Strategic Management

and Project Selection

Strategic Management
and Project Selection
„ Maturity of Project Management
„ Overview
„ Criteria for PS Models
„ Nature of PS Models
„ Types of PS Models
„ Uncertainty Analysis and Risk Management
„ Information Base for PS Models
„ Project Portfolio Process (PPP)
„ Project Proposal
Project Management
Maturity Levels

„ Ad-hoc (essentially disorganized)

„ Abbreviated (some processes
exist)
„ Organized (standardized processes)
„ Managed (measured processes)
„ Adaptive (continuous improvement)
Overview of PS Process
„ Project Management Office (PMO)
„ Project selection
„ Dealing with uncertainty
„ Strategically selecting best projects
„ Locking up the deal
PS Models
„ Idealized view of reality
„ Representing the STRUCTURE of the
problem, not the detail
„ Deterministic or stochastic
Criteria for Project
Selection Models
„ Realism (technical-, resource-, market-risk)
„ Capability (adequately sophisticated)
„ Flexibility (valid results over large domain)
„ Ease of Use (no expert needed to run model)
„ Cost (much less than project benefit)
„ Easy Computerization (use standard
software)
Nature of PS models:
Caveats
„ Project decisions are made by PM --
- NOT by PS model!

„ A PS model APPROXIMATES, but

does NOT DUPLICATE reality!
Nature of PS Models:
Methodology
„ Start with goals
„ Create list of factors (PEF’s)
„ Weigh every element in list
„ Compute an score for project
„ Select project aligned with firm’s
goals
Project Evaluation
Factors (PEFs)

„ Production Factors
„ Marketing Factors
„ Financial Factors
„ Personnel Factors
„ Administrative and Misc. Factors
Types of PS Models:
Nonnumeric

„ Sacred Cow
„ Operating Necessity
„ Competitive Necessity
„ Product Line Extension
„ Comparative Benefit Model
See Q sort
 Comparative Benefit
Model

Q sort
Groups

of 8
Numeric PS Models:
Profit / Profitability
„ Payback Period (PB)
„ Discounted Cash Flow (NPV)
„ Internal Rate of Return
„ Profitability Index
„ Other Profitability Models
Numeric PS Models:
Scoring
1. Unweighted 0-1 „ S = ∑(x)
Factor Model
2. Unweighted Factor
„ S = ∑(s)
Scoring Model
3. Weighted Factor
Scoring Model „ S = ∑(s·w)
4. Constrained
Weighted Factor „ S = ∑(s·w) ∏(c)
Scoring Model
Choosing the PS Model
„ Dependent on wishes and philosophy
of management
„ 80% of Fortune 500 firms choose
“nonnumeric” PS models
„ Firms with outside funding often
choose scoring PS models
„ Firms without outside funding often
choose profit / profitability PS models
Management of Risk:
Terminology
„ Risk: Decision based on complete
information about the probability of
each possible outcome.
„ Uncertainty: Decision based on
incomplete or insufficient data.
„ Game: Decision based under
conditions of conflict.
Areas of Uncertainty
„ Project timing & expected cash flow

„ Direct outcome of project, i.e. what

exactly will the project accomplish

„ Side effects and unforeseen

consequences of project
„ Reward assess plan
Risk Analysis
Crystal Ball®2000
Software
1) Start with estimated risk profile for all
key parameters of project
2) Use Crystal Ball®, an EXCEL® plug
in, to represent decision by statistical
model
3) Repeat many times to get a statistical
distribution of all possible outcomes
Risk Analysis:
Crystal Ball®2000
Software
1) Input of Cash Flow parameter from
Psycho Ceramic example
Risk Analysis:
Crystal Ball®2000
Software
2) Select distribution parameter
(Triangular for this example)
 Risk Analysis:
Crystal Ball®2000
Software
3) Output, 1000 Monte Carlo Runs
(example:Average Project NPV $10,821)
Window-of-Opportunity
Analysis
„ Estimate in advance economic
impact of innovation before R&D is
undertaken
„ Set up a baseline of current process
as the sum of all current sub-processes
„ Compute cost/performance of new
innovation as a multiple of each sub-
process in the baseline system
Problems Affecting Data
Used in PS Models
„ Accounting: arbitrary assignment of
overhead costs, linear cost and
revenue forecasts
Problems Affecting Data
Used in PS Models
„ Measurements: subjective vs.
objective, quantitative vs. qualitative

„ Technology shock: New

technology has to overcome initial
resistance threshold.
Project Portfolio Process
(PPP)
„ Step 1: Establish a Project Council
„ Step 2: Identify project categories &
criteria
„ Step 3: Collect project data
„ Step 4: Assess resource availability
„ Step 5: Reduce project and criteria Set
„ Step 6: Prioritize projects within categories
„ Step 7: Prioritize the projects within
categories
„ Step 8: Implement the Process
Step 1: Establish a
Project Council
Includes:
„ Senior Management

