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The Problems in Project Management With Particular Reference to Cost Overruns

Outline

This paper is a study of problems in project management with particular reference to cost overruns. It is seen that project management is a complex undertaking and requires managerial and technical skills for the efficient completion of projects. Cost overruns are frequent in most projects irrespective of the area or industry. Government projects are the most subject to cost overruns. The fault lies with the project manager and the management of the company undertaking the project. Cost overruns can be brought down to a great extent if the above two are more vigilant and strict over the whole process.

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Introduction

Management of an organization on a day-to-day basis is a complicated and responsible job. This is more so in the case of a project. Project management is quite different from ordinary management in the sense that each project has a definite start date and end date, after which the work on it is stopped. Management then begins when a new project is taken up. This could be with a different client in a different location, market, or even country. In the case of companies that are engaged in project management works on an international level, managers may find themselves working in different cultures while working for different projects. Clients will also change and their attitude and culture may vary to a large extent. Considering these factors management of projects is more complicated than regular management of an organization. This paper will be a research one major problem area or issue in the field of project management. To show the complexity of the field, general problems that can crop in project management will also be provided. An overview of the topic will also be provided to show the nature of project management and the different factors that are needed for successful project implementation.

Overview of Project management

Project management can be defined as “The application of modern management techniques and systems to the execution of a project from start to finish, to achieve predetermined objectives of scope, quality, time and cost, to the equal satisfaction of those involved.” (Project management framework: Project management, 2004). There are two distinct factors involved in the success of a project and the project manager. One is the human side and the other is the technical/analytical or scientific side. Like other areas of management, project management can also be called an art as well as science. The art aspect is needed concerning managing the diverse types of people that may be involved in a project. The scientific or technical side is about the management of the whole process involved in project management. (Heerkens, 2001, p.6). In most instances, there will be a client, the project management company, and a set of contractors involved in the process. The client will hand over the implementation of a project to a well-managed company. That company may or may not use the assistance of independent contractors while undertaking the project. This will depend on the individual resources available with each company. The success of any project, in general, will depend on the following factors. This section is provided here to illustrate the complexity that exists in project management. It is to be noted that problems and issues can come up in any of the factors mentioned below.

Project manager: Like all group activities, a project should also have an effective project manager. The project manager, apart from his technical skills, should also be a person who is acceptable to the team and also be able to manage the project and his team members. The person should preferably possess the necessary human and interpersonal skills involved in managing people. He should also be knowledgeable about the technical aspects of the project. If the project is about the construction of a bridge, the manager should preferably be a civil or construction engineer.

Defining the project: This is the first step in project management and is usually the job of the project manager (with the help of other company resources). The client will provide the necessary details of the project which should be used for this process. It is very important to clearly understand the needs of the client to clearly define the project. The problems that many crops up and the possible solutions should be identified. The planning and the project plan will be based on the definition of the project

Team building: In any team activity, the quality of the team will be instrumental to successfully achieve the aim of the project. In the case of a professional project management firm, there will be a ready-made team. The external contractors will also be regular companies who are trusted by the company in charge of the project. But where the project is undertaken in a new market, the company should be careful in selecting a contractual partner. In case the project is an internal one and not done by a professional company, team building is more complicated since a fresh set of people have to be assigned to the job. Finding the right contractors (if required) will also be a problem that has to be handled carefully.

Planning and estimation: Planning ahead is an essential requirement in any management process and holds good in this area also. For proper planning estimating the various resources needed to complete the project is necessary. Resources include finance, personnel, technology, machinery, and time. Once these estimates are calculated, the next step planning the steps needed to successfully complete the project. Preparation of budgets is an important element in planning.

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Project Plan: The project plan will document all the details necessary to complete the project and will include the estimation and planning steps mentioned above. The project plan is the document on which the whole activity of completing the project is based. Hence the level of detail and accuracy is extremely important here. The areas covered will include the time required, the resources needed, and the costs involved.

