Project cost forecasting and cost trending are important to the project cost control process. In making profits, organization requires an ability to predict project cost performance. Therefore, there have been many studies on this aspect to develop the pertinent theories and methods.
Through a critical review of forecasting methodology, it includes making estimates or predictions of the trend based on information and knowledge available at the time of the forecast. It is generated, updated, and reissued based on performance information provided as the project is executed and progressed.
A number of issues are highlighted that concern of trending approach, they involve examining project cost performance to determine if performance is improving or deteriorating. It provides a static view of potential versus actual costs by showing the trend over time.
The aim of this article is to increase awareness of comparison with project cost forecasting to cost trending, to provide early warning of cost performance overruns, to drive greater efficiency and improve performance for the benefit, and to focus throughout on delivering the successful project.
Keywords: Project Cost Forecasting, Project Cost Trending, Cost Control Process, Project Cost Performance
1．INTRODUCTION
Project forecasting and project trending are two of the most challenging tasks in predicting whether the project will be successful. In turn, this will depend on the ability of the project manager to predict within the cost control process, well ahead of time. In attempting to establish the reliable cost control process, it is required to develop tools which are capable in dealing with variability existing in IT operations. As such, this has still been a burden to project manager to determine the accurate data as early as possible where the primary importance of cost control process is, it should be able to predict variance data at any future time and at completion and thus provide an early warning of cost performance overruns. Often, project variables differ from time to time throughout the IT operations which usually unacceptable to most stakeholders. Thus, a reliable cost control system should provide project manager an accurate, unbiased, timely and stable system. In essence, however, accurate project performance indexes are difficult to produce when considering the impact of some factors such as material delays, scope deviation, poor productivity, unforeseen scope changes, and adverse weather conditions. Therefore, most of the current systems are designed to incorporate this input in the form of a judgmental input from the user and consequently could lead to predict accurate project performance.
The aim of this paper is thus to provide a critical summary of the status of current
system, to highlight the implications of the state-of-the-art for both research and practice. Consequently, key issues that have driven the development of the theoretical approaches are reviewed alongside the practical difficulties that arise when attempting to apply current system in practice.
This paper begins by synthesizing the perceptions that surround cost control process in order to state the fundamental goals of the approach. These goals provide a basis for assessing the development in forecasting and trending standards, which are then, can be used as a datum for future research purpose. A detailed critical analysis of cost control process is also presented and a number of issues highlighted that concern (a) the types of forecasting methodology and trending approach, (b) forecasting project cost performance at completion and project cost trending through the process, (c) cost variances in project performance, (d) other critical parameters of project performance to be incorporated along with cost, (e) ineffective methods in generating reliable and timely results and therefore providing early warning of cost performance overruns.
2. OVERVIEW
The nature of IT is to be profitable in extremely competitive environment. More specifically, the specific environment is continuously changing and resulted to uncertain variable in project data. As a consequence, Project Manager faced with performance problem in determining the accurate project performance. In attempting to gain better profits, Project Manager needs to make timely and informed decision. However, today's deficiencies in monitoring and controlling of project operation enable Project Manager to manage project effectively and result to major cause of project failure.
When controlling project performance, Project Manager should not only monitor cost and time variances for actual project progress, but also to properly establish the actual project status based on objective predictions of final project performance. At completion, project performance can be predicted by comparing estimates of planned total budget and final duration with their respective most likely forecasted values. This, however, are necessary for Project Manager to determine if corrective actions are required to minimize the expected variances from planned performance. Thus, forecasting is needed to predict the project performance at completion based on current performance collected from the trending within the cost control process.
2.1 Significance of Project Forecasting and Trending in IT Industry
In reality, the original estimates may be considered the first project forecasting and, at the point of project completion, the latest updated estimate (last forecast); project trending should be the actual amount of what is being expended which will be the same. In controlling an IT project, Project Manager should understand the importance of using project baselines which serves as a benchmark. This is to ensure the project is running smoothly and early indication on deficiencies of project can be identified.
In current practice, project baselines or planned S-Curves is used to determine variances. In cost, it is used to measure the earned value. In this context, it explains why this method is widely used in IT industry to measure the performance of projects. One of the advantages of this method is that it can identify any cost variances at the end of the project. However, there is still lacked within this method if negative variances are identified. Therefore, the needs of forecasting performance variances at completion and trending during the cost control process is necessary to Project Manager in order to decide the suitable effect on final project performance.
3. COST FORECASTING
3.1 Cost Forecasting and Analysis
Cost forecasting and analysis is a core capability and describes our ability to provide estimates and analysis of the cost of future defense and non-defense equipment. The output of the analysis is used to support project decision making throughout the project life cycle. Confidence in the underlying data and assumptions are critical to the decision making process and we can increase this confidence by providing informed, independent cost forecasting and analysis. The cost forecasting and analysis capability encompasses:
1. Cost Forecasting - the forecasting of equipment acquisition (development and procurement) costs and in-service (Operation and Support) costs.