„ Project Managers of major projects

„ Relevant general managers

„ Those who identify key risks

„ Those who could derail PPP later

Step 2: Identify Project
Categories and Criteria
„ Derivative Projects

„ Platform Projects

„ Breakthrough Projects

„ R & D Projects
Step 3: Collect Project
Data
„ Use “activity based costs”
„ Verify all data
„ Include timing for benefits and
resource needs
„ Document assumptions for future
checking
Step 4: Access Resource
Availability
Access availability of Internal and
External Resources by:
– Type
– Department
– Timing: can vary 100% over project life
cycle
Step 5: Reduce the
Project and Criteria Set
Narrow down existing projects
– required competence exists in organization
– Market for offering
– Profitability
– Risk
– Potential partner to assist with project
– Right resources available at the right times
– Good technological fit with organization
– Uses organization’s strengths
– Synergetic with other important projects
– Slipped in desirability
Step 6: Prioritize Projects
within Categories
„ Rank projects within each category
„ Measure by
– Risk
– Development of new knowledge
„ Consider benefits first
„ Consider cost second
Step 7: Select the projects
to be Funded and Held in
Reserve
„ Determine the mix of projects across
various categories and time periods

„ Leave 10-15 % of organization’s

resources free

„ Focus on committing to FEWER

projects
Step 8: Implement the
Process
„ Make results of the PPP widely known

„ Senior management must fully fund

„ Process will be repeated on a regular

basis
Project Proposal:
Content
„ Cover letter
„ Executive summary
„ Description and past experience of project
team
„ Nature of technical problem to be solved
„ How to approach solution of technical
problem
„ Plan for implementation of project
„ Plan for logistic support and administration
Project Proposal:
Cover Letter & Executive
Summary

„ Compose a cover letter

„ Explain nature and benefits

„ Minimize technical language

Project Proposal:
Past Experience of Project
Team

„ List key personnel

„ Include resume of principals

„ Provide references
Project Proposal:
Technical Approach

„ General description of project

„ Major subsystems

„ Methodology

„ Special requirements

„ Test procedures
Project Proposal:
Implementation Plan
„ Estimates

„ Establish milestones

„ List costs

„ Develop contingency plans

Project Proposal:
Plan for Administration and
Logistic Support

„ Controlsubs
„ Nature and Timing of all reports

„ Change management

„ Termination Procedures

„ “Touch of class” capabilities

End
 DESIGN -BID-BUILD
DESIGN-BID-BUILD

DESIGN -BUILD
DESIGN-BUILD

CONSTRUCTION MANAGEMENT AT RISK (CM @ RISK)

JOB ORDER CONTRACTING

 In the Beginning…..
Beginning…..

„ Project delivery systems evolved over time.

„ In centuries past the master builder was hired by
a facility owner to design, engineer and construct
an entire facility.
„ The master builder had complete control of the
design and construction of a facility.
 Project Delivery System
Evolution …..
Evolution…..
„ This master builder system was common until the
industrial revolution and, in some cases, into the early
20th century.
„ Frank Lloyd Wright was one such example.
„ Subsequently, changes in technology and the increasing
sophistication in buildings required specialization of
design and construction services.
„ Designers and constructors began to separately
specialize in the design, fabrication and/or construction
of particular building systems.
 Project Delivery System
Evolution …..
Evolution…..
„ Specialists became separate companies
„ Hired to provide their specific service or install products.
„ Led to the traditional design-bid-build system
„ Separation of design and build services in the public
sector was also a response to perceived corruption in the
public sector.
„ Sealed bidding was seen as the only way to select teams
objectively.
 Project Delivery System
Evolution …..
Evolution…..
„ Separation and specialization of services increased,
design and construction entities shared information only
at the end of design and during the construction
process.
„ Interaction was extremely low.
„ Results? Inefficient designs, increased errors, disputes,
higher costs and, ultimately, longer schedules.
„ In the 1970s and 1980s, facility owners brought in third
parties to assist them in managing design and
construction entities.
 Project Delivery System
Evolution …..
Evolution…..
„ Third parties, often called agency construction
managers, did not hold the trade contracts nor
contractually guarantee the cost or schedule to the
owner.
„ Projects were still awarded to a low bid general
contractor. agency construction managers act as an
agent of/or advisor to the owner.
„ Late 1980s and 1990s, the concept of the contractor in a
similar role as the agency construction manager, but
contractually taking responsibility for the work, and
guaranteeing both the cost and schedule.
 Project Delivery System
Evolution …..
Evolution…..
„ As general contractors developed capabilities, the
construction manager/general contractor (CM/GC) or
construction manager at risk (CM at-risk) evolved.
„ Under this approach the construction manager, could
also self perform some or all portions of the work in
order to meet a contract guarantee.
„ In CM @ Risk, the contractor has significant input in
the design process and guarantees the maximum
construction price. (GMP)
 Project Delivery System
Evolution …..
Evolution…..
„ A desire for unified responsibility in the project delivery
process and a faster, more seamless, delivery led many
owners toward single source design build contracting.
„ Widespread efforts to downsize in-house project
management staff and costly disputes between design
and construction parties also made design-build
contracting popular
„ In the 1990s the design-build project delivery system saw
increased use. This project delivery system is
characterized by a single contract between the design-
build entity and the owner.
 Project Delivery System
Evolution …..
Evolution…..
„ By 1996, design-build was recognized for use in public
agency procurement in over half of the 50 U.S. states
and accounted for over 24 percent of the $286 billion of
non-residential construction put in place (Forest, 1997).
„ Congress also enacted specific authorization that
enabled federal contracting officers to use the design-
build project delivery system in the public sector.
„ Also, civil and infrastructure industries developed new
applications of design-build to procure highway and
bridge projects (Powers, 1997).
 Project Delivery System
Definitions...
„ A project delivery system defines the relationships,
roles, and responsibilities of parties and the sequence
of activities required to provide a facility.
„ More commonly stated, delivery methods “describe the
roles of participants, the relationships between them,
both formal and informal, the timing of events and the
practices and techniques of management that are
used” (Ireland, 1982).
 Design -Bid-Build...
Design-Bid-Build...
„ Traditional project delivery system in the U.S.
construction industry under which the owner contracts
separately with a designer and a constructor.
„ The owner normally contracts with a design entity to
provide “complete” design documents.
„ The owner subsequently solicits fixed price bids from
construction contractors to perform the work.
„ A general contractor is selected and enters into an
agreement with the owner to construct the facility in
accordance with the plans and specifications.
D-B-B
D-B-B client

