Peculiarities of the estimate for different phases of the project
The total project estimate should be broken down into parts corresponding to the life cycle of the project (see Figure 1.3):
• the phase of the project definition;
• planning phase;
• the phase of the project works;
• Phase of completion and delivery of the project to the customer.
Each phase has its own specifics, which is reflected in estimates compiled or refined at these phases, which we will consider below.
Project Definition Phase
Estimates compiled at this phase are inaccurate and will later be subject to large-scale adjustments. Most often, they are based on previous experience in implementing similar projects, as well as in assessing the growth of labor costs, materials and equipment. Thus, the earliest project cost estimate is characterized by a high degree of uncertainty and represents, to a large extent, an expression of project expectations, rather than a real guide to action. Until the scale and technical requirements of the project are developed in detail, no manager can accurately estimate the cost of the project at an early stage. When the main plan of the project is approved, the costs can be estimated with a higher degree of reliability. Even after that, they can vary greatly depending on the significant changes, defects and omissions in the project. In addition, for large-scale projects it is very difficult to determine the amount of funds required at this stage for unforeseen expenses.
Since the funds deferred for the repayment of additional costs may not correspond to the costs as the project develops, the acceptable size of such funds should be at least 20%.
Project Planning Phase
The first truly realistic project cost estimate can be compiled after the end of this stage. Such estimates are based on the preliminary plan of the project, tenders for significant goods and materials, determining the value of contracts with subcontractors and on preliminary estimates of project performance. At the end of this phase, a decision is made to continue or terminate the project.
This stage is still characterized by a high level of uncertainty, but it will sufficiently elaborate the necessary areas of the project and allocate the required reserve funds.
The amount of money in the contingency budget should be at least 10%, but there is still a danger that the scale of the changes in the technical requirements of the project will be such that the reserve of funds allocated in the estimate for this purpose will not allow covering the newly emerged costs.
Project execution phase
In this phase, there is maximum certainty regarding the project estimate, as the number and scope of the project are fully defined, schedules are drawn up, all necessary resources are collected. In many respects unforeseen circumstances arising at this phase are connected with the subjective factor - management errors, inadequate performance discipline, inadequate staff qualification, problems in coordination of work performance by contractors, etc.
The project completion phase carries risks of penalties, penalties related to the delay in the delivery of parts of the project or the project as a whole from the schedule, the need for modification, alteration of the project in accordance with the final wishes of the customer, unforeseen circumstances related with the training of personnel to service the product of the project, obstacles, to reach its design capacity, etc.
Thus, it becomes possible to determine the various stages in most projects on which estimates can be made, differing from each other by improving the quality of the data used. This depends on the characteristics of the life cycle of the project in various industries. The general patterns are as follows.
At the level of 15% of the life cycle of the project, we can assume that the plan is developed at 20%, the necessary equipment is 80% determined, the search for the project area is completed by 70%, and the most important equipment is already ordered. At the same time, necessary studies have been carried out to establish the risk factors of the project, which can lead to the abandonment of the project or to significant additional costs. In accordance with the prepared estimate, further development of the project can be ensured and all necessary decisions for this are taken. However, the threat remains that the project can be canceled or revised due to technical problems.
At the level of 25% of the life cycle of the project, we can say that the plan is developed at 40% and orders for equipment and materials are placed at 70%. The necessary equipment is already fully defined, the search for the project scope has been completed. At this stage, estimates can be compiled with an uncertainty level of 10%. This estimate ensures the fixing of the developed plan and the cost recovery of the project, together with the adoption of important decisions to improve its efficiency (profitability). The remaining level of uncertainty is usually associated with detailed design and performance of works, including operating conditions, the probability of delays in deliveries, management and labor productivity. Changes in the project plan during the phases of completion and completion are usually very expensive, as they are characterized by a significant disruption to the normal operation of the project and entail the urgent ordering of materials, equipment, and the invitation of specialists. However, there is still a difficulty in compiling a rational estimate of all costs and controlling costs, but at least at the beginning of the project implementation phase.
At the level of 45% of the life cycle of the project the plan is developed at 75%, the work is in full swing, and an updated estimate can be drawn up to complete the overall project budget. One of the reasons for the need to clarify the estimate at this stage is the need to provide the project with a realistic budget.
The allocation of costs between different phases of the project varies from project to project, from industry to industry, but the overall form of the cost distribution curve looks the same. The relationship between the main stages of project implementation and the approximate percentage of costs is reflected in the following values:
1) the definition of the project and one hundred preliminary plan - 1-5%, on average - 2%;
2) project planning - 8-20%, on average - 13%;
3) purchase of material and equipment - 40-70%, on average - 55%;
4) construction and production -15-45%, on average - 35%. Such an approximate distribution of costs between project stages is typical for projects in construction and manufacturing sectors, with the exception of very long projects (one year or more) for which the proportion of development costs and project planning decreases. In some projects, maintenance and maintenance costs should be taken into account by the so-called cost-of-life maintenance assessment, which minimizes project costs, for example, in the construction of chemical plants and military aviation.
If we assume that the combination of the project management management effectiveness parameters and the labor productivity can change the cost level for each phase of the project in the region of 10%, then theoretically the difference between efficient and inefficient execution of works at the construction stage will be only 7% in relation to the total number of costs. However, if this evaluation model is applied to the procedure for the supply and payment of materials and equipment for the project, the difference between good and bad performance will be about 11%. Thus, we can conclude that the procedure for the supply and payment of material and equipment of the project is very important, because inefficient solutions here lead to a greater cost of the project than construction.
So, management efficiency and labor productivity can undoubtedly affect the level of costs in each phase, but they have the greatest impact on decision-making and work in the early stages, such as project development and pre-planning and direct project design . In this case, it becomes less important how efficient or ineffective the phase of construction is, since the initial cost of the project is determined through the adopted design decisions in the previous stages. The key stages in the decision-making process for the project are the design and start-up phases of the project. 10-15% of the total cost of the project spent at these stages, mainly determines the costs at the next stages. The implementation of control in the subsequent phases of the material and technical support of the project and construction is to a large extent connected with the performance of a certain work than with the adoption of design decisions.
The importance of early decision making regarding project costs can not be underestimated. For example, 2% of the project costs realized at the stage of preliminary project planning, determine the costs for the remaining 98% of the work. In this case, there is a likelihood of a large number of types of project costs that can be eliminated or overcome through effective control. Similarly, 13% of the project costs realized at the design stage can greatly affect the amount of costs of the remaining 85% of the work on the project. So, special attention should be paid to cost control or to the process of minimizing costs in the early stages of the project.
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