2. Cost Analysis - the review of equipment costs in the context of historical trends.
3. Cost Forecasting and Analysis Management Plans - the development and implementation of Cost Management plans.
4. Data and Assumptions - preparation of data and assumption.
5. Bid Support - the provision of support to clients in the development of cost material for inclusion in bids.
6. Cost Model Development - the development of bespoke models to estimate and analyze the likely cost of future equipment.
7. The provision of advice on the development of cost forecasting and analysis material for inclusion in a bid for a major UK defense equipment programmes.
8. An independent review of the cost estimation process for a major public works programmes to ensure validity of the approach and the baseline assumptions utilized.
9. Review of a cost modeling capability for a major defense contractor to support senior management decision making.
10. Provision of support to value for money studies undertaken on defense equipment programmes.
11. Development of a model for forecasting the cost of the UK defense budget.
12. Evaluation of trends for major defense programmes.
3.2 Methodology
The technology organization of a major financial institution based in the United States, in which project managers estimated costs in the project start up phase and re-estimated them at the end of each phase of the project life cycle, provides a good subject for a case study. Alignment between the business partners and project managers happened at the end of each month based on actual spending and the re-forecasts. The project managers updated the forecasts in the project management tool and baselined forecast accuracy variance at the end of each month using the re-forecast values.
Figure1: Project Forecasting Process
Project Forecasting Process
The IT project forecasting process improvement project was executed by a company technology team and consultant. They evaluated the IT project forecasting process performance and improved the same by leveraging Six Sigma expertise. Six Sigma DMAIC (Define, Measure, Analyze, Improve, and Control) rigors were used in executing the project. The company team was responsible for implementing the control plan / forecasting process improvement framework and verifying the success measures.
3.2.1 CTQs Are an Eye Opener
Voice of customer (VOC) was collected by conducting interviews and focus groups with the stakeholders from a key portfolio of the company's technology organization. Level 2 and Level 3 as-is process maps were prepared for IT project forecasting process. Internal customer critical-to-quality characteristic (CTQ) was derived from the VOC data, and the project CTQ was determined using a CTQ drill-down tree. Customer and project CTQs were defined as:
Customer CTQ = Percentage post-Analyze sizing accuracy = (Percentage variance of post-Analyze sizing and total project cost / the post-Analyze sizing)
Project CTQ = Percentage monthly average forecast accuracy = (Difference between monthly forecast and monthly actual spend in the post-Analyze phase / the monthly forecast)
With the current practice, project managers reported lower forecast accuracy variance to senior leadership team since the baseline was done using re-forecast values at the end of each month, which were accurate as compared to the forecasts at the post-Analyze sizing. The suggested CTQ baselines the variance using forecasts at the post-Analyze sizing uncovering the hidden variance. The new practice brought focus on the ability of the project managers to perform better forecasts at the post-Analyze sizing.
3.2.2 Analysis of Under spend and Overspend
Data analysis indicated that 57 percent of the projects were under spend cases while 28 percent were overspend cases when compared with post-Analyze sizing, considering better accuracy in forecasting process costs of small-sized projects. The level of variability, however, was the same for both low as well as high-dollar value projects.
The project costs included hardware, resource, third party software and miscellaneous costs. Trend analysis of the cost variance categories indicated under spend cause categories as 1) less effort realized, 2) unregistered billing for external receivables, 3) administrative issues, and 4) inaccurate forecasts registered. Similarly, the overspend cause categories identified were 1) additional effort realized, 2) unplanned billing registered, 3) administrative issues, and 4) inaccurate forecasts registered.
Industry benchmark data indicated that 60 percent of the IT projects failed in terms of cost and schedule compliance. Only one out of five IT projects were likely to be compliant on cost, scope, quality and schedule parameters. Also data indicated that larger the project size, the more likely was the failure on cost and schedule compliance. The performance objectives were determined based on industry benchmark reports, estimation standards, current performance baseline and agreement of the project team.
3.2.3 Monte Carlo Simulation and FMEA
Based on the current trend, the likenesses of different causes were analyzed. A probability distribution function for each cause category was determined based on the historical frequency data. Forecast accuracy results were then captured by running a Monte Carlo simulation for each of the cause categories. Factors related to less effort realized, unregistered billing and administrative issues were found to be vital Xs for the under spend variance situation. Simulation could not be performed for overspend variance due to lack of confidence in the probability distribution function determined for these cause categories. It was concluded that factors related to overspend situation were not vital since there were a fewer number of overspend cases reported.
