Knowing When to Act

PMs need to have a meaningful knowledge about their project's status and they need to know when to take corrective actions. The amount of buffer utilization provides the required information. Buffers are generally divided into three equal sections of time that can be thought of as "expected variation," "normal variation," and "abnormal variation." They are somewhat analogous to the green, yellow, and red of a traffic control light. An illustration of this division is shown in Fig. 3-9. In Fig. 3-6, there are 30 days in the project buffer, which means there would be about 10 days in each of the buffer variation sections.24

Expected Variation (Green Zone)

Time has been aggregated in the CC buffers to protect the completion date of the project. If everything works according to the CC schedule, some or all of the buffers will be used and the project will complete on or before the scheduled date. As the project work proceeds, we can expect one-third of the buffers to be utilized due to inherent task uncertainty. That means that, in our sample project from Fig. 3-6, we will expect that 10 or 11 days will be utilized from our project buffer. No action is required to correct the system at this point. Deming (1993, 194209) called excessive intervention in operations "tampering." Taking corrective action when none is required can waste productive time and cause loss of focus.

Normal Variation (Yellow Zone)

The basis for Deming's discussion of tampering was his hypothesis (now universally accepted) that there are two kinds of variation in any process. He called them "common cause" variation and "special cause" variation (Deming, 1986). Common cause variation is inherent in the design of the process itself because no process is perfect. By their very nature, project task times are uncertain. The utilization of the second third of CC buffers is usually caused due to the inherent uncertainty of task duration prediction. Small variations in the operation of a project are not a reason for alarm, but if the second third of the buffer begins to be used to cover task overages, plans should be formulated to recover lost time. However, to avoid tampering, action should not be initiated until abnormal variation, the last third of the buffer, is experienced.

Utilization of the last (abnormal variation or red) section of a buffer is usually the result of special cause variation and it is wise to observe the scout motto to "be prepared." The time for the PM to develop an action plan to be used if the red (abnormal) section of the buffer is penetrated is before it happens-while only the second section of the buffer (normal variation) has been penetrated. Among other possibilities, an action plan might include such items as arranging for the possible use of overtime or additional resources, outsourcing parts of the project, or securing an agreement to reduce the scope of the project.

Abnormal Variation (Red Zone)

Special cause (abnormal) variation is usually the result of a unique event outside of the normal course of the project operation. Such events could be as simple as illness of a project resource or as momentous as a natural disaster. When the red portion of the buffer is penetrated, it is definitely time for action and the implementation of the plans made while buffer consumption was in the middle section of the buffer.

If a feeding buffer is involved, the appropriate action is to carefully monitor the project buffer. If the project buffer still holds adequate safety, immediate action may not be necessary. If the project buffer is involved, the action plan should be initiated immediately. If a scheduling buffer is involved, the initiation of the next project should be delayed if possible. Some precedent tasks of the next project may have already been started before knowledge of the SR problem surfaced. If the next project has already been initiated, it would be prudent to delay the initiation of other projects that occur later in the project schedule.

Adjusting Buffers

As a project nears completion, it is expected that some or all of the buffers will be utilized. It is less and less important to maintain the full size of the protective buffers unless they are needed. Remembering that we had to add 4 days from a feeding buffer, the sample project in Fig. 3-6 (or Fig. 3-5) starts with 30 days in the project buffer. Compared to the original CC time, that is a ratio of 30/52 0.58. This ratio of task duration to buffer time should be maintained throughout the performance of the project.

Using Fig. 3-6, for example, when Tasks A, D, and E have been completed, Tasks B, C, and J on the Critical Chain would leave 38 days of work to be completed. Maintaining the same ratio of 0.58 means that the project buffer can now be adjusted down by 8 days to about 22 (actually 22.04). The traffic light buffer sections of the new buffer would be divided into thirds of 7-1/3 days each and an adjustment made to calculate the new action triggering points. The amount of the reduction in the buffer (8 days) is subtracted from any previous buffer utilization and the difference is applied to the new buffer sections. Assuming that 10 days of safety have been used from the buffer, subtract the 8 days of buffer reduction from the 10 days of safety consumption and the project has utilized 2 days of our recalculated buffer. The project is still "in the green" (experiencing expected variation) and no action is required. See Fig. 3-10 for an illustration of (a) the buffer penetration of 10 days using the original buffer size and (b) the recalculated buffer with two days penetration. (A thick black line denotes the portion of the buffer that has been used.) FIGURE 3-10 Original and revised buffer sizes (after completion of Tasks A, D, and E).

Sometimes consumption of the buffer is referred to as buffer burn rate. The TOCICO Dictionary defines this term as, "The rate at which the project buffer is being consumed in Critical Chain Project Management. The rate is calculated as the ratio of the percent of penetration into the project buffer and the percent of completion of the Critical Chain" (Sullivan et al., 2007, 78). A result of 1.0 would indicate that the original relationship between the Critical Chain and the buffer is being maintained. Using this formula in our sample project, the burn rate would be 0.33 [percentage of buffer consumption: (10 days)/(30 days)], divided by 0.27 [percentage of Critical Chain completed: (14 days)/(52 days)], or 1.22, a bit higher than the desired 1.0. However, Fig. 3-10 indicates the project is still in the expected (green) range of variability.

