The assignment is to answer the question provided above in essay form. This is to be in narrative form. Bullet points should not to be used. The paper should be at least 1.5 – 2 pages in length, Times New Roman 12-pt font, double-spaced, 1 inch margins and utilizing at least one outside scholarly or professional source related to project management. This does not mean blogs or websites. This source should be a published article in a scholarly journal. This source should provide substance and not just be mentioned briefly to fulfill this criteria. The textbook should also be utilized. Do not use quotes. Do not insert excess line spacing. APA formatting and citation should be used.
Running head: CATEGORIES OF COSTS 2
CATEGORIES OF COSTS 2
Categories of Costs Prashanth Kura University of the Cumberlands
Categories of Costs
A project is not without its costs. It is the budgeting process that highlights the costs that a project will incur and the ways the project team will handle them. Project managers use the cost management function in assessing, assigning, and controlling the costs of a project. The process allows the manager to predict coming expenses in order to avert the risk of it exceeding its budgetary allocation (Kerzner, 2017). Costs take various forms depending on factors, key of which is there nature. The primary classification of costs looks at their type, their frequency, the opportunity to be adjusted, and schedule (Pinto, 2019). These four classes represent the most fundamental ways to categorize costs in the domain of cost management.
Costs can either be direct or indirect when categorized in terms of types. Direct costs denote those assigned to aspects of a project that generated the particular cost (Pinto, 2019). For instance, the amount spent on hiring labor or acquiring construction materials is a classic example of such costs. On the contrary, indirect costs are those that may not directly be accountable to a cost object. For example, administration, office expenses, and utilities cannot be directly be connected to a purchased item.
Costs are also categorized based on how frequently they occur. Costs that occur frequently are classified as recurring costs (Pinto, 2019). Such costs will always occur throughout the lifecycle of the project. For instance, labor costs, the cost of leases, and logistics always attract a budgetary charge and thus fall into this category. On the other hand, those that only attract a charge only once in a project’s life cycle constitute nonrecurring costs (Kerzner, 2017). As an example, the cost of personnel training might only be incurred once, hence qualifying to be called non-recurring. In either case, how frequently a cost occurs determines its classification.
The third classification of costs considers whether they are fixed or variable. A cost is regarded as fixed if it does not fluctuate over time (Pinto, 2019). For example, the cost of leasing capital equipment may remain constant throughout the project’s lifecycle irrespective of usage (Al-Tmeemy & Al Bassam, 2018). On their part, variable costs are those that change depending on the degree of usage. Hence, the more a service or product is used, the higher the charge it will attract. For instance, the cost of leasing a crane could vary depending on how long it will be used and for which purpose.
The fourth category considers the schedule of costs. Those that are incurred during the everyday process of working are regarded as normal costs. According to Pinto (2019), these costs are used in completing the project as per the initial schedule at the start of the project. They are calculated as the sum of actual direct material costs, actual labor, and related direct expenses (Heinze, 2017). Examples include repairs, maintenance, and salaries. The opposite of these normal costs is expedited expenses, which include the charges incurred in an attempt to rush the project (Pinto, 2019). A common example is the payment of overtime to workers in a bid to get them to work for longer hours.
Cost management is the process of aassessing, assigning, and controlling project costs. The process allows the project team to predict impending expenses to lessen the chances of cost overruns. Costs take various forms and can be classified based on their nature. The primary classification of costs considers their type, their frequency, the opportunity to be adjusted, and their schedule. Each category determines how the project team will approach its cost management function.
Al-Tmeemy, S., & Al Bassam, B. (2018). An empirical analysis of the relationship between cost of control activities and project management success. MATEC Web of Conferences, 162(1), 2036-2051.
Heinze, K. (2017). Cost management of capital projects. Abingdon: Routledge.
Kerzner, H. (2017). Project management: A systems approach to planning, scheduling, and controlling. London: John Wiley & Sons.
Running head: COST CATEGORIES 2
COST CATEGORIES 2
Cost Categories Lakshmi Narayana Gomatam University of the Cumberlands
Costs form an important part of projects, and how they are managed might determine the outcomes of the project. Lomas, Gale, Richardson, and Walker (2018) claim that it is the cost management function that informs how the project manager will approach costs and the strategies to use in controlling them. However, an important skill needed in the management of costs is their classification. Even though a project incurs several charges throughout its lifespan, the costs are broadly categorized into four classes based on their ability to be adjusted, their type, their frequency of occurrence, and their schedule.
