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2 The cost buffer 205

2 The cost buffer 205

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206

Critical Chain Project Management

8.2.1

Cost buffer penetration

Penetration of the cost buffer provides the global information you need to
drive cost decisions. The measure is cost buffer penetration in dollars, and
the action levels are the same as for the time buffers. Take no action in the
first third of the buffer, plan for actions in the second third of the buffer,
and take actions when you penetrate the third third of the cost buffer. The
cost buffer includes two elements: the net effect of approved project
changes and the difference to date between actual cost and planned cost
for the work performed.
You cannot compare actual project cost to planned project cost versus
time to calculate buffer penetration. The reason is that actual cost to date
includes actual schedule performance, and planned cost to date is based
on the scheduled activity performance. Because of variation, actual
schedule performance never matches scheduled performance. Use the
earned value method to determine cost buffer penetration. As described
in Chapter 3, earned value was developed precisely to separate out the
two contributors to the difference between cost and estimate on a project:
schedule performance and cost performance. Earned value defines three
terms:
◗ Actual cost of the work performed (ACWP), which is simply how

much you have spent to date on the project, broken down to
elements of the project.
◗ Budgeted cost of work scheduled (BCWS), which is the time-

phased budget for the project.
◗ Budgeted cost of work performed (BCWP), which is the earned

value. You credit activities with a portion (from zero to 100%) of
the budgeted cost for the activity. (Note that the actual cost to
perform the task does not matter to BCWP or earned value.)
The only new term here is BCWP. ACWP is simply the cost to date.
BCWS is the budgeted cost to date. The difference between ACWP
and BCWS is the spending variance. Spending variance is made up of
two parts: the cost variance and the schedule variance. Use the cost
variance to determine cost buffer penetration:
CV = BCWP − ACWP

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Most computer scheduling software includes the capability to calculate the earned value, or accumulated BCWP. The ACWP is your actual
project cost as of a given date.
Two of the earned value measures are the same as critical path cost
measures, that is, the BCWS and the ACWP. Earned value really introduces only one new measure. Most earned value practitioners consider
BCWP a schedule status indicator. Unless you have all your budget information loaded into your schedule file, that requires processing the activity status data with the budget file. Normally, that cannot happen more
frequently than the accounting system runs, so it usually is monthly. The
delay is a problem in many projects, because it turns schedule status into
history. It makes the whole job of project management equivalent to driving your car by looking through the rearview mirror.
Most projects have little trouble coming up with comparable BCWP
and ACWP for direct labor hours or cost. Many projects and companies
do have trouble achieving comparable values for material costs. The
problems come from delays, accruals, and commitments.
Few companies are yet able to compile effective actual cost reports
more frequently than monthly and more quickly than a week or two after
the end of the month. Time lags may be greater for subcontract work.
Unless a project is very long, a significant portion of the project time or
budget may be expended before the project manager sees it in cost
reports. Multiyear government projects have to work to annual budgets
as well as overall project budgets; thus, the six-week delay can represent
10% of the annual budget.
Material costs may include contract labor. The reason project control
systems have difficulty is that the financial systems often lag actual material expenditures. Make sure you account for that in determining cost
buffer penetration.
The accrual problem occurs because you often do not get billed for
long lead-time materials as they are built by the supplier; you get the
bill upon delivery and usually take a month or more to pay for it. Your
schedule system usually spreads the cost for the material over the
time from placing the order to delivery, sometimes many months. Your
financial system does not account for the cost until it is paid in one lump
sum some time after the actual delivery. To account for that, some
companies estimate accruals and include them in the project ACWP.

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Critical Chain Project Management

Accruals are estimates of what you owe on the material. Unfortunately,
accrual systems are notoriously inaccurate and often have a delay of
their own.
Material commitments are the total value of signed contracts not
recognized as costs in your accounting system. You may have budgeted
$10,000 for some piece of equipment and then signed a contract of
$15,000, because that is the best price you could get at the time you
placed the order. Your cost variance should include the difference as soon
as you sign the contact, because your project will see the cost. In most
financial systems, you will not see the difference until the costs are
accrued over time, or until the payment is actually made. Some project
management systems prevent you from changing the budget to account
for the difference. You may have to account for the difference between
committed material cost and actual material cost separately and add it to
your cost buffer penetration.