Risk and unforeseen circumstances: In the complex modern world, the element of risk and uncertainty is a constant possibility. These factors can be both internal and external. Internal risks can be accidents, lack of resources, and poor team performance. External factors can include sabotage, governmental policies, the lack of support from or financial problems of the client. Internal factors are easier to foresee and correct. There is also more control with regard to internal factors. External factors on the other hand involves the influence of many agencies and hence more difficult to predict and control. The plans should include all possible eventualities that may arise and provide individual course of action to face and solve the issues.

Control during execution of the project: By this stage, the product is ready to be started. The activities and costs should be closely monitored and controlled to see that the project stays on schedule. In case the control is poor, costs and time taken can overshoot budgeted figures and time. Daily meeting with supervisors and reporting of the day’s activities are a must with regard to control.

Communication and documentation: Communication is a key factor in the success of any managerial activity. Unless there is effective communication, proper understanding of the duties and responsibilities of team members will not be there. This will result in wrong or defective work. A proper communication infrastructure will also provide the manager with information regarding any problems that have arisen in the project execution. Extensive documentation of the day to day activities, issues, and costs should be made. This is useful to convince the client of the way the project was competed and also the problems faced during the process.

Finishing the project: The Project closure phase “is the last phase of the Project Life Cycle. The commencement of the Project Closure Phase is determined by the completion of all Project Objectives and acceptance of the end product by the customer.” (Project closure phase, 2009). It is common for companies to prepare a closure report. Companies also undertake a post implementation review to understand the successes and failures of individual tasks in the project process. This will help in improving the overall ability of the company in undertaking future projects.

Common problems in project management

Before moving on to a particular problem area, it is proposed that a brief review of common problems that can occur during the implementation of a project. The American Management Association has published an article which details this. One of the problems shown here will be researched in detail after this section. “Here are ideas from some of the project management experts American Management Association works with about overcoming ten of the most common problems you may encounter.” (Overcoming project management problems, 2009).

Not being able to start the project on time is the first problem listed by the Association. Project tasks sometimes get too big or complicated to handle, resulting in the project crossing its original parameters. The third most common problem is the amount of paperwork to be done by mangers, supervisors and team members. A lot of this paperwork is quite unnecessary with regard to the project. The project usually seems to loose its momentum especially when it nears completion. It becomes necessary to make changes and revisions to the original plans. This could be because of poor planning or occurrence of unexpected incidents. Gaps in staffing or understaffing are quite frequent during the implementation of projects. Another problem area is that costs cannot be controlled and usually overshoots the budget. In many cases, the company or client may demand the project manager that the project should be completed ahead of schedule. Many company officials believe that the project is not really needed for the company. The final most common problem is that team members fear to innovate, and stick to tried and tested methods. They do not want to think out of the box when it comes to project decisions.

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Cost overruns: It is proposed that the one area that is to be researched here is the area of cost overruns. Finance is an extremely crucial component in any business, and wastage of this resource is not welcomed. Another factor that should be considered that cost and time involved in a project is one of the key indicators of project performance. “At present, time and cost overruns are the most commonly used indicators of project performance. It is almost taken for granted that a project completed with minimum of time and cost overruns are well-managed projects.” (Choudhury, 2009).

Hence costs should be kept within budgeted levels as much as possible. Author James P Lewis who wrote the book ‘Team-Based Project Management and The Fundamentals of Project Management’, “cost control problems occur because of inaccurate budget allocations, schedule delays that demand more resources than foreseen, new technology demands, requirements unanticipated during initial planning, and changes in project mission.” (Overcoming project management problems: Problem #8: Costs are over-budget, 2009). This explanation indicates that cost overruns can occur at any stage in the project management lifecycle and also be due to any of the factors mentioned in the section on ‘overview of project management’ mentioned above. Robert L. Kimmons and James H Loweree, authors of a book titled ‘Project Management: A Reference for Professionals’ says that cost overruns tends to increase in direct proportion to the size of the project. In other words, the likelihood of higher than planned costs increases as the project size gets bigger. (Kimmons & Loweree, 1989, p.270). But due to the volume of investment involved the ratio of cost overrun to budget will be higher for smaller projects than for larger ones. A review of industry wise breakup of occurrence of cost overruns is also worthwhile. This is based upon a study done by the above mentioned authors. It is not very surprising that the highest percentage of cost overruns occur in the government sector. Almost 40% of all government projects overshoot their original budgets. This could be because commitment and control might be lower in the government sector when compared to the private sector. The management of the project management company will put pressure on the project manager and the team to see that the work is done as per schedule and below or at cost. Industrial expansion is the next biggest culprit with 21% of projects overshooting their budget. New industrial projects and other projects take the next two places in cost overruns having 14% and 11% incidences. This is followed by apartments and office buildings (10%), power transmission projects (5%), and shopping malls (4%). This breakup is represented in the following pie chart. (Kimmons & Loweree, 1989, p.271).

