Practical Project Management

When will the breakeven point occur?

Typically the breakeven point is used for manufacturing.
It tells you how many widgets you have to sell to cover your setup cost.
However, the strict definition of breakeven point is the financial crossover point where revenue exactly matches costs [Shi].
Thus, it is a useful measurement for project management.

If you have an accurate cash flow analysis, you can calculate the breakeven point by plotting the budget (the predicted internal cost) and revenue over time using cumulative-to-date values.
The point where the cash flow becomes positive is the breakeven point of the project.
If you have to borrow money to start the project, the length of time before the breakeven point occurs determines the cost of money required to support the startup expenses.

How much of the contingency will become profit?

There are two ways to mitigate risk in your project plan.
You can "pad" each activity so that there is very little risk that you will not finish a specific activity on time and under budget.
Or, you can manage contingency apart from the activities.

In 1958, C. Northcote Parkinson concluded that "work expands so as to fill the time available for its completion."
This statement, popularly known as "Parkinson's Law," explains why an activity that is estimated to take two weeks, rarely takes less.
Therefore, if you "pad" your original estimate to support any known risks, you will use the "padding" or contingency.
In fact, you may use all of the "padding" and still need more!

The 2000 edition of the PMBOK states, "A contingency plan is applied to the identified risks that arise during the project.
Developing a contingency plan in advance can greatly reduce the cost of an action should the risk occur."

In the 1996 edition of the PMBOK, there is a discussion about the difference between the "known unknowns and the unknown unknowns."
While this is a mouthful, it explains the difference between using a project level contingency pool for unknown events that might occur. These are the unknown unknowns.
The known unknowns are the risk factors that we can foresee for a particular piece of work.
We can create an estimate for these known unknown risk factors should they occur.

A contingency plan that is documented for known unknowns is easier to manage for the following reasons:

• You have less risk of using up the contingency budget at the beginning of the project.
• You have a better idea when the use of the contingency budget is justified.
• The contingency budgeted is more likely to be accurate because you estimated the amount needed should a particular risk occur as opposed to just adding 10% to the overall budget.

Often it is helpful to have a second pool for the "unknown unknowns" at the project level as an extra precautionary.

Moving contingency to budget also makes it easier to status your activities.
For example, assume that the work is a drawing and that you now determine you will require several additional drawings to adequately detail your design.
At this point, you realize that you will need to use the contingency budget to complete all the drawings.
Increasing the budget by drawing from the contingency allows you to status and calculate earned value on an activity that more accurately describes what you are doing.

Managing contingency improves the probability of realizing a profit on the project by providing a cushion for unknown problems that may occur.

Conclusion

In today's competitive marketplace, financial success (even financial survival in some instances) depends on a company's ability not only to deliver projects on time but also to achieve an acceptable profit margin.

In order to reach this goal, it is essential that 21st Century project managers can achieve the following throughout the project life cycle:

• predict profit and ROI in advance as well as calculating it after the fact
• analyze cash flow requirements and calculate the cost of money required to support the project startup before tendering a bid
• manage the contingency

We continue to work at breakneck speed in order to satisfy our customers and remain competitive.
Our companies undoubtedly live and die by the success or failure of the projects we so carefully nurture.
By using sound cost management practices on all of our projects, we can be constantly aware of the position today and be able to predict the future with a degree of consistency and accuracy.
Problems can be identified, addressed, and resolved so that we can deliver our projects on time and on budget.

"Sophisticated" project management is now a different ball game than ten years ago.
We ignore (at our peril) new processes, techniques, and tools that enable us to do a much better job with our projects than was thought possible ten years ago.

Every forward thinking company is striving for improved business success.
As project managers, we hold the key.
Can we afford not to accept the challenge?

2002 © Ruthanne Schulte, PMP

About the Author:

Ruthanne Schulte, PMP,
is employed at Welcom as a product manager for their leading earned value management software package called Cobra.
She has been employed with Welcom since 1990 and has held positions such as an implementation consultant, software developer, and product architect.
Schulte holds a BS Degree in Civil Engineering from Texas A&M University.
She can be reached by email

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