When I was studying for the PMP exam, a few years ago, I remember memorizing a group of formulas. One of those was the "Variance of Activity." At this point, don't remember if it was even referenced in the exam. There were no direct questions asking "what is the formula for..." On my exam, I remember having numerous questions resulting from schedule variance calculations and cost variance calculations. To my surprise, I went searching for the Variance of Activity formula in the PMBOK (4th Edition) and I can't find it! So as not to lead people astray when giving PMP study advice, I'm now researching each formula I was once told to memorize. I'm very surprised PMI didn't save us a lot of trouble and list known formulas in the back of the PMBOK.
Defining Organizational Structure
Over the last 15 years, I've seen a lot of interesting ways an organizational structure will influence a project. I've worked in projectized, functional, matrixed, and even composite environments. These terms of management are interesting to me because I had to understand the definitions as part of the PMP exam. At my last engagement, ironically, my boss went so far as to use Wikipedia to get the definition for Matrix Management without realizing I was one of the contributing authors to the page. Personally, I would prefer to use the PMBOK. I've noticed quite a few people have modified the Matrix definition on Wikipedia.
Today I was reading the PMBOK (I'm strange like that) reviewing differences between the 3rd and 4th editions. What I noticed were definitions (in the glossary) for each organization structure with the exception of composite. Composite, by the way, is new to the 4th edition. Perhaps PMI will take notice and add it at a later date. Below you'll find figures and definitions of each.
The Best Kind Of Contract To Manage Is…(3 of 3)
Unfortunately, there is no ONE best type of contract to manage. The risk the vendor and customer share is determined by the contract type. The best thing you can do is understand the risks and benefits of each. There are three categories of contracts: Fixed-Price, Cost-Reimbursable, and Time and Material (T&M). In this 3 part series, I defined the contracts in each category. Hopefully, it will help you on the PMP exam and out in the real world.
Time and Materials (T&M) is a hybrid type of contractual arrangement that contains aspects of both cost-reimbursable and fixed-price contacts. They are often used for staff augmentation, acquisition of experts, and any outside support when a precise statement of work cannot be quickly prescribed.
These types of contracts resemble cost-reimbursable contracts in that they can be left open ended and may be subject to a cost increase for the buyer. The full value of the agreement and the exact quantity of items to be delivered may not be defined by the buyer at the time of the contract award. Thus, T&M contracts can increase in contract value as if they were cost-reimbursable contracts. Many organizations require not-to-exceed values and time limits placed in all T&M contracts to prevent unlimited cost growth. Conversely, T&M contracts can also resemble fixed unit price arrangements when certain parameters are specified in the contract. Unit labor or materials rates can be preset by the buyer and seller, including seller profit, when both parties agree on the values for specific resource categories, such as senior software engineers at specified rates per hour, or categories of materials at specified rates per unit.
Image courtesy of Marc Lemmons via Flickr
Risks and Benefits of Cost-Reimbursable Contracts
As I mentioned in my previous post, Fixed-Priced Contracts, there is no ONE best type of contract to manage. The risk the vendor and customer share is determined by the contract type. The best thing you can do is understand the risks and benefits of each. There are three categories of contracts: Fixed-Price, Cost-Reimbursable, and Time and Material (T&M). In this second installment of a 3 part series, I will define the contracts in the cost-reimbursable category. It will hopefully help you on the PMP exam and out in the real world.
Cost-reimbursable is a contract category involving payments (cost reimbursements) to the seller for all legitimate actual costs incurred for completed work, pus a fee representing seller profit. Cost-reimbursable contracts may also include financial incentive clauses whenever the seller exceeds, or falls below, defined objectives such as costs, schedule, or technical performance targets. Three of the more common types of cost-reimbursable contracts in use are Cost Plus Fixed Fee (CPFF), Cost Plus Incentive Fee (CPIF), and Cost Plus Award Fee (CPAF).
A cost-reimbursable contract gives the project flexibility to redirect a seller whenever the scope of work cannot be precisely known and defined at the start and needs to be altered, or when high risks may exist in the effort. Frankly put, if the buyer doesn't know what they want, this type of contract allows the project to move forward without the risk to the seller.
Cost Plus Fixed Fee (CPFF) reimburses the seller for all allowable costs for performing the contract work, and they then receive a fixed fee payment calculated as a percentage of the initial estimated project costs. The fee is paid only for competed work and does not change regardless of seller performance. The fee amounts do not change unless the project scope changes.