„ Several variations
„ The design entity subcontracts parts of design
scope to several specialty design consultants.
„ The construction contractor subcontracts part or
all of its construction scope.
„ The owner selects a designer, a constructor
takes possession at substantial completion.

designer general contractor

-design -subs
consultants -suppliers
 Design -Bid-Build...
Design-Bid-Build...
Project start Substantial completion

Select designer

design

Select constructor

construction

Design-bid build project timeline

Design -bid-build advantages...
Design-bid-build
„ Established way of doing things
„ Suitable for competitive bidding
„ A/E directly works for owner
„ Extensive litigation has resulted in well established
legal precedents.
„ No legal barriers in procurement and licensing
„ Insurance and bonding are well defined
Design -bid-build disadvantages...
Design-bid-build
„ Two contracts for owner to manage
„ Disagreements go through owner, owner bears design
adequacy risk
„ All parties have different agendas/objectives
„ Initial low bid doesn’t result in final best value
„ Bids over budget presents most difficulties in reducing
costs/creates significant delay
„ No constructor involvement in design
„ Slowest project delivery system
„ Most litigious delivery process
 Design-build...
Design-build...
• Design-build represents the most recent evolution of
project delivery systems. It is a project delivery system
where the owner contracts with a single entity to perform
both design and construction under a single design build
contract.
• Contractually, design-build offers the owner a single point
of responsibility for design and construction services and
often guarantees the performance of the facility.
• Portions or all of the design and construction may be
performed by a single integrated design-build entity.
 Design -build...
Design-build...
client

• Selected specialty work, or in some cases all work,

may be subcontracted to other design, construction
or design-build specialty companies.
• The owner selects a design-build entity to design
and build the facility. The constructor portion of the
entity provides constructability input to design and
then constructs the facility as portions of the design
become available.
• The owner takes possession of the facility at
substantial completion Design-build
entity
 Design-build...
Design-build...
Project start Substantial completion

Select design-builder

design

Pre- construction construction

Design-build project timeline

 Design -build Advantages...
Design-build
• Single point of responsibility for owner
• One RFQ and or RFP required vs. two for other
systems
• More professional relationship with contractor
• A/E and constructor on the same team providing unified
recommendations to owner
• Fastest most cost-effective delivery system
• Design submission and pricing project at proposal
stage possible
• Earliest knowledge of firm costs
 Design-Build Advantages...
Design-Build

