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Case Study 1

THE MANAGEMENT RESERVE

Background

A project sponsor forces the project management to include a management reserve in the cost of a project. However, the project sponsor intends to use the management reserve for his own “pet” project and this creates problems for the project manager.

Sole-Source Contract

The Structural Engineering Department at Avcon, Inc. made a breakthrough in the development of a high-quality, low-weight composite material. Avcon believed that the new material could be manufactured inexpensively and Avcon’s clients would benefit by lowering their manufacturing and shipping costs.

News of the breakthrough spread through the industry. Avcon was asked by one of its most important clients to submit an unsolicited proposal for design, development, and testing of products for the client using the new material. Jane would be the project manager. She had worked with the client previously as the project manager on several other projects that were considered successes.

Meeting with Tim

Because of the relative newness of the technology, both Avcon and the client understood that this could not be a firm-fixed-price contract. They ultimately agreed to a cost-plus-incentive-fee contract type. However, the target costs still had to be determined. Jane worked with all of the functional managers to determine what their efforts would be on this contract. The only unknown was the time and cost needed for structural testing. Structural testing would be done by the Structural Engineering Department, which was responsible for making the technical breakthrough. Tim was head of the Structural Engineering Department. Jane set up a meeting to discuss the cost of testing on this project. During the meeting, Tim replied:

A full test matrix will cost about $100,000. I believe that we should price out the full test matrix and also include a management reserve of at least $100,000 should anything go wrong.

Jane was a little perplexed about adding in a management reserve. Tim was usually right on the money on his estimates and Jane knew from previous experience that a full test matrix might not be needed. But Tim was the subject matter expert and Jane reluctantly agreed to include in the contract a management reserve of $100,000. As Jane was about to exit Tim’s office, Tim remarked:

Jane, I had requested to be your project sponsor on this effort and management has given me the okay. You and I will be working together on this effort. As such, I would like to see all of the cost figures before submitting the final bid to the client.

Reviewing Cost Figures

Jane had worked with Tim before but not in a situation where Tim would be the project sponsor. However, it was common on some contracts that lower and middle levels of management would assume the sponsorship role rather than having all sponsorship at the top of the organization. Jane met with Tim and showed him the following information, which would appear in the proposal:

Sharing ratio: 90–10%

Contract cost target: $800,000

Contract profit target: $50,000

Management reserve: $100,000

Profit ceiling: $70,000

Profit floor: $35,000

Tim looked at the numbers and Jane could see that he was somewhat unhappy. Tim then stated:

Jane, I do not want to identify to the client that we have a management reserve. Let’s place the management reserve in with the $800,000 and change the target cost to $900,000. I know that the cost baseline should not include the management reserve, but in this case I believe it is necessary to do so.

Jane knew that the cost baseline of a project does not include the management reserve, but there was nothing she could do; Tim was the sponsor and had the final say. Jane simply could not understand why Tim was trying to hide the management reserve.

Execution Begins

Tim instructed Jane to include in the structural test matrix work package the entire management reserve of $100,000. Jane knew from previous experience that a full test matrix was not required and that the typical cost of this work package should be between $75,000 and $90,000. Establishing a work package of $200,000 meant that Tim had complete control over the management reserve and how it would be used.

Jane was now convinced that Tim had a hidden agenda. Unsure what to do next, Jane contacted a colleague in the Project Management Office. The colleague informed Jane that Tim had tried unsuccessfully to get some of his pet projects included in the portfolio of projects, but management refused to include any of Tim’s projects in the budget for the portfolio.

It was now clear what Tim was asking Jane to be part of and why Tim had requested to be the project sponsor. Tim was forcing Jane to violate PMI’s Code of Ethics and Professional Conduct.

QUESTIONS

1. Why did Tim want to add in a management reserve?

2. Why did Tim want to become the project sponsor?

3. Are Tim’s actions a violation of the Code of Ethics and Professional Conduct?

4. If Jane follows Tim instructions, is Jane also in violation of the Code of Ethics and Professional Conduct?

5. What are Jane’s options if she decides not to follow Tim’s instructions?

Case study 2

The Estimating Problem

Barbara just received the good news: She was assigned as the project manager for a project that her company won as part of competitive bidding. Whenever a request for proposal (RFP) comes into Barbara’s company, a committee composed mainly of senior managers reviews the RFP. If the decision is made to bid on the job, the RFP is turned over to the Proposal Department. Part of the Proposal Department is an estimating group that is responsible for estimating all work. If the estimating group has no previous history with some of the deliverables or work packages and is unsure about the time and cost for the work, the estimating team will then ask the functional managers for assistance with estimating.

Project managers like Barbara do not often participate in the bidding process. Usually their first knowledge about a project comes after the contract is awarded to their company and they are assigned as the project manager. Some project managers are highly optimistic and trust the estimates that were submitted in the bid implicitly unless, of course, a significant span of time has elapsed between the date of submittal of the proposal and the final contract award date. Barbara, however, is somewhat pessimistic. She believes that accepting the estimates as they were submitted in the proposal is like playing Russian roulette. As such, Barbara prefers to review the estimates. One of the most critical work packages in the project was estimated at 12 weeks using one grade 7 employee full time. Barbara had performed this task on previous projects, and it required one person full time for 14 weeks. Barbara asked the estimating group how they arrived at this estimate. The estimating group responded that they used the three-point estimate where the optimistic time was four weeks, the most likely time was 13 weeks, and the pessimistic time was 16 weeks.

Barbara believed that the three-point estimate was way off of the mark. The only way that this work package could ever be completed in four weeks would be for a very small project nowhere near the complexity of Barbara’s project. Therefore, the estimating group was not considering any complexity factors when using the three-point estimate. Had the estimating group used the triangular distribution where each of the three estimates had an equal likelihood of occurrence, the final estimate would have been 13 weeks. This was closer to the 14 weeks that Barbara thought the work package would take. While a difference of one week seems small, it could have a serious impact on Barbara’s project and incur penalties for late delivery.

Barbara was still confused and decided to talk to Peter, the employee assigned to do this task. Barbara had worked with Peter on previous projects. Peter was a grade 9 employee and considered to be an expert in this work package. As part of the discussions with Barbara, Peter said: “I have seen estimating data bases that include this type of work package, and they all estimate the work package at about 14 weeks. I do not understand why our estimating group prefers to use the three-point estimate.”

“Does the typical data base account for project complexity when considering the estimates?” asked Barbara.

Peter responded:

Some databases have techniques for considering complexity, but mostly they just assume an average complexity level. When complexity is important, as it is in our project, analogy estimating would be better. Using analogy estimating and comparing the complexity of the work package on this project to the similar works packages I have completed, I would say that 16–17 weeks is closer to reality, and let’s hope I do not get removed from the project to put out a fire somewhere else in the company. That would be terrible. It is impossible for me to get it done in 12 weeks. And adding more people to this work package will not shorten the schedule. It may even make it worse.

Barbara then asked Peter one more question: “Peter, you are a grade 9 and considered as the subject matter expert. If a grade 7 had been assigned, as the estimating group had said, how long would it have taken the grade 7 to do the job?”

“Probably about 20 weeks or so,” responded Peter.

QUESTIONS

How many different estimating techniques were discussed in the case?

If each estimate is different, how does a project manager decide that one estimate is better than another?

If you were the project manager, which estimate would you use?

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