Cost Plus Incentive Fee (CPIF) reimburses the seller for all allowable costs for performing the contact work and receives a predetermined incentive fee based upon achieving certain performance objectives as set forth in the contract. In CPIF contracts, if the final costs are less or greater than the original estimate costs, both the buyer and seller share costs from the departures based upon a prenegotiated cost sharing formula, e.g., an 80/20 split over/under target costs based on the actual performance of the seller.
Cost Plus Award Fee (CPAF) reimburses the seller for all legitimate costs, but the majority of the fee is earned, based on the satisfaction of certain broad subjective performance criteria. This performance criteria is defined and determined by the buyer and and incorporated into the contact. The determination of the fee is based solely on the subjective determination of seller performance by the buyer, and is generally not subject to appeals.
Image Source: Pictofigo
The Best Kind Of Contract To Manage Is...
Unfortunately, there is no ONE best type of contract to manage. The risk the vendor and customer share is determined by the contract type. The best thing you can do is understand the risks and benefits of each. There are three categories of contracts: Fixed-Price, Cost-Reimbursable, and Time and Material (T&M). In this 3 part series, I will define the contracts in each category. Hopefully, it will help you on the PMP exam and out in the real world.
Fixed-Price is a category of contract involving setting a fixed total price for a defined scope of work to be provided. Fixed-price may also incorporate financial incentives for achieving or exceeding selected project objectives, such as schedule delivery dates, cost and technical performance, or anything that can be quantified and subsequently measured. Sellers under fixed-price contracts are legally obligated to complete such contracts, with possible financial damages if they do not. Under the fixed-price arrangement, buyers must precisely specify the products or services being procured. Changes in scope can be accommodated, but generally at an increase in contact price.
- Firm Fixed Price Contracts (FFP) are the most commonly used contract type. It is favored by most buying organizations because the price for goods is set at the outset and not subject to change unless the scope of work changes. Any cost increase due to negative performance is the responsibility of the seller, who is obligated to complete the effort.
- Fixed Price Incentive Fee Contracts (FPIF) are arrangements which give the buyer and seller some flexibility whereby allowing for deviation from performance, with financial incentives tied to achieving agreed to metrics. Typically such financial incentives are related to cost, schedule, or technical performance of the seller. Performance targets are established at the outset, and the final contract price is determined after completion of all work, based on the seller's performance. Under FPIF contracts, a price ceiling is set, and all costs above the price ceiling are the responsibility of the seller, who is obligated to complete the work.
- Fixed Price with Economic Price Adjustment Contracts (FP-EPA) are used whenever the seller's performance period spans a considerable period of years, as is desired with many long-term relationships. FP-EPA is a fixed-price contract, but with a special provision allowing for predefined final adjustments to the contract price due to changed conditions, such as inflation changes, or cost increases (or decreases) for specific commodities. The EPA clause must relate to some reliable financial index which is used to precisely adjust the final price. The FP-EPA contract is intended to protect both buyer and seller from external conditions beyond their control.
Next in my series on Contracts, I'll define Cost-Reimbursable and Time and Material Contracts (T&M)
Image Source: Pictofigo
Mitigated Speech and Project Negotiations
Try this
Mitigated speech is a linguistic term describing deferential or indirect speech inherent in communication between individuals of perceived High Power Distance. The term was recently popularized by Malcolm Gladwell in his book, Outliers, where he defines mitigated speech as "any attempt to downplay or sugarcoat the meaning of what is being said". He described 6 degrees of mitigation with which we make suggestions to authority:
1. Command – “Implement this”
2. Team Obligation Statement – “We need to try this”
3. Team Suggestion – “Why don’t we try this?”
4. Query – “Do you think this would help us in this situation?”
5. Preference – “Perhaps we should take a look at this an an alternative”
6. Hint – “I wonder if we will run into any issues by following our current process”
As I observe the command and communication structure between a PMO and its members and contractors, I have the opportunity to witness mitigated speech every day. Being direct (command) doesn't always work. People need to learn to be flexible in their requests and negotiations if they have the hope those in power will implement new strategies. Additionally, learn to read those around you to know what degree of mitigation you will use IF you intend to use it.
As I read Outliers, I started to think of the relationship between mitigated speech and Appendix G.8 (negotiation) of the PMBoK.
Negotiation is a strategy of conferring with parties of shared or opposed interests with a view of compromise or reach an agreement. Negotiation is an integral part of project management and when done well, increases the probability of project success.
