1^0
DEWEY
HD28
.M41A
%
Development
Projects
Cost
Dynamics
Ali
N.
Mashayekhi
June
1996
WP#3919
System
Dynamics Group
Alfred
P.Sloan
School
of
Management
Massachusetts
Instituteof
Technology
50 Memorial
Drive
SEP
16
1996
D-4634
DevelopmentProjectsCostDynamics
DEVELOPMENT
PROJECTS
COST
DYNAMICS
By: Ali
N.
Mashayekhi
E60-
357,System
Dynamics
Group,
MIT
30 Memorial
Dr.,Camb.
MA,
02139
June 1996
Abstract
Cost
and
time overrunshave been
acommon
characteristic ofdevelopment
projectsin
many
countries.This paper
presentsa theoryof
costand
timeoverrunsbased
on
project cost structure.The
costof
adevelopment
project consists ofbase
costand progress
cost.Base
costkeeps
a projectready
for physical progress.Progress
cost creates real physicalprogress inthe project.
This
cost structure has an importantinherentdynamic
characteristicwith implications for the efficiency
and
effectiveness ofprojectmanagement.
An
imbalance
between
annual
budget
and ongoing
projects results inan
increasing inefficienciesand
ineffectiveness unrelated to the quality
of
management
in individual projects.Under
such
conditions, the policy
governing
the starting rate of thenew
projectsbecomes
very
important.
The
theoreticalframework
presentedin this papercan
explain at leastpartof
thecauses of time
and
costoverruns
in terms ofimbalance between
development
projectsand
development
budget.The
paper
also suggestssome
policyrecommendations
for startingnew
projects.Key
words:
Projectmanagement, development
projects, time overruns, costoverruns
Introduction
In the
evolution of
economic
growth
theory, gross nationalinvestment has
remained
an
importantdeterminant
of thegrowth
ofnationalproduction
capacity 1.2,3.4,5However,
the efficiencyand
effectiveness ofthe investment processesat amacro
levelhasnot
been
discussed in the literature.The
efficiencyand
effectiveness ofsuch a
process isvery importantto the real contribution ofinvestmenttothe
growth
ofproduction
capacity.Low
efficiency in theinvestment
processwould
result in less production capacity foreach
unit
of
grossinvestment
made.
Low
effectiveness of theinvestment
process results in along
constructionperiod
and
increases the capital costof investment
projects.The
efficiency
and
effectivenessof
theinvestment
processbecomes
very
important
to thegrowth
of nationalproduction
capacitywhen
governmental investment
indevelopment
projects constitutes a
major
partof national investment, as is the case inmany
developing
countries.Development
projects areinvestment
projects,undertaken
by
thegovernments
of
developing
countries to construct infrastructureand
production capacities toenhance and
facilitate the
development
processes.Many
developing
countrieshave
been experiencing
cost
and
timeoverrun
in theirdevelopment
projects^.For
example,
in Iran,completion
costs
and
constructiontime
ofdevelopment
projects are usuallymuch
largerthan initiallyplanned. Figure 1
shows
the ratioofactualcostand
constructiontime toplanned
values fordevelopment
projectscompleted
during1989 and
1990. Point (1,1) indicates a position inwhich
projects arecompleted
according
to theplanned
costand
time. Allof
thedevelopment
projectscompleted
during1989 and 1990
in Iran are located in thehigh
costand
long construction time region ofthe scatter, indicatinglow
efficiencyand
effectivenessinproject
management.
Initial cost underestimation
and
inflationcan
contribute tothe cost overrun.But
notall
of
the costoverrun
shown
in Figure 1can be
attributedto thesetwo
factors.The
whole
sale price
index
in Iran rosefrom
100
in 1980, to390
in 1989,and
530
in1990
\
The
average
priceindex
for auniform
capital expenditurefrom
1980
to1990
was
around
a factorof
2.However, government
projects usuallyenjoyed
a fixed officialexchange
rate for their foreignprocurements.
