Pricing Out The Work

Using logical pricing techniques will help in obtaining detailed estimates. The following thirteen steps provide a logical sequence to help a company control its limited resources. These steps may vary from company to company.

Step 1: Provide a complete definition of the work requirements.

Step 2: Establish a logic network with checkpoints.

Step 3: Develop the work breakdown structure.

Step 4: Price out the work breakdown structure.

Step 5: Review WBS costs with each functional manager.

Step 6: Decide on the basic course of action.

Step 7: Establish reasonable costs for each WBS element.

Step 8: Review the base case costs with upper-level management.

Step 9: Negotiate with functional managers for qualified personnel.

Step 10: Develop the linear responsibility chart.

Step 11: Develop the final detailed and PERT/CPM schedules.

Step 12: Establish pricing cost summary reports.

Step 13: Document the result in a program plan.

Although the pricing of a project is an iterative process, the project manager must still develop cost summary reports at each iteration point so that key project decisions can be made during the planning. Detailed pricing summaries are needed at least twice: in preparation for the pricing review meeting with management and at pricing termination. At all other times it is possible that "simple cosmetic surgery" can be performed on previous cost summaries, such as perturbations in escalation factors and procurement cost of raw materials. The list below shows the typical pricing reports:

• A detailed cost breakdown for each WBS element. If the work is priced out at the task level, then there should be a cost summary sheet for each task, as well as rollup sheets for each project and the total program.

• A total program manpower curve for each department. These manpower curves show how each department has contracted with the project office to supply functional resources. If the departmental manpower curves contain several "peaks and valleys," then the project manager may have to alter some of his schedules to obtain some degree of manpower smoothing. Functional managers always prefer manpower-smoothed resource allocations.

• A monthly equivalent manpower cost summary. This table normally shows the fully burdened cost for the average departmental employee carried out over the entire period of project performance. If project costs have to be reduced, the project manager performs a parametric study between this table and the manpower curve tables.

• A yearly cost distribution table. This table is broken down by WBS element and shows the yearly (or quarterly) costs that will be required. This table, in essence, is a project cash-flow summary per activity.

• A functional cost and hour summary. This table provides top management with an overall description of how many hours and dollars will be spent by each major functional unit, such as a division. Top management would use this as part of the forward planning process to make sure that there are sufficient resources available for all projects. This also includes indirect hours and dollars.

• A monthly labor hour and dollar expenditure forecast. This table can be combined with the yearly cost distribution, except that it is broken down by month, not activity or department. In addition, this table normally includes manpower termination liability information for premature cancellation of the project by outside customers.

• A raw material and expenditure forecast. This shows the cash flow for raw materials based on vendor lead times, payment schedules, commitments, and termination liability.

• Total program termination liability per month. This table shows the customer the monthly costs for the entire program. This is the customer's cash flow, not the contractor's. The difference is that each monthly cost contains the termination liability for man-hours and dollars, on labor and raw materials. This table is actually the monthly costs attributed to premature project termination.

These tables are used by project managers as the basis for project cost control and by upper-level executives for selecting, approving, and prioritizing projects.

Project Management Made Easy

Project Management Made Easy

What you need to know about… Project Management Made Easy! Project management consists of more than just a large building project and can encompass small projects as well. No matter what the size of your project, you need to have some sort of project management. How you manage your project has everything to do with its outcome.

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