What is the Iron Triangle concept for managing cost overruns
ECONOMY & POLICY

What is the Iron Triangle concept for managing cost overruns

The construction industry is one of the indicators of economic performance and growth in the country. Despite having a progressive economic potential, the industry faces several challenges in project management. Among these challenges, time and cost overruns are a persisting problem that leads to...

The construction industry is one of the indicators of economic performance and growth in the country. Despite having a progressive economic potential, the industry faces several challenges in project management. Among these challenges, time and cost overruns are a persisting problem that leads to undesirable impacts on projects. The Iron Triangle concept explains that project managers work within three constraints: Schedule, Scope, and Budget. Quality resides in the middle of the project triangle and effective project managers must balance the trade-offs within these constraints to achieve success. For the project management to be effective overall, schedule management, scope management, cost management and quality management have to be efficiently implemented. Impact of project management on cost overruns According to the Project Management Book of Knowledge (PMBoK), there are 10 knowledge areas for a project, which are as follows: All these knowledge areas have ebb and flow trade-off relationships. For example: Scope creep creates pressure on the contractor, leading to cost overruns. If the project is delayed as per schedule, it leads to increase in indirect costs. The blind selection of lowest price bidders generally shows results in terms of overruns. Known-Known and Known-Unknown Risks are the simplest categories for which contingencies can be easily provided in the project budget. However, contingencies must be provided for Unknown-Known and Unknown-Unknown Risks as well to avoid cost overruns in future. Other factors that could lead to cost overruns owing to managerial aspects are: Inaccurate estimates Improper planning and design Poor scheduling Lack of good resources Failure to adapt changes quickly Poor onsite management Poor communication Administrative errors There are several activities and stakeholders involved in managing a project. The roles and responsibilities of all stakeholders differ as per the contract. The client defines the scope, based on which the architect prepares drawings and releases the tender. The contracts get awarded in the tendering stage. By this stage, the project costs get budgeted and the contractor onboarded to undertake the work. Doing this, multiple parties get involved in the project. At such a level, several issues are encountered, such as scope creep, changes in design, reworks, quality non-conformance, etc. If these issues are not resolved at this point, it leads to overruns. In the above cases, the role of the project manager and the team is crucial. The manager should be able to identify the risks and propose a mitigation plan to resolve such scenarios. Cost monitoring What tools or techniques can help manage costs (techniques such as budgeting perhaps, or cost control)? How important is cost tracking? Overruns can be managed by cost monitoring using several methods and technologies. To monitor cost overruns, Earned Value Management (EVM) is performed at several intervals in the project. It is a project performance management methodology that integrates cost, schedule, technical scope and risk to assess progress against a baseline, use that information to identify problems and forecast cost (and, to a certain extent, schedule) at completion. By using EVM, Earned Value (EV), Planned Value (PV) and Actual Value (AV) are calculated, which further gives a result in the form of Schedule Variance (SV) and Cost Variance (CV). It not only helps to knowthe status of project but to forecast project values in terms of Estimate at Completion (EAC). This gives the project manager an opportunity to find the grey areas and complete the project amid the constraints by value engineering. This method is now integrated into many project management and cost management software, like Microsoft Project, Primavera P6, Cost- X, @Risk, etc, which makes the process simpler and efficient to track. In conclusion Though the Indian construction sector has developed a lot in the past few decades, it stands unorganised compared to the construction sector of developed nations. There are standard practices adopted in the industry, while the necessity today is to adopt best practices to grow. Efficient project management helps manage costs effectively. There are tools and technologies available that are proven as a great support in increasing productivity while managing project costs without errors.In addition, it is prudent to note that a good project manager can make a huge difference in managing a project and, hence, the costs. About the Author: Deben Moza, Senior Executive Director - Head Project Management Services, Knight Frank (India), is a business leader with the vision and leadership skills to strategically plan, direct and control company operations to capitalise on emerging business opportunities. He comes with over 27 years of experience in real estate strategy, infrastructure, construction, architecture, planning, and project management.

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