Pie chart

The study also says that 77% of the total projects studies had substantial cost overruns while there was not a single one which was completed as per or under budget estimates. Only 23% of the total projects had minimal cost overruns. The figures may vary from time to time and also according to other factors like labor unrest, inflation, and government policies. But it is proposed that the industry wise balance with regard to the cost factor may remain more or less the same.

Another study on the Norwegian road construction industry showed that there were substantial cost overruns in this sector also. It should be remembered that road construction is primarily a government responsibility and cost overruns are not surprising as seen from the results of the above study. “The findings reveal a discrepancy between estimated and actual costs, with a mean cost overrun of 7.9% ranging from −59% to +183%. In absolute terms, cost overruns amounted to a formidable 519 million Norwegian kroners.” (Odeck, 2004, p.43-53). But the study also reports that a new result with regard to smaller projects. It says that smaller projects faced comparatively larger cost overruns when compared to larger projects. This is in direct contrast to what Kimmons and Loweree had mentioned earlier. The IT industry is also subject to this aberration in costs. “Despite best efforts, the average IT project still overruns its budget by about 43 percent.” (Affordable IT staying on budget: What’s a project to do, 2009). It can be seen that cost overruns is not limited to any industry, but to the concept of project management as a whole. A review of the different factors in project management that can result in cost overruns is provided here.

The project manager is to a large extent responsible for overshooting of budget costs. The required control over the whole process may have resulted in this state of affairs. Alternatively unrealistic budgeting by calculating low figures could also result in costs not matching with the budgeted figure. This is the fault that happens during planning and estimation stage. The quality of the team and the contractual partners will also be a factor here. An efficient team can complete the tasks as per schedule even though the compensation paid to them will be more when compared to a poor team. It is better to have a good team and good contractual partners even if they cost more, than finding that the project has overrun its cost and time parameters. Risk factors and unforeseen events cal also result in cost overruns. For example, an accident in the workplace which causes destruction of property or machinery can cause delays resulting in escalation of costs. This will affect the total cost even if the damaged items were insured. Natural and manmade disasters also play a part. Lack of proper communication and control can also result in wrong tasks being performed. Other factors include sudden change in duties of products used in the projects, increase in compensation, strike etc

Conclusion

A study of problems seen in project management with particular reference to cost overruns has been done here. It is seen that project management is a complex process and requires many management and technical skill for efficient performance. With regard to cost overruns, this phenomenon is present across all sectors of project management. The factors resulting in this happening does not have too much relation to the type of industry. The only area where cost overruns are common occurs in government run projects. It is the duty and responsibility of the project manager and the management to see that this variation is kept to the minimum.

References

Affordable IT staying on budget: What’s a project to do. (2009). Network Computing. Web.

Choudhury, Sadhan. (2009). Time and cost overruns the bane of project management. Project Monitor. Web.

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Heerkens, Gary. (2001). Project management. McGraw Hill Professional. Web.

Kimmons, Robert. L., & Loweree, James. H. (1989). Project management. CRC Press. 270. Web.

Kimmons, Robert. L., & Loweree, James. H. (1989). Project management. CRC Press. 271. Web.

Odeck, James. (2004). Cost overruns in road construction what are their sizes and determinants. Transport Policy, 11 (1), 43-53. Web.

Overcoming project management problems. (2009). AMA: American Management Association. Web.

Overcoming project management problems: Problem #8: Costs are over-budget. (2009). AMA: American Management Association.

Project closure phase. (2009). Visitask: Project Management Training and Resources. Web.

Project management framework: Project management. (2004). The Ohio State University. Web.

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