Introduction
PM FPX 5333 Assessment 1 This analysis begins with the examination of the project’s budget, particularly the cash flow management during the Nearly Free project. Cash flow analysis is vital in knowing how payments are received, handled, and disbursed since maintaining a steady cash flow every month is essential for project sustainability. Essentially, cash flow analysis is a measure of the health of a company’s finances, which is instrumental in making the transition from simply starting business to actually operating one (Tally, 2022).
Now, the Nearly Free project is underway. Even though the project has remained within budget so far, it has surpassed the halfway point and is experiencing problems that are questioning the viability of the project. Hence, the project team asked for assistance with project management services. Upon careful analysis, our focus was shifted towards rectifying the requirements of the project and analyzing its financial status. This helped us generate a cost estimation report that could resynchronize the project. The analysis comprises essential elements such as the Work Breakdown Structure (WBS), Total Cost of Ownership (TCO), and Return on Investment (ROI). In addition, the report will use cost estimation techniques against the current financial conditions and contingency plans to take care of expected failure of projects.
Current Financial State
The initial budget for the Nearly Free New Employee Orientation project was set at $25,000. However, an evaluation of the cash position reveals that the budget would most likely be exceeded. First, there was a baseline spending of $23,300, but the overall project spending now amounts to $30,380, and that represents a budget overrun of $8,080. These figures are very alarming because the project is far from half completed yet and is already over the budget, which requires there to be immediate additional funds so the project schedule can be met.
Project leadership relied on an analogous estimating process, which has proven to be inadequate for the initial budgeting estimate. Analogous estimating is a rapid process that is incomplete and inaccurate. A better method in the future is the 3-point estimation method, which depends on estimators’ skills to give a more precise estimate by considering both negative and positive points. The 3-point estimating method has three main points:
• Most Likely (M) or Best Guess (BG): This is the typical effort which will be expended to perform a task assuming it is replicated again by a team member.
• Pessimistic (P) estimate: This is the work required if something goes wrong.
• Optimistic (O) estimate: This is the amount of effort required if positive risks materialize (Indeed, 2023).
Cost Estimate
PM FPX 5333 Assessment 1 It is necessary to comprehend the Work Breakdown Structure (WBS) to examine project cost estimates and enhance the team’s awareness of the cost of each task (Organ, 2023). The structure of WBS is hierarchical with a prioritized sequence of tasks.
To develop the WBS effectively, the following four steps are required (Organ, 2023):
• Develop a list of high-level requirements or scope deliverables.
• Categorize each high-level requirement under major deliverables.
• Break down these categories into measurable activities.
• Verify the work packages for completeness.
According to Organ, applying the WBS to the estimation of first projects significantly increases the likelihood of proper estimation, planning, and implementation. This makes global project teams able to shun risk and other issues involved with change control, creep, and project delay.
In the case of the Nearly Free project, the WBS was created by following these detailed steps. However, the budget concerns indicate that the project scope was not sufficiently covered, and that could make the deliverables infeasible.
Failure Points
PM FPX 5333 Assessment 1 A detailed report by Nearlyfree.com highlights two major reasons behind the failure of the project. Firstly, there is a huge difference between the estimated budget and the actual expense. Secondly, key deliverables were left out during the planning stage that resulted in the overall failure of the project.
Delays have also been against it, and they have taken a lion’s share of the budget. Proper scheduling and planning would have lessened the delays to allow for improved utilization of resources. Delays that were allocated for could have been used instead to fund other aspects of the project.
Turnaround Recommendations
We suggest employing the following estimation techniques to shift the direction of the project:
• Total Cost of Ownership (TCO): Calculate the total cost of the project, both direct and indirect costs. A proper understanding of all associated costs gives a clearer idea of the financial impact of the project.
• Return on Investment (ROI): Quantify potential returns and gains achieved through the project to determine if the anticipated gains are worth the associated costs.
• Contingency Reserves: Create reserves to handle unexpected risks and uncertainties to prepare for unforeseen challenges without losing project momentum.