The most common approach to classifying costs is to consider the type. When a cost has a direct impact or is assigned to a specific area of the project, it is regarded as a direct cost (Pinto, 2019). A good example is to contemplate the cost of purchasing construction materials. In such a case, it is possible to directly link these costs to the final product (Kivilä, Martinsuo, & Vuorinen, 2017). However, some costs might not be linked directly to the final product. Such costs are classified as indirect, and often include administrative expenses or the cost of consumable utilities.
How frequently a cost is incurred also determines its classification. For costs that have to be met regularly, they are regarded as recurring (Kivilä et al., 2017). Payment for such costs has to be made throughout the life cycle of the project (Lomas et al., 2013). For example, water bills are recurring because they have to be settled every month. As long as the project uses water, this cost will always be incurred. However, for costs with no established frequencies such that they are only incurred only once, Pinto (2019) calls them non-recurring expenses. Such expenditures include the cost of purchasing the piece of land on where to erect a project.
Another way to classify costs is to consider their schedule. Under this class, costs can either be normal or expedited costs. Normal costs are the ordinary expenses the project team incurs in completing the project and are mostly incurred on the initial schedule at the beginning of the project’s lifecycle (Pinto, 2019). Such costs range from wages paid to workers, electricity bills, and the cost of repairs. However, in case a project meets delays, the project team might opt to incur additional expenses to hire additional staff. Such expenditures are called expedited costs, which ensue when a project needs to be rushed.
The ability of a cost to be adjusted is the fourth classification factor. When a cost remains constant throughout the project’s lifespan, it is considered fixed (Pinto, 2019). These costs are mostly associated with purchases such as leases. On the other hand, the costs that change over time are termed as variable. They change based on factors such as duration and degree of use (Lomas et al., 2018). For instance, the cost of hiring drilling equipment could change based on the nature of the terrain and for how the equipment is leased.
Costs take various forms, and their knowledge is important for project managers. Effective project managers make cost-related decisions based on the nature and type of costs expected to be incurred. Cost management skills enable the project manager to make educated decisions, hence reducing the risks associated with poor costing strategies.
Kivilä, J., Martinsuo, M., & Vuorinen, L. (2017). Sustainable project management through project control in infrastructure projects. International Journal of Project Management, 35(6), 1167-1183.
Lomas, J., Gale, C. P., Richardson, G., & Walker, S. (2018). Which costs matter? Costs included in economic evaluation and their impact on decision uncertainty for stable coronary artery disease. Pharmaco Economics Open, 2(4), 403-413.
Pinto, J. K. (2019). Project management: Achieving competitive advantage (5th ed.). Boston: Pearson.
Running head: CLASSIFYING PROJECT COSTS 2
CLASSIFYING PROJECT COSTS 2
Classifying Project Costs Srujan Kapuganti University of the Cumberlands
Classifying Project Costs
Costs signify the value expended in exchange for a service or a product. Projects spend resources and often incur huge costs when trying to access these resources. The colossal responsibility for managing a project implies that the likelihood of some costs being disregarded is high. Cost management eases this problem by providing a robust way to identify, control, and track these costs (Pinto, 2019). Cost management eases this process providing a framework for distinguishing between the several types of costs involved in a project. Costs are classified based on their type, their level of flexibility, their schedule, and their frequency with which they are incurred.
Whether a cost is regarded as fixed or variable is dependent on how flexible it is. Variable costs are flexible such that they vary based on the nature of the service sought (Lichtenberg, 2016). Examples of variable costs include credit card fees, billable staff wages, and the cost of direct materials. In all these cases, the cost incurred will vary depending on how long the service is used or the quantity used (Pinto, 2019). However, there are costs whose value remains constant. Their value does not rely on factors such as the quantity used. Costs such as the amount paid for office space are fixed because the amount charged is not dependent on how long the office space will be used.
How costs are scheduled also determines their classification. For costs with a normal schedule such that they are incurred regularly, Pinto (2019) terms them as normal costs. These costs represent the bulk of the costs incurred and may include salaries paid to team members and the cost of repairing equipment. However, there are costs that a project incurs to ramp up progress and meet deadlines. For instance, a project manager could opt to hire additional staff or request existing workers to work additional hours in case there are fears of the project lagging (Kujala, Brady, & Putila, 2014). The cost of hiring these additional workers or paying them for putting in additional hours amounts to expediting costs.
The third form of classification considers how regularly a cost is incurred. Under this category, the cost can either be recurring or non-recurring. As the name suggests, recurring costs are those that continue recurring throughout the project’s life cycle (Kujala et al., 2014). For example, the monthly salaries paid to workers or the monthly phone bill are recurring because they will always be there as long as the project continues. However, if a cost is only incurred once, it is classified as non-recurrent. These costs could be paid at the beginning of the project or its conclusion (Pinto, 2019). For instance, the cost of purchasing capital equipment is only incurred the moment the equipment is purchased.
