Budgeting and Management at The Custom Woodworking Company - Assignment Example

MP3703 - Project Management Assignment Mini-Project Report Post Implementation Review Group 3: Finance Management IDNumber : Table of Contents Executive report 1. Introduction 2. Woody project failures 3. Recommendations 4. Conclusions 5. Annexes and supporting documents 6. References Executive report This report conducts a post project appraisal of Woody 2000, the prestigious expansion project of The Custom Woodworking Company. This report primarily evaluates the management of financials pertaining to this project. This appraisal is based on interviews with several stakeholders and informal documentation on the project. The appraisal revealed lack of formal project management procedure and documentation. Cost estimation details were not available, and no evidence of risk management was found. Formal project appraisal also does not seem to have been done, and the alignment of the project with the strategic goals of the company is suspect. Professional project management and control techniques were not used during execution and close-out. The project encountered time and cost overruns, and project cash flows were not financed efficiently. This report identifies the problem areas encountered during project execution, and makes suitable recommendation for future projects. 1.Introduction The Custom Woodworking Company launched project Woody 2000 in the spring of 1989. The project encountered several problems in conception and execution with substantial cost and time overrun. After the completion of the project, an external project management consultant was hired to conduct post project appraisal. A typical project include three phases, viz., Initial, Intermediate, and Final. The first phase involves conceptualization and planning, while the intermediate phase constitutes execution and monitoring, and the final phase includes project close out. The cost and staffing is lower at the initial phase of the project. During this period, the level of uncertainty is the highest and the risks of failing to achieve the objectives are the greatest. The certainty of completion progressively gets better as the project continues. The ability of the stakeholders to influence the project is highest at the initial phase and gets lower towards the final phase. 2. Woody project failures The major problems identified during the audit are detailed below. Conception & scope: The contribution of the project to the strategic goals of the company was never objectively quantified. Gate reviews were not conducted and the cost estimation and risk mitigation efforts were half-baked. The cost estimation for the project was done during a single meeting without considering any supplier quotes and probably without involvement of estimation professionals. Risk analysis was not done, and no contingencies were added at this stage. The project scope was not defined objectively, and seemed to have been influenced by personal bias; there was no reason to include office renovation within the scope of this production capacity enhancement project. Planning & control: The contingency was developed after the project was authorized, and was done without any formal assessment of risk. The monthly cash flow was done on an ad-hoc basis without the involvement of the project manager. The cash flow was developed without reckoning the project schedule and the actual spending pattern. Without this vital information, there was no way Spencer could have actually mobilized the necessary funding for this project. This cash flow was never used for the purpose of monitoring and controlling. There was no project plan to address the key issues, and no Work Breakdown Structure (WBS) or project schedule was prepared. In absence of a baseline plan it became impossible to monitor the project progress. There was no cost control process in place; without use of proper cost performance index, it was impossible to predict to cost overrun. Contracting strategy: Spencer decided on a cost plus basis for contracting the work. Management of cost plus contracts usually requires higher project management expertise, which was not present in this case. Objective identification of deliverables and specifications were not done while outsourcing the contract. Lump Sum Turn Key (LSTK) would have been a better method of outsourcing. 3. Recommendations At the outset, the project sponsor should identify a dedicated project manager responsible for guiding the project through its different phases should be assigned to the project (Frigenti & Comninos, 2002). The project stakeholders should be made part of the project team. Cost Budgeting: Any capital investment project of this nature should be aligned with the strategic goals of the company. The project should have a clearly defined scope and objective, and should evolve through at least two stage gate reviews. The first gate review should explore the various investment options, and should help the management narrow the choices down to a single (or two) project(s). The second (and more detailed) stage gate review will enable the management to choose the final project and authorize the budget. The budget should be based on cost estimate plus contingency. The project selection decision shall be based on sound appraisal criteria like payback period, Net Present Value (NPV), Internal Rate of Return (IRR), etc. (Arnold, 2002; McLaney, 2000). Cost estimation should be done by breaking down the project into small manageable proportions using a Work Breakdown Structure (WBS). The estimate should be based on bottoms up approach using actual supplier quotes, material take-offs, and man hours. A risk/ opportunity matrix (Fig.1) should be developed, and appropriate mitigation should be identified for each risk. The probability weighted cost of risk mitigation should be added to the base cost estimate as contingency. The necessary funding for the project shall be arranged in advance either from internal sources or from external debt and/ or equity as per the project cash flow. Cost control: Once the project is authorized, the project manager should develop a project plan, which addresses the various areas of project management, e.g., cost, schedule, quality, safety & environment, communication, document control, procurement & contracting strategy, etc.. These documents shall form the basis of project management. The cost and the schedule developed at the outset are treated as baseline (Project Management Institute, 2004, p.157-178), and any variation from these are to be monitored at on monthly basis using the WBS and tools like performance indices (Annex-5), S-curves (Fig.2), bar charts (Fig.3), milestone charts, cumulative cash flows (Fig.4), etc.. The actual cash flow of the project is also monitored against the baseline cash flow, and the forecast cash flow is adjusted periodically. Monthly progress reports are generated to apprise the management regarding the cost and schedule performance, and highlight critical issues in advance. Contracting strategy: Lump Sum Turn Key (LSTK) would be a better method of outsourcing as the company does not have a professional project management team in place. The company can switch to a cost plus outsourcing later once it develops adequate in-house project management expertise. 4. Conclusions The above analysis shows that the project Woody 2000 was poorly conceived; adequate objective project appraisal criteria were not used during project authorization. The cost estimate and risk analysis/ mitigation efforts were at best cursory, and project monitoring and control methods were rudimentary. It is recommended that the company identify a competent project manager, who would be able to guide the project through its entire life cycle. The project cost estimate and risk mitigation should be done objectively, and investment decision should be subject to stringent appraisal criteria and gate reviews. The project should be monitored using sophisticated project management tools. The cash flow should be monitored to ensure that enough liquidity is available within the system to manage the project efficiently. 5. Annexes The following templates have included in this section to clarify several concepts described in the main report. Figure-1 Risk/ Opportunity Analysis Figure-2 Project S-Curve (Cost or Schedule) Figure-3 Project Bar Chart (Schedule) Figure-4 Project Cash Flow Annex-5 Performance Indices Cost Variance (CV) = EV - AC Cost Performance Index (CPI) = EV/ AC where, EV = Earned Value (Budgeted amount for the work actually completed on WBS component AC = Total cost incurred in accomplishing work on the WBS component EAC is a forecast of the most likely total value based on project performance and risk quantification. This needs to be monitored and controlled during the entire duration of the project. It can be calculated as - 1) EAC = AC + ETC where, ETC= Estimate to complete the remainder of the project developed using bottoms up approach. This method is used when past variances have no reflection on the future variances, which need to be estimated accurately. 2) EAC = AC + (BAC- EV) where, BAC= Budget at completion. This method is used when past variances have no effect on future variances. 3) EAC = AC + (BAC- EV)/ CPI This method is used when trend in past variances are expected to continue in future. 6. References The following templates have included in this section to clarify several concepts described in the main report. Project Management Institute, 2004. A Guide to the Project Management Body of Knowledge. 3rd ed. Pennsylvania. Frigenti, E., Comninos, D., 2002. The Practice of Project Management. 1st ed. London: The Bath Press Ltd. Arnold, G., 2002. Corporate Financial Management. 2nd ed. London: Financial Times Pitman Publishing. McLaney, E.J., 2000. Business Finance: Theory and Practice. 5th ed. London: Financial Times Pitman Publishing. Read More