8.3

Quality measurement

Ireland describes the fundamentals of project quality management [4].
CCPM does not directly affect the requirements or processes necessary for
project quality control. TOC places a premium on process and product
quality because of the importance to the company goal. TOC is a process
of ongoing improvement. Quality systems such as those prescribed in ISO
9000 are completely compatible with CCPM.
In The Haystack Syndrome, Dr. Goldratt described an effective measure
of quality as dollar-days [1]. Dollar-days are the accumulation of the
dollars of impact for each day an item does not meet the requirements.
Dollar-days put the correct focus on quality of product. The technical
measures of product quality do not relate directly to either the project or
company goal and the necessary conditions. You measure technical
performance by conformance to customer requirements, as defined in
the customer requirement lists or other specifications, standards, or
sources of product requirements. Such diverse measurement units do not
give us an understanding of the importance of quality.
The quality assurance function usually has the lead to measure and
report on quality conformance to plan, but a preventive approach to quality requires all project participants to plan how not to make defective

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209

product. You need a measure that correctly portrays the cost of poor quality and incentivizes prevention of quality defects. Dollar-days encourage
quality performance on a project. If one activity must reject an input that
does not meet quality standards, the product goes to the quality department, which accumulates the dollar-days until the product is passed on to
the activity that caused the defect. (The activity that rejected the product
does not get credited with dollar-days.)
Dollar-days can help you provide the necessary incentive to produce
quality deliverables from each activity. As soon as an activity completes
and passes on the work result, the dollar-days are passed on to the successor activity. The dollar-days continue to grow until the excess activity
time recovers. Downstream activities will realize it is not fair to penalize
them for the overruns of duration by predecessor activities; nevertheless,
in most cases, they will be a little more motivated to get their activity done
and pass on the hot potato.
What are the dollars to assign to the dollar-day computation? Several
choices come to mind. The daily burn rate of the activity is the low end.
The overall project cost is the high end. For activities on the critical chain
and for activities on the feeding chains, once they have consumed the
project buffer, the total project cost seems appropriate. That will cause
immediate focus in the right place. For activities on feeding chains that
have not used up the project buffer, the value of the chain would seem
appropriate.

8.4
8.4.1

Responses to buffer signals
Schedule buffer exceeds first third

This is a signal that the schedule buffer may have been violated, affecting
the overall project schedule. At that level, you must plan ways to recover
the schedule on current or downstream activities on the chain. There are
four general ways to reduce path time: Change the activity logic, increase
resources, reduce scope, or improve the process for the activity. Table 8.1
lists ideas to carry out three of those four methods.
Changing the activity logic usually means putting more activities in
parallel. If you choose to do that, be sure to assess the need for additional
feeding buffers.

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Critical Chain Project Management
Table 8.1

Ideas to Help Reduce Schedule Buffer Penetration
Methods to Increase
Resources

Methods to Reduce
Scope

Methods to Improve
the Process

Hire additional staff

Subcontract part of the
scope

Change activity logic (e.g., go
from finish-to-start to finish-tofinish)
Examine the activity logic for
ways to reduce batch sizes

Break up the activity to use a
more diverse kind of staff

Revise requirements

Provide improved tools

Authorize overtime (for labor)

Defer requirements to
later in the project

Obtain expert assistance

Subcontract labor



Use process improvement
tools, especially cycle time
analysis

8.4.2

Cost buffer exceeds first third

This is a signal that the overall project may overrun the budget. You must
plan ways to reduce cost (Table 8.2). Depending on the trend and the
indications and projections from the cost buffer, you may initiate action
before exceeding the second third of the cost buffer.
Table 8.2

Ideas to Help Reduce Cost Buffer Penetration
Methods to Increase
Resources

Methods to Reduce
Scope

Methods to Improve
the Process

Use lower cost staff

Subcontract part of the
scope

Change activity logic (e.g.,
go from finish-to-start to
finish-to-finish)

Use more productive staff

Revise requirements
Negotiate

Provide improved tools

Use competitive bidding for
subcontracts

Defer requirements to later
in the project

Obtain expert assistance

Perform make-buy analysis on
planned subcontracts and on
activities that might be
subcontracted at reduced cost

Look for activities that can
be deleted

Use process improvement
tools, especially cycle time
analysis



Look for costs that may not
be necessary to meet the
customer’s requirements