Finally, costs are categorized based on how they affect the project. Direct costs are distinguished by their ability to be traced to the final product (Pinto, 2019). In the case of a construction project, costs such as the purchase of raw materials can easily be isolated once the project is complete. However, some costs offer an indirect contribution to the project. For construction projects, the cost of hiring consultancy services may not have a direct link to the final project. For either case, the costs are distinguished based on how they can directly be linked to the final product.
The four categories considered represent the most fundamental way to categorize costs. Costs are classified based on factors such as their frequency of occurrence, their connection to the final product, their schedule, and how flexible they are. While some costs might not have a direct impact on the project, they nonetheless play a vital role in overseeing the project to its completion. Understanding each category of costs is an important cost management skill depicted by successful project managers.
Kujala, J., Brady, T., & Putila, J. (2014). Challenges of cost management in complex projects. International Journal of Business and Management, 9(11), 48-58.
Lichtenberg, S. (2016). Successful control of major project budgets. Administrative Sciences, 6(3), 8-13.
Pinto, J. K. (2019). Project management: Achieving competitive advantage (5th ed.). Boston: Pearson.
List of Cases by Chapter
Chapter 1 Development Projects in Lagos, Nigeria 2 “Throwing Good Money after Bad”: the BBC’s
Digital Media Initiative 10 MegaTech, Inc. 29 The IT Department at Hamelin Hospital 30 Disney’s Expedition Everest 31 Rescue of Chilean Miners 32
Chapter 2 Tesla’s $5 Billion Gamble 37 Electronic Arts and the Power of Strong Culture
in Design Teams 64 Rolls-Royce Corporation 67 Classic Case: Paradise Lost—The Xerox Alto 68 Project Task Estimation and the Culture of “Gotcha!” 69 Widgets ’R Us 70
Chapter 3 Project Selection Procedures: A Cross-Industry
Sampler 77 Project Selection and Screening at GE: The Tollgate
Process 97 Keflavik Paper Company 111 Project Selection at Nova Western, Inc. 112
Chapter 4 Leading by Example for the London Olympics—
Sir John Armitt 116 Dr. Elattuvalapil Sreedharan, India’s Project
Management Guru 126 The Challenge of Managing Internationally 133 In Search of Effective Project Managers 137 Finding the Emotional Intelligence to Be a Real Leader 137 Problems with John 138
Chapter 5 “We look like fools.”—Oregon’s Failed Rollout
of Its ObamacareWeb Site 145 Statements of Work: Then and Now 151 Defining a Project Work Package 163 Boeing’s Virtual Fence 172 California’s High-Speed Rail Project 173 Project Management at Dotcom.com 175 The Expeditionary Fighting Vehicle 176
Chapter 6 Engineers Without Borders: Project Teams Impacting
Lives 187 Tele-Immersion Technology Eases the Use of Virtual
Teams 203 Columbus Instruments 215 The Bean Counter and the Cowboy 216 Johnson & Rogers Software Engineering, Inc. 217
Chapter 7 The Building that Melted Cars 224 Bank of America Completely Misjudges Its Customers 230 Collapse of Shanghai Apartment Building 239 Classic Case: de Havilland’s Falling Comet 245 The Spanish Navy Pays Nearly $3 Billion for a Submarine
That Will Sink Like a Stone 248 Classic Case: Tacoma Narrows Suspension Bridge 249
Chapter 8 Sochi Olympics—What’s the Cost of National
Prestige? 257 The Hidden Costs of Infrastructure Projects—The Case
of Building Dams 286 Boston’s Central Artery/Tunnel Project 288
Chapter 9 After 20 Years and More Than $50 Billion, Oil is No Closer
to the Surface: The Caspian Kashagan Project 297
Chapter 10 Enlarging the Panama Canal 331 Project Scheduling at Blanque Cheque Construction (A) 360 Project Scheduling at Blanque Cheque Construction (B) 360
Chapter 11 Developing Projects Through Kickstarter—Do Delivery
Dates Mean Anything? 367 Eli Lilly Pharmaceuticals and Its Commitment to Critical
Chain Project Management 385 It’s an Agile World 396 Ramstein Products, Inc. 397
Chapter 12 Hong Kong Connects to the World’s Longest Natural
Gas Pipeline 401 The Problems of Multitasking 427
Chapter 13 New York City’s CityTime Project 432 Earned Value at Northrop Grumman 451 The IT Department at Kimble College 463 The Superconducting Supercollider 464 Boeing’s 787 Dreamliner: Failure to Launch 465
Chapter 14 Duke Energy and Its Cancelled Levy County Nuclear
Power Plant 478 Aftermath of a “Feeding Frenzy”: Dubai and Cancelled
Construction Projects 490 New Jersey Kills Hudson River Tunnel Project 497 The Project That Wouldn’t Die 499 The Navy Scraps Development of Its Showpiece
Warship—Until the Next Bad Idea 500
Project ManageMent achieving coMPetitive advantage
Jeffrey K. Pinto Pennsylvania State University
Boston Columbus Indianapolis New York San Francisco Hoboken Amsterdam Cape Town Dubai London Madrid Milan Munich Paris Montreal Toronto Delhi
Mexico City São Paulo Sydney Hong Kong Seoul Singapore Taipei Tokyo
F o u r t h E d i t i o n
To Mary Beth, my wife, with the most profound thanks and love for her unwavering support. And, to our children, Emily, AJ, and Joseph—three “projects” that are definitely
over budget but that are performing far better than I could have hoped!
