initiate the Change Management process. This will allow an analysis of the Change and impact/risk assessment to be undertaken resulting in discussions with the various departments which will identify potential impacts of the Change.
In this Change, Approvals identified that re-sequencing the works would lead to construction in several areas now being completed in the wet season. Land access agreement with the property owner required that construction works would be finalised in that section of the property before then. Procurement identified that the specialised parts required for these particular works were not due to arrive in country within the new timeframe. Civil identified that the access road construction would need to be brought forward causing a flow on effect with the accommodation area that in turn identified that there was insufficient accommodation in that period to accommodate the civil construction crew.
Suddenly, a small change has led to potential delays and cost, which, if caught early enough could be mitigated. Unfortunately in this scenario the relevant departments often do not find out about the change until things fall off the rails and from then their response is purely reactionary rather than planned, resulting in additional cost and time on the project. It is the flow on effects of a Change such as this, that is often overlooked on a Project.
Change Management is not complicated and can be simply defined in the following questions.
What were we supposed to do?
What are we going to do (or have done)?
Why is this different?
What is the impact? and
Do we need to mitigate?
Initiating the Change process is not just the responsibility of the Project Manager, Client or Supervisors. It is the responsibility of every person on the project who can see and identify that something has changed. Failure to follow a process to capture and document this change will and can affect successful delivery of the project and the commercial outcomes to follow.