• Allows most innovations/options for owner to select

• Delivers equal or higher quality
• Allows clearest definition of risks
• Fewer changes
• Fewer claims and less litigation
 Design -Build Disadvantages...
Design-Build
• Owners pushed for earlier and timely decisions
• New learning curve for owners
• Different process in front end of project
• Barriers in some states with procurement and licensing
• Use of new insurance bonding products
• Resistance among those not familiar with approach
 Construction Management at
Risk ……..
Risk……..
• Construction Management at Risk evolved from the
traditional project delivery system as a method to somewhat
overlap the design and construction phases and to obtain
significant constructability input during the design phase of a
project.
• Construction Management at Risk is a project delivery system
where the owner contracts separately but somewhat
simultaneously with a designer and a contractor.
• The owner contracts with a design entity to provide a facility
design. As with the design-bid-build methodology, the
designer may subcontract part of its design scope to specialty
sub consultants.
 CM @Risk
• The owner selects contractor to perform construction
management services and construction work in
accordance with the plans and specifications, for a fee
and reimbursable costs.
• Construction manager has significant input during the
design phase.
• The construction manager (CM) generally will subcontract
part or all of its construction scope to specialty contractors
as soon as that specific part of the design is completed.
• When the design is sufficiently complete, the CM usually
guarantees the maximum price of the project and a
project schedule to the owner.
 client

CM @Risk
• Any savings in actual costs under the guaranteed
maximum price can be shared by the owner and
contractor, or retained in full by the owner.
• The owner selects a designer to design the facility.
The owner can simultaneously select a CM/GC to
provide constructability input to design and then to
build the facility. The CM/GC then constructs the
facility and the owner takes possession at substantial
completion.

Construction
designer Manager/
General
contractor
 Construction Management at
Project start Risk... Substantial completion

select designer
design

select CM/GC Pre- construction construction

Construction management at risk project timeline

 Construction Management at
Risk Advantages……..
Advantages……..
• More professional relationship with contractor
• Earlier knowledge of costs
• Earlier involvement of constructor possible
• Two contract system is less change for owner
• Project delivery faster than traditional
 Construction Management at
Risk Disadvantages……..
Disadvantages……..

• Two contracts for owner to manage

• Disagreements go through owner
• Owner bears design adequacy risk
• Parties may still have different agendas/objectives
• Cannot firmly price project as part of proposal
• Constructor input may not be included by designer
• Project delivery slower than Design-build
• Agency CM places ever more risk on owner
 United States Project Delivery
System Study ……..
Study……..
• The objective was to empirically compare cost, schedule
and quality performance of projects delivered using design-
build, design-bid-build, and cm @ risk.
• Data from 351 general building projects recently completed
in the United States.
• Statistical analysis of cost, time data and quality results
quantified the differences among the project delivery
systems studied.
 United States Project Delivery
System Study ……..
Study……..
• In 1997, the top 400 contractors in the U.S. construction
market generated $62.6 billion in revenues from the
general building sector.
• This represented 45% of their total volume (Tulacz,
1998).
• The data was divided into six sectors of the U.S. general
building market.
• The six general building sectors studied were: light
industrial, multi-story dwelling, simple office, complex
office, heavy industrial and high technology.
 Summarizes the primary results
of the study ……..
study……..
Design-build Vs. CM@R vs. Design-build vs. Level of
Metric Design-bid-build Design-bid-build CM@R
Certainty

Unit Cost 6.1% lower 1.6% lower 4.5% lower 99%

Construction 12% faster 5.8% faster 7% faster 89%

Speed

Delivery Speed 33.5% faster 13.3% faster 23.5% faster 88%

* The level of certainty is a statistical measure used to express the ability of a particular
regression model to explain differences in each performance metric. The higher the
Level of certainty the more confident one can be about the results shown.
(Sanvido & Konchar 1999)
 Illustrates the average
differences among the project
delivery systems ……..
systems……..
Design-build Vs. CM@R vs. Design-build vs. Level of
Metric Design-bid-build Design-bid-build CM@R
Certainty

Cost Growth 5.2% less 7.8% more 12.6% less 24%

Schedule Growth 11.4% less 9.2% less 2.2% less 24%

* The level of certainty is a statistical measure used to express the ability of a particular
regression model to explain differences in each performance metric. The higher the
Level of certainty the more confident one can be about the results shown.
(Sanvido & Konchar 1999)
 Bibliography:

„ Sanvido, Victor, and Konchar, Mark 1999. “Selecting Project Delivery

Systems” Ph.D.diss., The Pennsylvania State University.
„ Tulacz, Gary J. 1998. “Markets Are Mixed but Advancing Overall.”
Engineering News Record Sourcebook, November, p.4.
„ Beard, Jeffrey, L., Wundram, Edward C., Loulakis, Michael, C. 2001.
Design Build Planning through Development. No. ISBN 07049
„ Dell’Isola, Michael D. 1987. The Construction Management Impact.
The Construction Specifier April: 71-77
„ Forrest Products. 1997. Building Material and Construction Division.
U.S. Department of Commerce Washington, D.C.
„ Ireland, V. 1982. Virtually Meaningless Distinctions Between Nominally
Different Procurement methods.
Additional Reference:
„ Design Build Institute of
America (DBIA), Foundation
for Integrated Services. 1010
Massachusetts Avenue NW,
Third Floor Washington, D.C.
20001-5402
„ www.dbia.org