Project Life Cycle Economics

Cost Estimation, Management and Effectiveness in Construction Projects

Massimo Pica

• Publisher: Routledge
• Year: 2016
• ISBN:
  9781317075189
• Edition: 1
• Topic: Business
• Subtopic: Business General
• Index: Business

The financing of modern construction projects reflects the need to address the costs and benefits of the whole life of the project. This means that end of life economics can now have a far greater impact on the planning and feasibility phases. During the project itself, decisions on construction materials and processes all influence the schedule as well as both immediate and down-the-line costs. Massimo Pica and his co-authors explain in detail the fundamentals of project life cycle economics and how they apply in the context of complex modern construction. This is an essential guide for those involved in construction project design, tendering and contracting; to help ensure the sustainability of the project or their contribution to it, from the start. It is also important for those involved in the delivery of the project to help them make the choices to keep the project on a financial even keel. Government, corporations and other organizations are looking for new models of collaborative working to fund their large construction and infrastructure projects in the face of changing attitudes to risk; a better educated and more demanding base of end-user clients and the increasing requirements for projects that are environmentally responsible and sustainable. Project Life Cycle Economics is a fundamental primer for those commissioning and those delivering construction.

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PART I
Fundamentals of Project Life Cycle Economics: Introduction to Part I

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MASSIMO PICA

Decision makers will normally approve a project, or a bid, at a certain (risk-adjusted) confidence level in line with organization policy and procedures, and with information provided by their analysts on the so-called ‘risk pot’ incorporated at that confidence level. Sound financial decision-making processes therefore need to be informed by a good understanding of the impact of risk on both schedule and cost. By and large, analysts are faced with a number of challenges:

• quantitative modelling is often conducted independently on project schedule and cost;

• mixed sources of data are in use at differing maturities, ranging from estimates to firm prices already incorporating at least some risk;

• differing use of terminology for ‘risk’, ‘uncertainty’ and ‘variability’;

• a lack of statistical knowledge in decision makers and in stakeholders providing the input data to the quantitative modelling.

More generally, with reference to the overall project life cycle policies, for example, it has been recently pointed out by the British-established, not-for-profit Society of Cost Analysis and Forecasting (SCAF) that, with frequent headlines on the overspend and overrun of major projects, it is critical that budgets are set and reviewed using robust models and that rich analysis information is provided to decision makers.

Effective Project Management efforts are required to enable ‘organizations to accomplish … the identification and management of project activities both at the early phases of a project and throughout its lifecycle’, as stated in BS 6079–1.¹

In this context, the following statement by Arthur Griffiths, the former Chairman of the SCAF, is also applicable:

The task of developing and delivering capital intensive complex engineering projects has probably never been more difficult for engineers and managers particularly in the areas of mitigating potential life cycle cost growth while achieving cost-effective system optimization. With political pressure to minimize expenditure and the drive for value for money with shrinking resources it is essential that people involved today in the delivery of complex projects understand the wide range of often conflicting issues and interests which affect project acquisition.²

In conclusion, as will be seen in more detail in Part II, recurring assertions of project specialists have pointed out the inefficiencies in project organizations leading to delays in bringing projects to successful completion, frequent occurrences of contract claims and subsequent project variants, whereas these shortcomings could have been substantially reduced by optimizing the accurate application of such mechanisms as project verifications and validations, which can be – respectively – intended to make evaluations to assure or confirm that the conditions imposed on project outputs are satisfied and that those outputs comply with the specified requirements.

1 BS 6079–1:2010. Project Management – 1: Principles and Guidelines for the Management of Projects. ã BSI 2010.

2 Pica, M., Systems Lifecycle Cost-Effectiveness. Farnham: Gower Publishing.

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Chapter 1
The Essence of Project Management and its Challenges

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MASSIMO PICA

Applicability of Project Management to Specific Projects

It is canonically assumed that every project is an individual event that is not repeatable: if two projects have the same scope or the same objectives, nevertheless the variable influence from environmental, organizational and management factors will make them at best similar, but never identical.

There are, however, two definite connotations in common to all projects: the degree of standardization of activities and processes (which is related to the influencing factors mentioned above) and the degree of management or organizational complexity (which influences the effort required to manage, organize and drive the influencing factors). ‘Activity’ can be defined (with reference to the PMBOK^® Guide) as a component of work executed in a project, whereas ‘Process’ (from PRINCE2^®) is a structured set of activities aimed at a specific objective).

These two ‘dimensions’ (Figure 1.1) simultaneously define the applicability of Project Management to specific projects. Four situations emerge from this figure: two of them support the Project Management applicability, one is against it and the fourth one appears to be ambiguous.

Quadrant 1 reflects those projects in which the peculiar nature of work (low degree of standardization, high degree of complexity) requires an intensive use of resources.

Quadrant 3 refers to the same categories of projects as in Quadrant 1, but with a lower degree of complexity.

Figure 1.1 Applicability matrix of Project Management in projects

Quadrant 4 collects projects presenting a high degree of standardization of activities and a low degree of complexity. Under these circumstances, the implementation of a Project Management system is not advisable or economically feasible with respect to simple or routinely fashioned activities. The situation in Quadrant 2 will no longer be ambiguous if the level of technology is added as a ‘third dimension’ (Figure 1.2).

