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EV and indirect cost

2 replies [Last post]
Sat, 2007-02-03 11:04
mimoune djouallah
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Hello all

First I am speaking in the context of a contractor
In EV technique do you only include direct cost, or should we also include indirect cost (office overhead and project supervising).

mimoune


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Sun, 2007-02-04 10:29
#1
Stephen Devaux
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mimoune,

First, I completely agree with Trevor. But, in addition to his points, there is another hugely important reason for including overhead and support costs: the cost of TIME on a project is often ignored, leading to:

1. Inadequate schedule optimization, and
2. The assumption that a 200 work hour task performed by one person over five weeks costs no more than if performed by five people in one week.

The latter view is promoted by the fact that cost accounting regards the cost of project work as being simply the cost of resources. But the cost of time added to the project duration (though the critical path and in the form of DRAG Cost) is often a huge cost factor for a project!

This cost comes from many places (reduced market opportunities, delayed value creation, reduced rent revenue, purchase of megawatts from other members of the grid, opportunity costs, etc.), many of which are, unfortunately, hard to identify and quantify, and thus get ignored. But the indirect costs of overhead and project support are relatively easy to quantify -- they are "Marching Army" costs, paid to "feed" the project army as long it’s marching. Only by ending the project sooner do we save on such costs, and thus justify both the resource quantities that bring about a shorter schedule, and the project planner’s skills and decision-making that unearth such opportunities for savings.

It is not unusual for "Marching Army" costs to add 20-25% to the total costs of a large project.

Two well-known examples of the potential impact of such costs are the construction of the Hoover Dam and the debacle of Boston’s Big Dig in my home state. The former was accomplished under budget largely because it was completed years ahead of schedule, thus allowing the construction project to shorten the obligation of having to feed, house and school the families of the construction workers. The Big Dig is currently about $11 billion over budget because it is now ten years behind the original schedule.

BTW, I had intended to post the Boston Globe article "Cheaper Faster Path Led to Failure" here back in December when it was first published. For those interested in the construction project, it’s at:

http://www.boston.com/news/local/articles/2006/12/24/cheaper_faster_path...


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Sun, 2007-02-04 00:34
#2
Trevor Rabey
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You could just as well ask, "In project planning, scheduling and budgeting, should we include only the "direct" Tasks, or should we also include the indirect Tasks?".

In my humble view, which I am sure not even one person will agree with, a project plan should include everything, every Task down to the last nut and bolt, every expense down to the tiniest piece of stationery.

Otherwise, whatever gets left out will still have to be done or bought and you will have no budget for it, and your budget will be an under-estimate of what the project really takes and how much it really costs, and in the long run reality will impose itself.

What is the point of setting out to define a project and then deliberatley deciding to leave out some part of it without even knowing how big or small that part is going to be? What is gained by that?

Imagine that you are going to build a house, or a ship, or whatever, and imagine that you are starting with absolutely nothing, not even an office or a phone or a receptionist or a payroll clerk or even a bank account or a business name. Then build the project from scratch.

Your EV will be deficient commensurate with whatever you decide to leave out.
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