Cost Drivers in Project Management

Use of weighted criteria assessment to identify cost drivers in the tendering process.

Written by Philip Oxley on . Posted in Project Management Articles


Philip Oxley is a Risk and Value Manager with Network Rail and provides support to the London Bridge Station Redevelopment project, a significant project in the Thameslink upgrade programme.

SUMMARY

The ability of service supplier to quickly and comprehensively understand the needs of a prospective clients can be an important competitive advantage when trying to win business. Experience from using formal Value Management techniques in Network Rail’s broad suite of projects supports the assertion that the use of weighted criteria in assessing options during Project initiation can optimise value. In this paper it is argued that by using similar techniques to weight the anticipated cost of stages of project’s life cycle and the component work packages, a qualitative assessment can be made to help understand cost drivers. This note will describe the background to the technique, similar managerial models and techniques, the method and a summary of the benefits and drawbacks.

BACKGROUND

Cost profile can be driven by a number of factors and these may vary across the life cycle of a project. Assessing the quantum of cost across the project is likely to be an area that potential clients will be keen for prospective delivery partners to understand and may be a specific question in an ITT. For this reason, cost drivers and estimating were topics covered in a recent Network Rail Infrastructure Projects-sponsored course delivered by Parallel Project Training. The technique described in this note was used by delegates to help demonstrate their competence in identifying cost drivers in a competitive bidding scenario.

WEIGHTING TECHNIQUE

The first task is to list the phases of the project life cycle in ascending cost order. This is best done with appropriately selected stakeholder delegates in a facilitated workshop, thereby gaining maximum value from multiple perspectives. This has been done below using a generic project life cycle.

Table 1: Indicative Ranking of Cost by Stage in Project Life Cycle

 

Stage Cost Weighting Factor Justification
Initiation 1 Likely to include low cost feasibility studies, opportunity costs of sponsor and technical support
Initial Design 2 Likely to include scope development and in-principle design costs.
Detailed Design 4 Likely to include significant costs for detail design, consultations and engineering support.
Construction 5 Most costly phase because of rate of resource consumption and impact of risks.
Handback 3 Complex handover requirements and recovery of snagging costs.

Note: 1 indicates lowest cost, 5 indicates highest cost.

 

The justification for the rankings may appear superficial. However, it is assumed that this detail may not be available by prospective bidders and the technique aims to assist teams to understand a client’s perspective in the absence of this.

The next task is to list the work packages or subordinate projects in ascending cost order for each stage. This can be built up by using the detailed duties expected by the client or proposed work breakdown structure, and standard estimating techniques, or can refer to lessons captured from previous work. This has been done below:

Table 2: Indicative Ranking of Cost by Project

 

Stage of Project Life cycle

1 2 3 4 5
Station rebuild 4 4 5 5 5
Upgrade track 5 5 4 4 3
Build car park 1 1 1 1 1
Build new approach road 2 3 2 3 2
Build new RRAP 3 2 3 2 4

Note: 1 indicates lowest cost, 5 indicates highest cost.

These two tasks have provided an assessment of likely cost for each stage and the most expensive project for each stage. By multiplying the project cost ranking by the life cycle ranking a qualitative model for anticipated cost profile can be created as shown below. The qualitative assessment rankings should be agreed during the workshop.

Table 3: Weighted Cost Profile

Stage of Project Life cycle

1 2 3 4 5
Station rebuild 4 8 20 25 15
Upgrade track 5 10 16 20 9
Build car park 1 2 4 5 3
Build new approach road 2 6 8 15 6
Build new RRAP 3 4 12 10 12

 

Note: Qualitative Assessment Ranking

 

Not Significant Significant Very Significant Highly Significant Extremely Significant

1-4

5-9

10-14

15-19

20-25

 

These results suggest that the planning, construction and handback of the station rebuild will be the most commercially significant elements of the programme. This may be an obvious deduction but the technique helps surface subtleties in the complexity of the programme, for example the Road-Rail Access Point (RRAP) handback to the route maintenance team is deemed as a significant period and may allow the Programme Director to redistribute resources to facilitate this activity.

SIMILAR AND COMPLEMENTARY TECHNIQUES

This technique draws from experience using Value Management Option Selection techniques in Network Rail. This technique unpacks the functional requirements for projects and assesses the viability of possible solutions set against these objectives. The approach also reflects the Kepner Tregoe approach to managerial decision making where options are selected against predetermined criteria. The concept of weighting criteria is common in many areas of management and the technique described above is not considered revolutionary. Using objective criteria supports a rational approach to problem definition and solving, and therefore is vulnerable to missing context, rapid change or Groupthink. A complementary technique could be the use of normative dots, where delegates vote for the elements of a project they consider most costly, or any other non-rational problem solving technique. The results of this can then be combined with weighted criteria analysis to provide a powerful assessment of an issue.

CONCLUSION

The use of weighted criteria in managerial decision making allows an objective qualitative assessment to be made of available options. Using the technique to identify programme cost drivers allows multiple perspectives to be incorporated into a structured analysis of the project life cycle and work breakdown structure. The examples given in this note are simple but the technique can be refined to include a more comprehensive and sophisticated analysis of likely activities driving cost. The assumptions made in using the technique should be rigorously analysed and agreed as valid. For example, it is assumed that the cost profile for the stages of the life cycle can be ranked in a linear distribution. This may not be valid where the cost profile differs for each project, and this should be identified in assumption surfacing. In certain cases, the output from this technique may not be appropriate and other approaches should be considered. One of these approaches should be the use of robust risk management techniques to understand the risks associated with options and decisions being made.¬†Although this technique provides a very clear output it should be combined with other managerial considerations to ensure the results are used coherently and in line with the client’s needs.

 

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