A systematic approach to effective project cost management
Cost modelling essentially captures the cost structure of a project, and this helps users to organise, analyse and manage the cost consumption. The cost model would then assist the project manager in estimating the initial budget, as well as monitoring the incurred cost during the project execution and the process reengineering at the end of the project. This paper discusses the findings of an action research study in developing a systemic approach to project cost modelling for project managers (Goh, 2004). Through the study, an inquiry process was developed that utilises nine criteria as the guiding principles for capturing the relevant items needed for project cost modelling. The nine criteria were derived from the process of reflection and the use of grounded theory techniques (Strauss & Corbin, 1990). Using the nine criteria, a cost modelling software application was developed and tested in a Diagnostics Expert System development project for an engineering company in Singapore.
Cost management is a key responsibility of the project manager. This includes cost estimation, which is an essential part of contract preparation and project management. The ability to carry out accurate front-end costing, cost monitoring and cost review has a direct impact on the profitability of the project and hence the business success of the organisation. From the project managers’ perspective, the challenge of achieving accurate front-end cost estimation, effective work-in-progress cost monitoring and effective post-project cost review, is often an uphill task. This situation gives rise to two thematic concerns commonly faced by project managers. The first concern is the need to carry out accurate cost budgeting, which helps in the preparation of a competitive price proposal, before the start of the project. The second is to effectively control cost during project development in order to meet or outperform the planned budget. These thematic concerns form the focus of this study.
What is Cost Modelling?
Modelling, according to Darby (2000), is the reduction of a real-world phenomenon of interest into a construct or set of constructs called symbolic models, which captures specific system behaviours. When applied to building project cost models, the model emulates the cost structure system, budget allocation, cost consumption and cost performance review within a project. Projects are often governed by constraints such as resources (budget, manpower, material and overheads), the project schedule, and the customer's project requirements etc. As an end effort, the cost model is often expressed on paper and worked out using calculator, before converting it into a software application.
Cost models, like all models, have their own limitations. Models allow the model builder to emphasise or ignore certain aspects of the reality, depending upon the purpose of the model. Models inevitably overlook, rearrange or distort some details of the reality. A lack of correspondence between the reality and the model may lead to decisions being made on the basis of incorrect information (Beaman, Ranatunga, Krueger & Mudalige, 1998, p.3). Thus, the need for a good correlation between reality and model is a key goal of this research, which seeks to establish a set of success dimensions or criteria for the development of effective cost models for project cost management. A ‘dimensionally enhanced’ approach to cost modelling focuses on the ontological aspect, in defining the essential ‘what’ rather than the ‘how’ of the model. According to Banathy (1996), the ontological task is the formation of a systems view of what is in the broadest sense a systems view of the world. This can lead to a new orientation for scientific inquiry.
A Systemic Approach To Cost Modelling
According to Banathy (1996, p.74), a systems view enables us to explore and characterise the system of our interest, its environment, and its components and parts. We can acquire a systems view by integrating systems concepts and principles into our thinking and learning and the way we represent our experiences and our world. When adapted to a costing system, the systems view represents an inquiry process that will generate the following insights:
- Characteristics of the “embeddedness” of costing systems operating at several interconnected levels (e.g. project management, cost modelling, end-user operation, senior manager reporting, system administration, organisation learning, financial and business process improvement levels).
- Relationships, interactions, and mutual interdependencies of systems operating at those levels.
- The purposes, goals, and boundaries of costing systems.
- Relationships, interactions, and information/data/instructions exchanges between systems and their environment.
- Dynamics of the interactions, relationships, and patterns of connectedness amongst the components of the costing systems.
- Properties of wholeness and the characteristics that emerge at various systems levels as a result of systemic interaction and synthesis.
- System processes, and the behaviour and change of system and their environment over time.
The Inquiry Process for Cost Modelling
According to McDermott (1981), inquiry is the controlled or directed transformation of an indeterminate situation into one that is so determinate in its constituent distinctions and relations, as to convert the elements of the original situation into a unified whole. During the inquiry process, a set of ‘guiding questions’ is needed to help the project managers to capture the essential information needed to build the cost model. In this research, the set of ‘guiding questions’ is embodied in the list of nine success criteria identified as being necessary to achieve effective cost modelling. The nine success criteria were first derived from a 9-step process for building the life cycle costing (LCC) model for vehicle fleet management that I had adopted in my course of work. The 9-step LCC process was evolved from the combination of my practical experience as a project manager and personal learning from the literature.
Deriving a Set of Ontological Codes for Project Cost Modelling (PCM)
In order to translate the nine steps into a set of ontological codes, I had used the sequence of six grounded theory actions proposed by Professor Bob Dick (2002) to condense my data and derive the success criteria for project cost modelling. The following actions were carried out for each of the LCC steps: data collection, note-taking, coding, memoing, sorting and writing. The following exhibit shows the coding and sorting of the entire set of nine LCC modelling steps and the associated themes. The third column shows the final codes that would represent the success criteria for project cost modelling.
Exhibit 1: Sorting of Codes from the Nine LCC Modelling Steps
In further examination of the final codes, it was found that these codes can be grouped into three perspectives of cost modelling, namely structural, investment and results as shown in the final column. The criteria are grouped as follows:
- Criterion 1 to 3 - Structural perspective of the PCM
- Criterion 4 to 6 - Investment perspective of the PCM
- Criterion 7 to 9 - Results perspective of the PCM
Exhibit 2: The Nine Criteria of Project Cost Modelling in Three Perspectives
In the structural perspective, the modelling focused on building the shell of the model. These include the work breakdown structure (of criterion 1), the workflow linkages (of criterion 2) and the risk contingency plan (of criterion 3). This perspective is established at the start of the project before the execution of the work activities.