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Library of Congress Cataloging-in-Publication Data
Pinto, Jeffrey K. Project management : achieving competitive advantage/Jeffrey K. Pinto.—Fourth edition. pages cm Includes index. ISBN 978-0-13-379807-4 (alk. paper)—ISBN 0-13-379807-0 (alk. paper) 1. Project management. I. Title. HD69.P75P5498 2016 658.4'04—dc23 2014036595
10 9 8 7 6 5 4 3 2 1
ISBN 10: 0-13-379807-0 ISBN 13: 978-0-13-379807-4
Chapter 1 Introduction: Why Project Management? 1
Chapter 2 The Organizational Context: Strategy, Structure, and Culture 36
Chapter 3 Project Selection and Portfolio Management 76
Chapter 4 Leadership and the Project Manager 115
Chapter 5 Scope Management 144
Chapter 6 Project Team Building, Conflict, and Negotiation 186
Chapter 7 Risk Management 223
Chapter 8 Cost Estimation and Budgeting 256
Chapter 9 Project Scheduling: Networks, Duration Estimation, and Critical Path 296
Chapter 10 Project Scheduling: Lagging, Crashing, and Activity Networks 330
Chapter 11 Advanced Topics in Planning and Scheduling: Agile and Critical Chain 366
Chapter 12 Resource Management 400
Chapter 13 Project Evaluation and Control 431
Chapter 14 Project Closeout and Termination 477
Appendix A The Cumulative Standard Normal Distribution 509
Appendix B Tutorial for MS Project 2013 510
Appendix C Project Plan Template 520
Company Index 534
Name Index 535
Subject Index 538
Chapter 1 IntroduCtIon: Why ProjeCt ManageMent? 1 Project Profile: Development Projects in Lagos, Nigeria 2
1.1 What Is a Project? 5 General Project Characteristics 6
1.2 Why Are Projects Important? 9 Project Profile: “Throwing Good Money after Bad”: the BBC’s Digital
Media Initiative 10
1.3 Project Life Cycles 13 ◾ Box 1.1: Project Managers in Practice 15
1.4 Determinants of Project Success 16 ◾ Box 1.2: Project Management Research in Brief 19
1.5 Developing Project Management Maturity 19
1.6 Project Elements and Text Organization 23 Summary 27 • Key Terms 29 • Discussion Questions 29 • Case Study 1.1 MegaTech, Inc. 29 • Case Study 1.2 The IT Department at Hamelin Hospital 30 • Case Study 1.3 Disney’s Expedition Everest 31 • Case Study 1.4 Rescue of Chilean Miners 32 • Internet Exercises 33 • PMP Certification Sample Questions 34 • Notes 34
Chapter 2 the organIzatIonal Context: Strategy, StruCture, and Culture 36
Project Profile: Tesla’s $5 Billion Gamble 37
2.1 Projects and Organizational Strategy 39
2.2 Stakeholder Management 41 Identifying Project Stakeholders 42 Managing Stakeholders 45
2.3 Organizational Structure 47
2.4 Forms of Organizational Structure 48 Functional Organizations 48 Project Organizations 50 Matrix Organizations 53 Moving to Heavyweight Project Organizations 55
◾ Box 2.1: Project Management Research in Brief 56
2.5 Project Management Offices 57
2.6 Organizational Culture 59 How Do Cultures Form? 61 Organizational Culture and Project Management 63 Project Profile: Electronic Arts and the Power of Strong Culture in Design Teams 64
Summary 65 • Key Terms 67 • Discussion Questions 67 • Case Study 2.1 Rolls-Royce Corporation 67 • Case Study 2.2 Classic Case: Paradise Lost—The Xerox Alto 68 • Case Study 2.3 Project Task Estimation and the Culture of “Gotcha!” 69 • Case Study 2.4 Widgets ’R Us 70 • Internet Exercises 70 • PMP Certification Sample Questions 70 • Integrated Project—Building Your Project Plan 72 • Notes 74
Chapter 3 ProjeCt SeleCtIon and PortfolIo ManageMent 76 Project Profile: Project Selection Procedures: A Cross-Industry Sampler 77
3.1 Project Selection 78