Feeding buffers similarly are adjusted as the feeding paths are completed. Since Task A has been completed, its feeding buffer is no longer needed. However, 12-day Task A required 16 days for completion, so 2 of the 10 days of the original project buffer used resulted from Task A, which was able to use only 2 days of its original 6 days of feeding buffer.

The PM should know how and why to perform these buffer calculations each time they receive task reports on active tasks, but in complex project settings it would be a very difficult chore without CC project software that reports resized buffers, buffer penetration, and other useful project management information. Various CCPM software programs may compute buffer consumption slightly differently, but the example in Fig. 3-10 will give you an understanding of how the buffers can be adjusted manually as the project is completed.

A typical fever chart showing the trend of buffer consumption versus CC completion over a number of reporting periods, is illustrated in Fig. 3-11. The solid black area (top of Fig. 3-11) represents the red zone, requiring immediate action, the dark grey area in the middle (diagonal) represents the yellow zone, where plans are made, but action is delayed, and the light grey area represents the green zone where things are going well and the PM should not intervene. Note that by the fourth reporting date, buffer consumption jumped to about 80 percent while only 40 percent of the CC was completed. The project was in the red zone and required immediate intervention. While the project recovered (back to the yellow zone) by the sixth period, additional recovery plans should be formulated in order to ensure on-time completion.

FIGURE 3-11 Buffer tracking on a fever chart [adapted from Newbold (2008), 112].

Using Buffer Consumption Information to Continuously Improve

When buffer consumption enters the expected (yellow) variability zone (see Figs. 3-9 and 3-11), every task that overruns its expected (aggressive) time should be analyzed for the cause. This investigation might be initiated for any buffer consumption, starting from the beginning of a project. Causes of overruns (overages) include the following: Material damaged or of poor quality Resource ill or absent due to family emergency Task poorly defined (or poorly understood) Quality problem with previous work Resource assigned to a more critical project by the PMO (or similar body) Subcontractor problems such as poor quality or late delivery Unexpected event such as abnormal weather25 Whatever the cause, it should be recorded and all like events aggregated via a check sheet. A Pareto analysis will reveal the most common and expensive causes of delay. This information should be used to analyze how processes and procedures can be changed to avoid future overrun occurrences. The data definitely should not be used to point fingers or berate employees.

Everyone involved in the most common and most critical overrun events should be part of a team to formulate a solution. This group might include individuals involved in predecessor and successor tasks. In this way, an organization can continuously improve its project performance.

Project Budgeting

Now that you have been exposed to CC scheduling and management, we need to return to the subject of project budgeting. We know that we can control task uncertainty with buffers of time. Should we control project costs with a budget buffer of cash? First, let us review, very briefly, a few things about project budgeting.

Keep in mind that the first priority for the organization is completion of every project on or before its CC (shortened) due date. Time is the element that limits organizational profitability. Costs are secondary, or perhaps even further down the list of organization goals. However, if a process is not established to permit cost savings on projects, they most assuredly will not occur.26

Components of a Project Budget

We are all familiar with the angst of going through the preparation of a regular annual budget and the subsequent budget cycle. Fortunately, preparation of a project budget is much easier and requires fewer schedules. For example, project revenue, either actual or imputed (for internal projects), generally is known prior to a detailed estimation of costs.27 In addition, either the finance or accounting department will take care of managing cash flows, so a project can be treated as a cost center (for internal projects, where only costs are traced to the project) or a profit center (for projects initiated for outside customers and involving revenue generation as well as cost accumulation). Project costs include materials, labor, and overhead.

Materials

Required raw materials, major (costly or unique) supplies, and outsourced work that generally is billed in a lump sum are included in this category and should be estimated for each task that must be performed to complete the project. Materials typically are added when the first task on a path is begun, but can be required for any task.

Equipment purchased for the sole use of the project can be included in the materials or overhead (see subsection "Overhead") category. The original cost of the equipment, minus any resale or salvage value, or, alternatively, the periodic lease cost, should be assigned to the project task designated to use the equipment.

If more than one task requires use of this special equipment, the net purchase cost (original purchase price, less salvage value) or the lease cost of the equipment may be apportioned to the tasks using the equipment by employing a rational and reasonable allocation method. In this case, the project's overhead account is used rather than the materials account.

Labor

Labor can be the largest element of project cost, and includes the fully loaded (salary plus benefits) cost of all resources assigned to the project. For convenience, some organizations use an average resource cost per day for all projects, but, with present-day software, it is easy to use individual resource costs. Only the time spent working on the project should be charged to the project.

Overhead

In addition to overhead amounts that may be incurred for the direct benefit of a particular project (such as equipment lease cost or specialized equipment depreciation expense), organizations usually assign a portion of total organization overhead to a project during its life. Overhead costs include information systems, maintenance, and human resources costs, as well as the costs of general materials and equipment commonly used by many projects and departments. Overhead might also include interest expense on borrowed funds.