Since there could be other unreported causes, a system and component a failure mode and effects analysis (FMEA) was performed to completely identify and prioritize causes of the project cost variance. Assessment of as-is risk was done using FMEA. Key causes with a risk priority number greater than 120 were identified. All the identified vital Xs impacting forecast accuracy variance were classified using a control impact matrix.
3.2.4 Action Plans and a Framework
Detailed future-state process maps were prepared. The high and medium-impact action items were categorized based on the effort, then detailed action plans were developed for each stakeholder group including the business partners, the technology leadership team, project managers, tools group, hardware vendors and third party software vendors.
A forecasting process improvement framework with focus on requirements management, resource management, schedule management and administrative issues was suggested to eliminate sources of variation and achieve forecast accuracy variation within the +/- 5 percent specification limit.
4．COST TRENDING
4.1 Analysis & Definitions
4.1.1 Analysis
Cost trending analysis involves examining project performance over time to determine if performance is improving or deteriorating.
Cost trending includes potential cost and actual cost, the analysis is used to determine whether a project is on schedule in terms of hours and cost, it provides a static view of planned versus actual costs by showing the trend over time.
Each week shows the total "Actual" hours and costs spent on tasks completed in that week (Status is changed to "Complete" in that week) and the corresponding total Planned, ETC, forecast and variance hours for those tasks.
The key value is the variance that should be positive or zero.
4.1.2 Definitions
The definitions include the following meanings and approaches:
Planned Effort is the same as Baseline effort in the budget table or MS Project.
Actual Effort is the total hours booked to work in the timesheets.
ETC Effort is the Estimate to Complete or Remaining Time is the new latest Planned Effort.
Forecast Effort = Actual Effort + ETC Effort
Variance Effort = Forecast Effort - Planned Effort
Planned Cost is Planned Effort multiplied by the separate rates of resources assigned to the work, or where a task has a fixed cost.
Actual Cost is the Actual effort multiplied by the assignees (or fixed) rate at the time when the effort was booked in the Timesheet. If the rate changes later on then the report would not be effected.
ETC Cost is ETC Effort multiplied by the assignees (or fixed) rate at the time the report is run.
Forecast Cost = Actual Cost + ETC Cost
Variance Cost = Forecast Cost - Planned Cost
4.2 Key trending metrics to project performance
4.2.1 Projects Profitability
Projects Profitability Trend - This report compares revenue and margin percent for each period in the current and in the prior year to display trends in organization profits.
Projects Profitability Cumulative Trend - Compares total revenue and margin percent across periods of the current and prior year to display the cumulative trend in profitability of the organization. Displays the profit accumulated across the periods of the year.
4.2.2 Projects Cost
Projects Cost Trend - Compares costs for projects across the periods of the current year with the periods of the previous year to display trends and cost.
Projects Cost Cumulative Trend - Compares the total cost of projects for the current and the previous year to show cumulative trends. This report sums up the costs across periods to show cumulative cost.
4.2.3 Capital Projects Cost
Capital Projects Cost Trend - Trend in costs over time and its breakdown for capital projects.
Capital Projects Cost Cumulative Trend - Cumulative trend for a selected group of projects. In this report capital cost figures are accumulated within a period to show cumulative capital cost.
4.2.4 Contract Projects Cost
Contract Projects Cost Trend - Cost trend for the selected group of projects. It shows cost amounts for a progression of selected periods, thus illustrating the trend in cost over time.
Contract Projects Cost Cumulative Trend - The cumulative contract cost trend for the selected group of projects. In this report contract cost figures are accumulated within a period to show cumulative contract cost.
4.2.5 Projects Resource Availability
Projects Availability Trend - Trend of available resources for an organization over the next thirteen weeks.
4.2.6 Projects Utilization
Projects Utilization Trend - Compares actual and scheduled utilization by organization, for the current and previous years. You can use this report to see if an organization's resources are working according per scheduled.
4.2.7 Projects Bookings and Backlog
Projects Bookings Trend - Compares original and additional bookings by period for the current and previous years.
Projects Bookings Source Trend - Count and amount of original and additional bookings by period. It also displays the corresponding average original and additional bookings in each period.
Projects Backlog Trend - Compares the amount and source of backlog change by period for the current and previous years.
5. COMPARISON
5.1 Differences
Forecasting project cost performance at completion and project cost trending through the process. Forecasting is needed to predict the project performance at completion based on current performance collected from the trending within the cost control process.
Trending in changes is to derive total forecasting, trend is included in the forecast. Trending Systems handle changes for the future, it provides a scientific way to better predict the project cost forecasting.