For
thedomestic purchase of
goods and
services,development
projects usuallyhad
access togoods
at prices setofficiallyby
thegovernment
at a level
lower
thanmarket
prices. Therefore, inflation for thedevelopment
projectwas
lower
thanwhat
thegeneral price indexshows, and
certainly inflationalonecan
notexplainthe
whole
cost overrun.Because
different prices that existedsimultaneously
in Iran, it isdifficult to
determine
how much
ofthe costoverrunwas
due
to intlation.The
underestimationofcost,which
might
existtosome
extent, is not amajor
factorbecause
cost estimation is usuallydone
based
on
some
detailed feasibility studiesby
consultants.
There
aretwo
reasons that theconsultant should notwant
tounderestimate the cost of the project. First, the consulting feesdepend on
the total cost of the projectand
second,the credibility oftheconsultant
would
be
under
question ifthe estimate turned outDevelopmentProjectsCost Dynamics
S
H
Q
tnz
z
<
-1 a.O
H
UJS
<
D
H
U
<
u.O
o
<
z o S a: Z Z) 0^ q; [U > O LiJprovide abetterunderstanding
and
management
ofthe overalldynamics
of asingleprojects•2. 13
and
theimpact
ofclient-contractor relationshipon
projectdelayand
cost ^'^.Although
the qualityof
projectmanagement
is very important, it is not theonly
factorcausing long construction times
and
highcompletion
costs.There
are factors outsideof
projectmanagers'
control thatcontribute tosuch low
performance.One
such
factor is a lackof balance
between
thedevelopment
budget
and
financial resources required fordevelopment
projects. Indeveloping
countries, theneed
fordevelopment
ishigh
and
available resources are low.
There
isalways
pressurefrom
citizens, regional officialsand
sectoral officials to start
new
development
projects.These
pressures lead toan
imbalance
between
availableresourcesand
thenumber
ofprojectsconsuming
those resources.In Iran, for
example, according
to the information obtainedfrom
thePlan
and
Budget
Organization
in 1991, thebudget
allocated to the construction of a hospitalwas
about
30
percentofwhat
was
requiredtocomplete
theongoing
projectson
time witha fouryears construction period. In 1987, the allocated
budget
towater
projectswas
about
22
percent
of
thebudget
required tocomplete
those projects withinan average
constructiontime offiveyears '5.
This paper
shows
that thiskind
ofimbalance
between
availableand
requiredresources has a
profound impact
on
theperformance
ofdevelopment
projects.A
projectcost
model
isdeveloped
and
presented inthe nextsection.The model shows
thateven with
perfect project
management
and
without any
inflation, the costand completion time of
development
projects are affectedby
this imbalance.Any
improvement
indevelopment
project
management
requires asound
macro
management
of thebalance
between
totalnumber
ofprojectsand
available resources inthedevelopment
budget.Model
1:The
Basic
Dynamics
of
Project
Cost
Structure
The
annual
cost ofeach
projectcan be
divided intotwo
cost categories:base
costand
progress
cost.Base
cost consists of all costelements
thatshould be
paid tokeep
aproject
ready
for physical progress.Base
cost includessuch
items as the salaryand
overhead
costsof
the projectmanager
and
his staff, the cost ofkeeping
contractorsand
consultants related to the project,
and
the costof having
constructionmachinery,
equipment,
and
construction materialson
site.Progress
co^r consistsof those costelements
that,
when
paidin additiontothebase
cost,can
createrealphysical progress.Progress
costincludes
such
itemsas constructionmaterials, construction labor,and
the operatingcostof
construction
equipment.
Each
projectcan be
finishedwhen
acertainamount
of
progressDevelopment ProjectsCost Dynamics
priority
over
progresscost,because
base cost shouldbe paid tocreate acondition inwhich
progresscost
can be
effective.Figure 2
shows
acausal loopdiagram
ofa basicdynamic
cost structuremodel.
