View source for How to plan the schedule and calculate costs for a project

<h2>Introduction</h2>

<p>Many projects fail for one of two reasons: They had no plan to execute and
lost their way, or they didn't have a clear view of how much money was required,
and ran out.</p>

<p>The first issue is a prerequisite for getting the second issue right. If we
don't know how we're going to do something, it is impossible to estimate how
much it's going to cost.</p>

<h2>Schedule</h2>

<p>The first task for any project is to create a project schedule. This document
is the key part of the project, and everything else will flow from it. By now,
you should have done the EG1004 Skill Builder on Microsoft Project (probably the
most widely used product of its type in industry) and actually produced a
schedule.</p>

<p>Most people making a schedule are overwhelmed by the size of the project.
Initially, most projects look almost impossible to plan. However, obviously
technical professionals are successful in planning projects, so all we need to
do is learn from them.</p>

<p>The biggest mistake most people make who are planning a schedule is that they
don't take enough time thinking about the project. It's tempting just to charge
in and start mapping out tasks. As they seem to make progress, they begin to
get overwhelmed by the detail. At the other end of the spectrum, a planner has
no idea where to start. It's likely you'll find yourself in one of these two 
situations.</p>

<p>In both cases, stop and think about what it is that you're trying to
accomplish. Usually this is easily said (in the case of EG1004 it's in the
project assignments), but you should take time to fully understand what this
overall mission statement means. For Engineers, this step is called project
analysis, and sometimes it can be a lengthy process. Summarizing this activity
into a single word, it's "What?":</p>

<ul>
<li>What's the mission?</li>
<li>What's required of us?</li>
<li>What are the performance specifications?</li>
<li>What else do we need to know?</li>
</ul>

<p>Once you've answered these questions and others like them, you now know what
you have to do. Now we get to "How":</p>

<ul>
<li>How will we achieve the mission? (Our design)</li>
<li>How will we make the design? (What steps)</li>
</ul>

<p>There are two ways to approach this problem, and most professionals use them
both. The first approach is to think sequentially: What steps do I need to take
to accomplish this task? What order do I do them in? What steps can be done in
parallel? The second approach is to think hierarchically: What are the
components of the overall task? What components do they have?</p>

<p>Technical professionals call the result of the hierarchical approach a Work
Breakdown Structure. Most schedules reflect this Work Breakdown Structure, where
the major tasks are the Summary Tasks, and their components are the Detail
Tasks, using Microsoft Project nomenclature. It is not at all unusual for
Summary Tasks to consist of components which are also Summary Tasks, and so on,
with the Detail Tasks being at the bottom. For a large project, there can be
dozens of levels and thousands of tasks. In EG1004, we use the semester-long
project for practice since it doesn't have that much detail.</p>

<p>In planning, professionals will alternate between thinking hierarchically and
sequentially. Usually, they use the hierarchical technique at the higher levels,
and think more sequentially at the lower levels. However, even when thinking
hierarchically, it frequently helps to think in terms of how you would do the
major tasks to figure out what the subtasks should be.</p>

<p>The most common flaw in any schedule is lack of detail. If you have tasks
that last a long period of time, e.g., weeks, it is almost impossible to come up
with an estimate – the task is just too big and too abstract.</p>

<p>We can resolve this by using a "divide and conquer" approach. We'll break
down the big task into smaller tasks, and keep doing this until we have tasks
that each last only several days. When we get a task this small we're much more
comfortable in estimating the time to do it. You can still keep the big task if
you want by making it a summary task of these detailed tasks. You can do this by
using the task indent and outdent icons.</p>

<h2>EG1004 Project Schedule</h2>

<p>An EG1004 project lasts about 10 weeks. Using the guidelines in the preceding
paragraph, this means the schedule should have AT LEAST 20 detailed tasks. Next,
we can aggregate the detail tasks into summary tasks that identify the overall
effort involved. For this size of project, there would be probably at least 3
summary tasks. Finally, we add the project milestones and due date, all as
milestones (events with zero time).</p>

<p>In checking your schedule, make sure that you have the milestones that occur
during the term. These will be contained in the course syllabus, and there are
usually four of them. Check what's required for each milestone, and that you've
included the tasks necessary to complete these requirements.</p>

<h2>Costs</h2>

<p>One very important component of the project is to accurately estimate costs.
As business people, if we misestimate costs, the results are usually
catastrophic. If we consistently estimate too high, we'll price ourselves out of
the market and end up going out of business. If we consistently estimate too
low, we'll lose money and go out of business. This means we have to make
estimates that will allow us to make a profit, but still be competitive.</p>

<p>The EG1004 projects are designed to give you a feeling for what it's like to
produce a product. At various points in the project we have different roles,
acting as development engineers for most of the term building the prototype,
marketing people in doing the final presentation, and manufacturing engineers in
planning on how to produce our product in volume. In all these roles we worry
about cost to insure that we stay in business.</p>

<h2>Labor Rates</h2>

<p>You'll be seeing a lecture later in the term about project planning and
control, including how to estimate and track costs. One aspect of the
presentation is about labor rates. For the purposes of starting the project, you
should use a "fully burdened" labor rate (definition of this will be at the
lecture), which you can estimate at $50 per hour.</p>