A low technological level of processes and/or activities means that the implementation of a Project Management system is not required, due to the scarcity of non-controllable elements inherent in most cases; therefore, more traditional planning and control systems would be effective enough as part of the corporate governance system instead of the more advanced planning and control system portrayed by current Project Management practices. In the case of a high technological level, on the other hand, the adoption of an existing Project Management system appears to be necessary.

Concisely, whenever a project is envisaged, the feasibility of an advanced Project Management approach depends on the degree of standardization of activities and processes (low to high) and of management or organizational complexity (also low to high). This determines the quadrant in which the project will be located; in Quadrant 2 projects, an assessment of the technological level will also be required.

Figure 1.2 Applicability matrix of Project Management in projects: The level of technology is added in Quadrant 2

Projects, Their Constraints and Challenges

There is a difference in concept between a project and its final output. This can be a new product, a new facility, an ICT system, a new organization, a collection of documents, or any other tangible or intangible end product.

The project is the process by which a new final outcome is obtained. Kerzner (2009) adopts the following definition:

A project can be considered to be any series of activities and tasks that:

• Have a specific objective to be completed within certain specifications;

• Have defined start and end dates;

• Have funding limits (if applicable);

• Consume human and nonhuman resources money, people,
equipment);

• Are multifunctional (cut across several functional lines).

From this definition and other similar and numerous descriptions in the specific literature, the objectives of a project can be identified in terms of final results (for example, products or services) obtained in a certain timeframe and in line with cost and quality standard constraints. Project duration, expected costs and quality of project outputs are subject to a careful planning and checking process; these are the primary elements of projects. These are also interdependent constraints, acting in such a way that if one of them is optimized, the remaining two are adversely influenced; in fact, if a compressed schedule is envisaged, costs will tend to increase and quality will tend to decrease. The best overall result can be achieved by a careful and balanced view of all the aforementioned project variables.

In a certain project, the degree of complexity can be measured on the basis of human, material and financial resources expended, of the resulting degree of coordination and of the degree of involvement of key decision makers of the organization, and a new dimension can be envisaged: the strategic relevance of the project as a determinant for its success. This is portrayed in a new four-quadrant representation with respect to the dimension of project complexity (Figure 1.3).

Projects lying in the first quadrant belong to an area of limited strategic relevance, which means that their effects on the organization breakthrough are minimal. At the same time, these projects show a high degree of complexity, therefore requiring that Project Management systems be applied; this derives from the massive resource utilization and from the considerable involvement of managers, implying advanced planning and control arrangements for a convenient level of project governance.

Figure 1.3 Matrix of Project Management applicability to projects

As far as challenges in Project Management are concerned, it should be emphasized first that the average level of project performance has been repeatedly reported as being far from satisfactory and that several elements have to be considered to bring about a possible improvement:

• enhancement of top management support;

• increased involvement of final users;

• experience and knowledge of project managers;

• clear identification of project objectives;

• convenient definition of average project size.

With reference to the overall performance of individual company projects, deviations from the combined schedule, cost and requirements constraints are typically experienced. Additional constraints and challenges frequently derive from having to harmonize concurrent projects, coordinate resources conveniently, define and manage priorities effectively and establish suitable assessment criteria for the different initiatives. Investments in projects should therefore reflect specifically a Value for Money (VfM) approach, for which the following definition is provided (HM Treasury 2006):

VfM is defined as the optimum combination of whole-of-life costs and quality (or fitness for purpose) of the good or service to meet the user’s requirements.

This framework reveals the shortcomings of traditional views interpreting Project Management as a collection of techniques and tools. Indeed, current discussions on the essence of Project Management are confronted with original and innovative contexts implying new concepts and definitions for both the terms ‘Project Management’ and ‘Project Manager’; for example, while the latter term primarily identifies individual responsibilities, the former recognizes that projects are cooperative undertakings.

Major Challenges for Projects in the Current Practice

CHALLENGE NO. 1: PROJECTS DO NOT MEET THE REQUIREMENTS OF ALL STAKEHOLDERS

To an excessively large extent, projects are subject to the hazard of failing to deliver cost-effective solutions to owner requirements. Here and in the rest of this book, the following definition (Turner 2007) is adopted:

We define the owner as the person who provides the money to buy the asset and receives benefit from its operation.

A situation that often occurs is that projects show overruns (with respect to project schedule) and overspends (with respect to project cost). When contracting practices and cultural environments are too rigid and a...

Table of contents

• Cover Page
• Half Title page
• Title Page
• Copyright Page
• Contents
• List of Figures
• List of Tables
• About the Editor
• About the Contributors
• Foreword
• Preface
• List of Abbreviations
• Part I Fundamentals of Project Life Cycle Economics Introduction to Part I
• Part II Project Cost and Value for Constructions and Facilities Introduction to Part II
• Appendix 1 The New ISO Standard 21500 Guidance on Project Management
• Appendix 2 Project Optimization through AHP Decision Support Methods
• Appendix 3 The PILOT Method and Software Tools for Decision Making
• Appendix 4 Project Evaluation through Impact Analysis Methods: An Example
• Index