The following skills and behaviors are useful in negotiating successfully:
Analyze the situation.
Differentiate between wants and needs - both yours and theirs.
Focus on interests and issues rather that on positions.
Ask high and offer low, but be realistic.
When you make a concession, act as if you are yielding something of value, don't just give in.
Always make sure both parties feel as if they have won. This is a win-win negotiation. Never let the other party leave feeling as if he or she has been taken advantage of.
Do a good job of listening and articulating.
To summarize, stride to be a win-win negotiator and be aware of the mitigated speech you are using to conduct your negotiations.
Free Project Team Organization Worksheet
Project Team Organization
Today I'm going to write about (and provide) a free Project Team Organization worksheet to complement the Project Charter Template so many have downloaded. Both files are free for download, modification, and distribution. [Team Organization Worksheet] [Project Charter Template] When using the Project Team Organization worksheet, note that there are 4 sections: Structure, Roles and Responsibilities, and a Responsibility Matrix, Project Facilities and Resources. I'm going to focus on the first three.
Step 1: Describe the organizational structure of the project team and stakeholders, preferably providing a graphical depiction (organization chart).
Step 2: Summarize roles and responsibilities for the project team and stakeholders identified in the project structure above.
Step 3: Complete the responsibility matrix for each of the project roles. As a graphical depiction of a more detailed perspective of responsibilities, the matrix should reflect by functional role the assigned responsibility for key milestones and activities.
Step 4: Describe the project's requirements for facilities and resources, such as office space, special facilities, computer equipment, office equipment, and support tools. Identify responsibilities for provisioning the specific items needed to support the project development environment. Hey, you're people need places to sit and equipment to get their work done.
With preliminary approval, copy these values into Section 3 of our free Project Charter Template. Upon Project Charter approval, apply the identified team members to activities in Microsoft Project or your selected Project Management application.
Another thing I would recommend is leverage the data from this worksheet in your Communications Management Plan. You've already identified people and their roles or responsibilities. The most important thing to remember is do what makes sense. This planning worksheet isn't required to do a Charter. It's supposed to make things easier for you and lower the risk of not knowing who is on your team and what they are responsible for.
[Team Organization Worksheet] [Project Charter Template]
Impress Your PMP Friends By Understanding SPI and CPI
Variance Charts
Are you studying for the PMP exam and struggling with the concept of Schedule Performance Index (SPI) and Cost Performance Index (CPI)? Are you just bored and want to impress your friends with your knowledge of SPI and CPI? Well, I'm going to try to make it easy for you. To the left you'll see two charts. Both are displaying variances on a monthly basis. The first chart is displaying variances in thousands of dollars, both in schedule and cost. The second chart is displaying the variances as they relate to a performance index.
Definitions and Formulas
Earned Value (EV) - The estimated value of the work actually accomplished
Actual Cost (AC) - The actual cost incurred from the work accomplished
Planned Value (PV) - The estimated value of the work planned to be done [Chart 1 - Variance (In Dollars)]
Scheduled Variance (SV)=EV - PV a NEGATIVE schedule variance is behind schedule and a POSITIVE schedule variance is ahead of schedule
Cost Variance (CV)=EV - AC a NEGATIVE cost variance is over budget and a POSITIVE cost variance is under budget[Chart 2 - Variance]
Schedule Performance Index (SPI)=EV ÷ PV You are progressing at __% of the rate originally planned
Cost Performance Index (CPI)=EV ÷ AC You are getting $_____ worth of work out of every $1 spent
Practical Application
So, where does that leave us? Your goal is to have a $0 (zero dollar) cost and schedule variance, resulting in a SPI and CPI of 1.0. That would mean you estimated correctly, leading into your project. Going into the PMP exam, you should know these formulas and how to calculate all of the above. Here are a 2 simple questions you should be able to answer:
1. Is a 1.3 CPI a good thing or a bad thing? Why?
This is a good thing! A 1.3 CPI translates to you getting 1.3 dollars of results for every dollar you put into the project.
2. Is a 0.90 SPI a good thing or a bad thing? Why?
This is a bad thing! A 0.90 SPI translates to your project progressing at 90 percent of the rate originally planned.
Here is the moment of truth. What kind of question is going to be on the PMP exam?
Example Question: Based on the charts listed above, what would you be more concerned with, schedule or cost, if you were taking over this project from another project manager?
Answer: The answer is cost. As of August, CPI is closest to 1.