• 3-point Cost Estimation: Use this method to make project cost estimations by analyzing optimistic, pessimistic, and most likely situations, hence providing a better and realistic cost estimation.
By using these techniques, we aim to revitalize the project and enhance its success prospects through gaining a comprehensive understanding of costs, returns, and possible risks.
Total Cost of Ownership
Including the Total Cost of Ownership (TCO) in project considerations is essential to turning a project around. TCO assists investors in comparing a company with its peers, allowing them to make sound investment decisions. TCO encompasses the asset purchase price as well as operating costs, providing the project with a full picture of the long-term value of the project (Twin, 2023).
In projecting a new budget plan, the integration of the TCO is crucial. This integration accounts for not only the up-front expense of the system but also the immediate expenses, such as software cost, setup, and employee training, giving more insight than a flat overall figure. With an estimated TCO of $27,133.33, it becomes critical to illustrate how these funds will be allocated.
Return on Investment
Measuring ROI is also a project recovery strategy. While TCO is as important as ever, ROI quantifies the return on a capital investment, reflecting the proportion of the entire capital cost and predicting investment expansion and return in the future (Fernando, 2023).
To calculate ROI, one must examine both the outbound and inbound cash flows related to the investment. Accurate ROI calculations involve a thorough inspection of all costs (Fernando, 2023). In this project, it is difficult to ascertain long-term cost savings in resources or labor. Subtracting the estimated cost of $27,133.33 from the baseline cost of $30,380, the project saving stands at $3,246.67.
Contingency Reserves
Considering contingency reserves is another project turnaround technique. Contingency reserves are provisions in the schedule or cost baseline to accommodate known risks and implement response strategies (Harrin, 2022). Having a contingency plan is essential in handling uncertainties and risks in all projects. The calculation of the contingency reserves is made using the Expected Monetary Value (EMV) method, where the probability of occurrence is multiplied by the potential loss for known and unknown risks. Total contingency is derived from the sum of different risks (Harrin, 2022).
On passing through the budget, it is 90% likely that HR labor expenses will be over budget, there is a 50% likelihood that project manager expenses will be over allocated, and there is a 75% likelihood that training expenses will be under. With an estimated contingency reserve of $5,000, working out is as follows:
•90% of $2,777 is $2,500
• 50% of $2,500 is $1,250
• 75% of $3,750 is $2,812.50
3-point Cost Estimation
The final method of rejuvenating the project is to employ the 3-point estimation technique. This technique employs optimistic and pessimistic values to calculate the best value for each task (Indeed, 2023). The estimation formula is (E = \frac{(a + m + b)}{3}), where (E) represents the estimated value, and (a), (m), and (b) represent the most likely, pessimistic, and optimistic values, respectively. This is referred to as the triangular distribution formula.
When we examined the project reports, we observed that some activities had overrun the initial cost. The largest overage was for planning, which exceeded the baseline budget by $6,000. Three of the team members’ labor costs also exceeded the anticipated level. To address future underestimation, we shall employ the 3-point cost estimation technique and allocate the contingency reserves according to it.
The new baseline budget, with the $5,000 contingency reserve, puts the cost of the project at $32,133.33.
References
Fernando, J. (2023, May 24). Return on investment (ROI): How to calculate it and what it means. Investopedia. https://www.investopedia.com
Harrin, E. (2022, April 8). Project contingency: The ultimate guide. Rebel’s Guide to Project Management. https://rebelsguidetopm.com
How does cash flow help in decision making?: Tally solutions. Tally. (2022, July 20). https://tallysolutions.com
Indeed Editorial Team. (2023, February 3). Three-point estimating: Definition, formula and example. Indeed. https://www.indeed.com
PM FPX 5333 Assessment 1 Budget Analysis Report
Organ, C. (2023, March 23). Work breakdown structure (WBS) in project management. Forbes. https://www.forbes.com
Twin, A. (2023, January 25). Total cost of ownership: How it’s calculated with example. Investopedia. https://www.investopedia.com
