Theory of Constraints Handbook - James Cox Iii [58]
Whatever the cause, it should be recorded and all like events aggregated via a check sheet. A Pareto analysis will reveal the most common and expensive causes of delay. This information should be used to analyze how processes and procedures can be changed to avoid future overrun occurrences. The data definitely should not be used to point fingers or berate employees.
Everyone involved in the most common and most critical overrun events should be part of a team to formulate a solution. This group might include individuals involved in predecessor and successor tasks. In this way, an organization can continuously improve its project performance.
Project Budgeting
Now that you have been exposed to CC scheduling and management, we need to return to the subject of project budgeting. We know that we can control task uncertainty with buffers of time. Should we control project costs with a budget buffer of cash? First, let us review, very briefly, a few things about project budgeting.
Keep in mind that the first priority for the organization is completion of every project on or before its CC (shortened) due date. Time is the element that limits organizational profitability. Costs are secondary, or perhaps even further down the list of organization goals. However, if a process is not established to permit cost savings on projects, they most assuredly will not occur.26
Components of a Project Budget
We are all familiar with the angst of going through the preparation of a regular annual budget and the subsequent budget cycle. Fortunately, preparation of a project budget is much easier and requires fewer schedules. For example, project revenue, either actual or imputed (for internal projects), generally is known prior to a detailed estimation of costs.27 In addition, either the finance or accounting department will take care of managing cash flows, so a project can be treated as a cost center (for internal projects, where only costs are traced to the project) or a profit center (for projects initiated for outside customers and involving revenue generation as well as cost accumulation). Project costs include materials, labor, and overhead.
Materials
Required raw materials, major (costly or unique) supplies, and outsourced work that generally is billed in a lump sum are included in this category and should be estimated for each task that must be performed to complete the project. Materials typically are added when the first task on a path is begun, but can be required for any task.
Equipment purchased for the sole use of the project can be included in the materials or overhead (see subsection “Overhead”) category. The original cost of the equipment, minus any resale or salvage value, or, alternatively, the periodic lease cost, should be assigned to the project task designated to use the equipment.
If more than one task requires use of this special equipment, the net purchase cost (original purchase price, less salvage value) or the lease cost of the equipment may be apportioned to the tasks using the equipment by employing a rational and reasonable allocation method. In this case, the project’s overhead account is used rather than the materials account.
Labor
Labor can be the largest element of project cost, and includes the fully loaded (salary plus benefits) cost of all resources assigned to the project. For convenience, some organizations use an average resource cost per day for all projects, but, with present-day software, it is easy to use individual resource costs. Only the time spent working on the project should be charged to the project.
Overhead
In addition to overhead amounts that may be incurred for the direct benefit of a particular project (such as equipment lease cost or specialized equipment depreciation expense), organizations usually assign a portion of total organization overhead to a project during its life. Overhead costs include information systems, maintenance, and human resources costs, as well as the costs of general materials and equipment commonly used by many