Good internal control requires direct tracing of all overhead costs to the project benefitting from the use of the overhead item, if possible. However, many organizations use only a few overhead cost pools (sometimes called buckets) that are basically general ledger accounts where costs of a particular type are aggregated. Then the organization uses simple allocation methods based on common drivers (allocation bases), such as total materials costs or total labor hours or total labor costs, to allocate overhead amounts. Typically, there are weak cause-effect relationships between the accumulation of costs in the pool, the assumed dependent variable (the item caused by the driver) and changes in the driver (the assumed independent variable) whose increase causes the overhead cost pool to increase.

Typically, overhead costs and driver quantity are estimated prior to the start of an organization's fiscal year for each overhead pool. Then, an overhead rate [(estimated cost)/(estimated driver quantity)] is computed and used to allocate pool costs to "users" of the cost pool. For example, if the estimated annual costs for a particular overhead pool (overhead account) are $832,000 and the driver is direct labor hours of 208,000, every direct labor hour incurred on a project would be allocated $4.00 of overhead from this pool.28 A PM should seek to find out everything possible about the organization's overhead allocation process so they can be in a position to negotiate a lower rate if the project does not utilize the services provided by every overhead pool. While difficult to accomplish, some PMs succeed in negotiating a lower overhead rate.

Regardless of how costs are allocated to the project, we now return to the question of how the total project budget should be allocated to project tasks. The remainder of this topic is a bit beyond the beginner level we have assumed thus far, but the following discussion could prove extremely beneficial to your organization.

Assigning Total Project Costs to Project Tasks

Materials naturally are linked to the tasks requiring them and material costs, including outsourced work, which can easily be traced to particular tasks. Therefore, material costs normally are treated the same for traditional and CC projects.29 Human resource time (labor), however, is another matter. Logically, if aggressive task times are used and resource time safety moved to a buffer, costs should follow the same pattern. For example, Task A in Fig. 3-3 required 24 days of work by Resource 5. In a CC schedule, Resource 5 would be asked to complete the task, under different operating policies, of course, in 12 days. Ignoring material costs, if we assume that Resource 5 has a fully loaded cost of $50 per hour or $400 per day, $4800 [(12 days) ($400 resource labor cost per day)] would be assigned to Task A and $2400 (6 days $400 per day) would be assigned to the project budget buffer,30 analogous to a project buffer of time. While budget buffers might be established for feeding paths as well as for the project, there is little need for such dichotomy between feeding chains (paths) and the Critical Chain when establishing a budget buffer. Therefore, there is a need for only one budget buffer for each project into which half the cost of the safety time removed from all tasks is deposited.

Using traditional product budgeting, Task A would be assigned $9600 for Resource 5 labor, while CC would assign a total of $7200 ($4800 + $2400) to Task A and the project's budget buffer. The difference in these two amounts ($9600 and $7200), or $2400, would be held at the organizational level as project contingency funds. A PM can freely access funds in the project's budget buffer, but must petition the organization to access project contingency funds. The budget for other tasks would be handled similarly.

For example, the PM could transfer amounts from the project budget buffer to Task A to cover time overages. If Resource 5 required 16 days instead of the estimated 12 days to complete Task A, as we earlier assumed, the CC PM could transfer $1600 (4 days $400 per day) to cover Task A's overage. Should Task A complete in 12 or less days, the budget buffer would remain intact and remain available to cover other task (or materials) variability.

The project's budget buffer is computed from the safety time and individual resource costs for all tasks on the Critical Chain and feeding paths (chains). If the project completes on or before its calculated due date, any funds remaining in the budget buffer would be returned to Accounting/Finance. If the project requires access to contingency funds, the PMO, or similar body, should provide them upon reasonable and logical petition unless the project is to be cancelled or delayed.

Implementing a New Project Budgeting Process

Quite obviously, for all projects completed for outside parties, an organization would not want to return revenues earned by the completion of a project by its CC due date, which can be significantly shorter than a similar project completed using traditional project management techniques. Therefore, careful attention must be paid to agreed contracts. Contracts not only should state that all revenues promised are earned upon successful completion of the project, but there also may be opportunities to earn a bonus for early project delivery. Likewise, it is not too risky to accept contractual penalties for delivery beyond the promised due date. Even better, these terms (bonus for early completion, penalties for late completion) should be suggested to organizations preparing Requests for Proposals (RFPs) so all companies responding face the same terms.

Prior to implementing a new system for allocating project costs to tasks and the establishment of project budget (cost) buffers, however, the CCPM must be implemented and working as expected. Then the 10-step change process described later and illustrated in Fig. 3-12, shown later, should be followed to ensure that potential negative unintended consequences of such a change do not occur. For example, funds from traditionally budgeted project work may be used by a resource manager to compensate for unbudgeted items such as employee recruitment or specialized training needs, and this situation should be addressed prior to implementing a new budgeting process.

Project Reporting