5.2 Forecasting and trending in Change Management
5.2.1 Trending
Trend is a tool, a methodology, and a process to capture changes that are about to happen. Project Trending provides an effective forewarning of potential changes and cost / schedule forecasts
5.2.2 Trend Log
It serves as a discussion paper to present changes to higher management for alternatives or decision-makings. It records the impact of additional cost and extra time required if the change is physically implemented.
Figure 2: Simple Trend Log
Trend No.
Trend Description
Dated
Change
Requester
$ Cost Impact
Trend Status
WBS / COA
Notes
1
Fnds increase
06-05
Civil Eng.
$500K
Pending
0110-02
Vessel sizes change
2
HDFE Pipe to CS
05-05
Process Eng.
$2.5M
Potential
0110-05
Design Pressure change
5.2.3 Trending Pitfalls - Tricks of the Trade
"Already Happened"
Trends are used as a justification to explain for cost overruns
Trends are used to capture what has happened & incurred
Trends are used as "forgiveness" for errors and omissions etc.
Trends are used to increase "budgets" instead of forecasts
"Decisions for Alternatives"
It stays as a pending trend for "further study" and "decisions"
It evolves to a "major scope change" but is treated as a trend
It can not support potential claims; lacking of detailed changes
Figure 3: Trend Input and Output
5.2.4 Compromised Trended Forecasting
"Out, you are excluded"
FAC (Forecast at Completion) is regularly updated
FAC entails only trended amounts approved by Project Manager.
FAC excludes pending and potential trends recorded in the log
FAC discounts cost engineer's "gut feeling" towards changes
"More Holes, More Traps"
Variance Analysis is not available as an input to FAC process
Earned Value and Progress Measurements are not validated
External Influential factors causing uncertainties not considered
Figure 4: Compromised Forecast at Completion
Forecasting - long denigrated as a waste of time at best and a sin at worst - became absolute necessity in the course of 21st Century in the notorious budget over-run IT projects (Modified from "Against Gods" by Peter Bernstein).
5.2.5 Sour Marriage: Alarming Forecast
"Legitimate Trends"
FAC only includes In-scope changes and risk containment costs
FAC includes extra costs for Schedule acceleration (fixed end date)
Scope Changes MUST be estimated to increase "the budget"
"Definitive Estimate"
An IFC-based check cost estimate is necessary
The original base-line is not realistic to start with
Risk simulation for Forecast-to-Go is required
Figure 5: Total Cost Forecast
6. DISCUSSIONS
Given the critical review on literature as explained above, forecasting is an essential system and should be part in project control procedure. One view is that project forecasting should indicate early warning about the project deficiencies to Project Manager. In this case, this will depend on the effectiveness of forecasting tools suitable for the practical use. Being in the IT industry, very dynamic and complex, past performance is not always an accurate prediction of the future. Thus, there is a need for a process to model the dynamism and the nature of project performance. Indeed, from Neil (1987) studies indicated that few contractors are comfortable with sophisticated forecasting techniques but, if contractors wish to improve the quality of estimates, Vergara and Boyer (1974) suggested that they utilize methods that are consistent with Six Sigma techniques. Hence, this clearly shows why Six Sigma methods are more appropriate to predict project performance than other techniques.
Most of the reviewed papers based their trending approaches on the metrics. These metrics allow the project executive to stay informed at all times. It is a comprehensive reporting solution that provides cross-project visibility to full lifecycle performance - from opportunity tracking, to resource utilization, to profitability and activity analysis. This paper provides breadth of content with multiple parameters for focused analysis, e.g. drive project profitability and control cost, manage capital projects cost, control contract projects cost, track project bookings and backlog, optimize resource deployment. Projects enables top-down enterprise metrics and analytics for the entire project-based organization. Key Performance Measures enable you to quickly determine top-line performance, monitor trends, and analyze change.
Specific issues that also arise as a result of this research are the contrasts between forecasting and trending. It is argued that these forecasting tools should be deterministic and trending approaches should be considered during cost control process. However, this comparison requires the input of highly experienced and knowledgeable project managers to produce satisfactory results. As a consequence, a study by Al Tabtabai (1998) includes expert's judgment and intelligence is in the process. This method uses an artificial intelligence and expert system mitigates the process by providing the advantage of ability to model the complex nonlinear graphical and tabular format which is required in the process. Moreover, this method may produce realistic and meaningful revised forecasting methodologies and trending approaches which can be generated systematically at any stage of the project.
7. SUMMARY
Accounting for each of the theories explained above, it is clear that there is still a need for innovative research in the area of project forecasting and trending systems. There is still lacking of many aspects in forecasting and trending methods implemented by today's Project Managers. In conclusion, the aim of this paper is to increase awareness of the project cost forecasting and trending needs at all part of project performance, to identify and promote best practice and to encourage commonality in cost control systems and methodologies, to drive greater efficiency and improve performance for the profit of all, and to save time and money while achieving organizational success.