3.2 Approaches to Project Screening and Selection 80 Method One: Checklist Model 80 Method Two: Simplified Scoring Models 82 Limitations of Scoring Models 84 Method Three: The Analytical Hierarchy Process 84 Method Four: Profile Models 88
3.3 Financial Models 90 Payback Period 90 Net Present Value 92 Discounted Payback 94 Internal Rate of Return 94 Choosing a Project Selection Approach 96 Project Profile: Project Selection and Screening at GE: The Tollgate Process 97
3.4 Project Portfolio Management 98 Objectives and Initiatives 99 Developing a Proactive Portfolio 100 Keys to Successful Project Portfolio Management 103 Problems in Implementing Portfolio Management 104
Summary 105 • Key Terms 106 • Solved Problems 107 • Discussion Questions 108 • Problems 108 • Case Study 3.1 Keflavik Paper Company 111 • Case Study 3.2 Project Selection at Nova Western, Inc. 112 • Internet Exercises 113 • Notes 113
Chapter 4 leaderShIP and the ProjeCt Manager 115 Project Profile: Leading by Example for the London Olympics—Sir John Armitt 116
4.1 Leaders Versus Managers 118
4.2 How the Project Manager Leads 119 Acquiring Project Resources 119 Motivating and Building Teams 120 Having a Vision and Fighting Fires 121 Communicating 121
◾ Box 4.1: Project Management Research in Brief 124
4.3 Traits of Effective Project Leaders 125 Conclusions about Project Leaders 126 Project Profile: Dr. Elattuvalapil Sreedharan, India’s Project Management Guru 126
4.4 Project Champions 127 Champions—Who Are They? 128 What Do Champions Do? 129 How to Make a Champion 130
4.5 The New Project Leadership 131 ◾ Box 4.2: Project Managers in Practice 132
Project Profile: The Challenge of Managing Internationally 133
4.6 Project Management Professionalism 134
Summary 135 • Key Terms 136 • Discussion Questions 136 • Case Study 4.1 In Search of Effective Project Managers 137 • Case Study 4.2 Finding the Emotional Intelligence to Be a Real Leader 137 • Case Study 4.3 Problems with John 138 • Internet Exercises 141 • PMP Certification Sample Questions 141 • Notes 142
Chapter 5 SCoPe ManageMent 144 Project Profile: “We look like fools.”—Oregon’s Failed Rollout of Its Obamacare
Web Site 145
5.1 Conceptual Development 148 The Statement of Work 150 The Project Charter 151 Project Profile: Statements of Work: Then and Now 151
5.2 The Scope Statement 153 The Work Breakdown Structure 153 Purposes of the Work Breakdown Structure 154 The Organization Breakdown Structure 159 The Responsibility Assignment Matrix 160
5.3 Work Authorization 161 Project Profile: Defining a Project Work Package 163
5.4 Scope Reporting 164 ◾ Box 5.1: Project Management Research in Brief 165
5.5 Control Systems 167 Configuration Management 167
5.6 Project Closeout 169 Summary 170 • Key Terms 171 • Discussion Questions 171 • Problems 172 • Case Study 5.1 Boeing’s Virtual Fence 172 • Case Study 5.2 California’s High-Speed Rail Project 173 • Case Study 5.3 Project Management at Dotcom.com 175 • Case Study 5.4 The Expeditionary Fighting Vehicle 176 • Internet Exercises 178 • PMP Certification Sample Questions 178 • MS Project Exercises 179 • Appendix 5.1: Sample Project Charter 180 • Integrated Project— Developing the Work Breakdown Structure 182 • Notes 184
Chapter 6 ProjeCt teaM BuIldIng, ConflICt, and negotIatIon 186 Project Profile: Engineers Without Borders: Project Teams Impacting Lives 187
6.1 Building the Project Team 189 Identify Necessary Skill Sets 189 Identify People Who Match the Skills 189 Talk to Potential Team Members and Negotiate with Functional Heads 189 Build in Fallback Positions 191 Assemble the Team 191
6.2 Characteristics of Effective Project Teams 192 A Clear Sens
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