In the investment perspective, the modelling focused on filling the shell of the model with the data elements. These include the budgeted cost drivers (of criterion 4), the improvement targets (of criterion 5) and the timesheet (of criterion 6). This perspective is most important during the execution of the project.
In the results perspective, the modelling focused on evaluating the cost management outcome of the project. These include the performance of actual cost versus the budget (of criterion 7), the review of targets’ achievement (of criterion 8) and the overall results (of criterion 9). This perspective is used during the execution of the project and the post-project review.
Revisiting Banathy's Systemic Views
According to Banathy (1996), the systems view represents an inquiry process that will generate the various insights of a costing system as discussed earlier. It would be useful to compare these views against the perspectives offered by the nine criteria, as illustrated by the following exhibit:
Exhibit 3: Comparing the Nine Success Criteria with Banathy's Systemic Views
From the table, it can be seen that the nine criteria had helped to provide the various systemic perspectives of cost management. For example, Criterion 2 (Dependencies) identifies the relationships between inputs and outputs, upstream agencies and downstream agencies, and between the activities themselves, and this aptly reflect the systemic view of relationships, interactions and mutual interdependencies within the costing model.
Using the Nine Criteria as a Audit Checklist for other Project Cost Models
When taken as a sequence of steps to construct a project cost model, the use of the nine criteria provides an inquiry process sufficient to construct a project cost model. On the other hand, the nine criteria can also be used as an ontological checklist to check existing cost model in order to identify gaps in cost modelling practice. In the course of my research, I had found that most engineering projects in my organisation adopted only four of the nine criteria: criterion 1 (completeness), criterion 3 (risks), criterion 4 (commitment) and criterion 6 (visibility) in process of project cost modelling. The missing criteria were criterion 2 (dependencies), criterion 5 (improvement), criterion 7 (performance), criterion 8 (refinement) and criterion 9 (purpose), and this resulted in a less systemic and weaker cost management situation in the projects.
Case Studies of Implementing the Nine Criteria Project Cost Model
In order to demonstrate the practical use of the nine criteria, a cost modelling software was developed incorporating the nine criteria. The software application was developed using a XML based database that allowed it to be deployed online. The project cost model (PCM) application was first tested in a Diagnostics Expert System development project in my company. Exhibits 4 and 5 below show snapshots of the PCM application with respect to criterion 1 (Completeness) and criterion 2 (Dependencies).
Exhibit 4: PCM Application Showing Criterion 1 (Completeness)
Exhibit 5: PCM Application Showing Criterion 2 (Dependencies)
In order to validate the project cost modelling approach, the nine criteria PCM was introduced to two project teams for trial. In the trial, the project teams were trained how to use the software application. Based on the design of the PCM application, only the project manager (or leader) was required to utilise all the nine criteria. As for the team members, only criterion 6 (visibility) which featured a timesheet system was mandatory to them. However, the project managers in entering the data for Criterion 1, 2, 3 and 4 would solicit feedback from his team members. The case studies are as follows:
- Case Study One - Implementation of PCM in a Type-A project (with previous learning experience), the development of a diagnostics expert system (DES) for a new vehicular system.
- Case Study Two - Implementation of PCM in Type-B project (without previous learning experience), involving the development of an operation training system for a train system
The case studies had helped to produce several important findings concerning the use of the PCM in actual practice:
- Both project managers found that the PCM approach offered a more systematic approach to project cost management. By focusing on the ontological aspect of project costing, the PCM approach helped to determine project cost requirements independent of the project context.
- The PCM approach was found to be more effective in Type-A project (with previous learning experience) than Type-B project (without previous learning experience). In Type-B project, the uncertain scope makes it difficult to apply criterion C5 (Improvement) and criterion C8 (Refinement).
- However, the PCM approach through criterion C1 (Completeness), criterion C2 (Dependencies), criterion C3 (Risks) and criterion C6 (Visibility) helped to trigger the user on the possible missing scope. Using sampling or prototyping in the project had helped to reduce the scope uncertainty in Type-B project.
- The key advantage of the PCM approach was seen as a retrospective tool for planning future projects, once the first project had been implemented using the approach. PCM has the ability to refine the cost management of recurrent projects.
- In terms of success conditions, the PCM approach had improved the project cost visibility of the project managers in the two case studies. It had helped improved project ownership and control among the project team members.
The paper has presented an inquiry process that utilises nine criteria derived from an action research study that utilised a process of reflection and the use of grounded theory techniques on a set of life cycle cost (LCC) modelling steps. The nine criteria can be used as a sequence of steps to construct a project cost model or as an ontological checklist to audit existing cost models. With the nine criteria, a project cost modelling software application was developed and implemented in two case studies.
Banathy, B. H. (1996). Systems inquiry and its application in education. In D. H. Jonassen (Ed.), Handbook of Research for Educational Communications and Technology (pp. 76-92). New York: Simon & Schuster Macmillian.
Beaman, I., Ratnatunga, J., Krueger, P., & Mudalige, N. (1998). Financial modelling (2nd ed.). Melbourne: Quill Press. First published in 1997.
Darby, M. L. (2000). Simulation-based training - Beneath the shroud. Journal of Battlefield Technology, Volume 3, (1), 42-53.
Dick, B. (2002). Grounded theory: a thumbnail sketch. Southern Cross Institute of Action Research. Retrieved, from the World Wide Web: http://www.scu.edu.au/schools/gcm/ar/arp/grounded.html
Goh, S. M. (2004). Using action research to develop a dimensionally enhanced approach to project cost modelling. Unpublished PhD Dissertation, Southern Cross University, Lismore Campus.
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© 2005, Eric Goh Swee Ming, PhD
Originally published as a part of 2005 PMI Global Congress Proceedings – Singapore