<h2>Prototype Labor Hours</h2>

<p>The second part of the labor costs is how many hours are needed to produce
the product. For an engineer, this can be extremely challenging, but we have
tools to help us. When we do the project schedule, we assign "resources" to do
the tasks. For the project, it's typically the names of the team members working
on that task. You can also put a percentage of time that "resource" will be
working on the task. For example, assuming an eight hour day, if you plan to
work on that task two hours each day, you'd be working 25% of the time on that
task. That is the percentage you can put on your schedule. If you do this for
all the detail tasks on the schedule you'll have the total number of hours the
various "resources" work on the project.</p>

<h2>The Prototype Labor Estimate</h2>

<p>You now have an estimated labor rate for each resource, and estimated labor
hours for each resource. If you multiply the rate by the hours, you'll get the
total cost for that resource to work on the project. Add up all the resources,
 and you have the total labor cost for the project. You can also get this
information off the "Project Summary" window for the project.</p>

<h2>Production Labor Hours</h2>

<p>Next, you'll have to estimate how many hours it would take to build a
production unit. You can usually use your prototype schedule and labor hours to
deduce this. All the design tasks can be ignored, and you only have to count the
hours used to actually build the prototype. This number is your production labor
hours</p>

<h2>Production Labor Estimate</h2>

<p>Like the prototype, you can now multiply the production labor hour estimate
by the labor rate to arrive at a production labor estimate.</p>

<h2>Materials</h2>

<p>The next stop in planning for production is materials. Usually this is easy
since you have done a cost estimate for your prototype using the cost data
supplied to you. You should review your materials list again and see if anything
can be omitted to save money. This will give you materials cost for each unit of
production.</p>

<h2>Total Prototype Cost</h2>

<p>You can now take the materials needed to make the prototype and the prototype
labor estimate, and add them up to get a total prototype cost. This is the
number we want you to present at each of the milestones as well as the final
presentation.</p>

<h2>Total Production Cost</h2>

<p>When we're producing a quantity of units, we need to include several factors
in coming to a unit price that will allow us to make money and stay in
business:</p>

<ol>
<li> Recovering our unit production costs. This
includes the material costs described above, plus the production labor estimate
also given above.</li>

<li>Recovering our prototype costs. We spent
money making the prototype, and we'll get that money back by including that cost
in the production units. Take the total prototype cost you found above, and
divide it by the expected production run. Typically 100 units for the project.
This is the "tax" on each production unit so you can recover your prototype
costs.</li>

<li>Profit. So far we've covered our costs and
won't go bankrupt, but nobody is going to want to invest money in a company that
doesn't reward them with a profit for the risk they took. Also, you won't win
every project you do, so you need profit from the other projects to cover your
costs on the project you lose. Profit can be very subjective. Obviously, if
you are making a product that is extremely attractive and customers want badly, you
can charge a high profit margin (luxury cars and SUVs are examples of this). On
the other hand, if you're in a "commodity" market with many competitors, cost is
a major issue, and profits have to be razor thin (retail stores tend be
examples of this). For the sake of the project and its high technical content,
we can assume we can have a reasonable profit margin of about 10%.</li>
</ol>

<p>Putting all this together, we'll now arrive at the total production cost. Add
the unit production cost in Item 1 above to the prorated prototype cost in Item
2 to get overall cost. Add the 10% profit to this number and you have your total
production cost.</p>

<h2>Production Rate</h2>

<p>The next thing to consider is how fast you would make your production line
run. Each of the project specifications says to consider how you would produce 100
copies of  your project. It would be very shortsighted to make all 100 at one time
and then go out of business. It would be much more reasonable to assume some
"period of performance", which is the time that you'd be making and delivering your
production products. A typical period of performance might be six months or a
year, depending on how urgent the customer's requirement is. For the sake of 
discussion, we'll assume that the period of performance is a year. This means 
you'll have to make 100 units in that year, or two a week.</p>

<p>Once you have this rate, you have to estimate the lead time it will take to
get materials. You'll have to pay for the first few weeks of production before
you make revenue from these units. However, once the line gets going you can use
the revenue from the units shipped and billed to pay for the cost of more units.
Finally, as the line is making the last few units there is no material cost, but
you are collecting revenue. Finally, you'll be expending labor money the entire
time the production line is running. When you put all these factors together,
you can see that you'll be losing money at the beginning, and will move to
breaking even and making money in the middle, and making a lot of money at the
end (just before we go out of business). Presumably the influx of cash at the
end of the production run will be used to fund your next project so you can stay
in business. This cycle is called cash flow, where cash flows out in the
beginning for material bills and paychecks, and flows in via revenue from the
units built.</p>

<h2>Summary</h2>

<p>Being able to generate a realistic, usable schedule and calculate costs accurately
is critical to any business person, including
engineers. This article just scratches the surface of the issues involved, but
should give you an appreciation for the considerations needed to go into
business and stay in business.</p>

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