The
model
consistsof
a positive or reinforcing loop '^^ '^.The
dependency
ofone
variableon
another is
shown
by
an arrow connecting
thetwo
variables with the followingconvention
as is
commonly
used
inSystem Dynamics
'6- ^^- '^- ^^:X
—
^-^>'=>—
^>-0
or-T->~0
when
x^O
and
dx
dtX
—
^^y
=>
<0
or—
-^0when
x>Q
^
dy
dtThe
variables ofthe basicmodel
are:P
=
Number
ofongoingdevelopmentprojectsatdifferentstageandmeasured intermsofunit project. Unit projectis definedas aproject that requires acertain amount of progresscost, called u, to be completed within normalconstructiontime.S =
Starting rate ofnew
projects in each year measured in unitprojectsper year that increases thenumberofongoing developmentprojects.
C
=
Completion rate ofdevelopment projects in each year measured in unitprojects per year that decreasesthe numberofongoingdevelopmentprojects.BB
=
Requiredannual basebudgettopay basecostofdevelopmentprojectsmeasured in$/year.PB
=
Progressbudgetavailabletopay forprogresscostin $/year.D
=
TotaldevelopmentbudgetinPyear.U
=
Progresscostrequiredtocompleteaunit projectin atanormalconstruction time$/project.b
=
Annualbasecostofa unit projectin$/project/year.u
--C
^P-
SDrr*PB^
BB-e^b
Figure2:
A
causal loopdiagram
ofbasicdynamic
cost structuremodel.
The
equations forthemodel
presentedinFigure2
are the following:'''
(1)
PB{t)=D{t)-BB{t)
(3^
BB{t)=bP{t)
(4)
Equations 1 to
4
lead tothe followingtlrstorderdifferentialequation:"
" (5)The
generalsolution toEquation
5 is 20;/ h
-( r -('-r) Uit)
P(t)
=
P{0)*e"
+\e"
(5(0
—)dT
(6)
In a
simple
casewhen
the Starting Rate, 5,and
Development
Budget,
D, areconstants, then the general solutionis
reduced
to:PiO)b +
uS
-D
-rD-uS
/'(0=—
-^7 ^"
+—
I—
b
b
(7)
From
equations 2, 3, 4,and
7, thecompletion
rate, C,becomes:
P(0)
b
+
uS-D
->C{t)
=
S
—
e"(8)
As
Equation
7shows,
thenumber
ofprojects hasan
unstable equilibrium valueof
D-uS
.^ ,. e •r, • c
D-P(0)b
,, J ^.if the
Startmg
Rate
isS
=
.Under
this unstable equilibrium, theb
uCompletion
Rate
C
becomes
equal to the StartingRate
S
and
thenumber
ofproject issuch
that the
Base
Budget
BB=P.b
and
Progress
Budget
PB
=
Cu=
Su
add up
to totalDevelopment
Budget D.
b
If
S
becomes
largerthan
itsequilibrium
valuesuch
the coefficientof
^" inEquation
7becomes
positive, >- ,thenNumber
of ProjectsP
increasesb
to infinity
and
theCompletion
Rate
C
decreasestoand
then, mathematically, to negativevalues.
This
characteristicof
the solution indicates that thecompletion
costof
projectscould
go
to infinityand
the efficiencyof investment goes
to zero.Under
such
conditions,capital
investment
would
not lead toany
increase inproduction
capacity. IfS
becomes
b
smaller than its equilibrium value
such
thatthe coefficientof ^" inEquation
7becomes
DevelopmentProjectsCostDynamics
increases to infinity.
This
unrealistic behavior, as will be discussedand
corrected later, isthe resultofa simplistic
assumption
of constant progresscostfora unit project.Figures
3a
and
3b
show some
numerical
resultsfrom
thebehavior of
themodel
when
starting rate is increased ordecreased
by
a step functionfrom
equilibrium valueof
5by
one
unit at year 1.The
parameter
values for the behaviorshown
in Figure 3 are:u=l,
P(0}=20,
b=.l,D=7,
S=5
atequilibrium.project is
assumed
tobe
constant as u.When
u remains
constant, as theannual
progressbudget
per unitof
project rises, thecompletion time
shortensand could
approach
zerowhile the progresscost
of
aunitprojectdoes
notchange. Thisassumption
willbe
relaxedinthe nextsection inorderto
modify
theequation forthecompletion
rate.Model
2:Variable Progress Cost
forUnit
Project
In reality,
when
thecompletion
time
shortens to values lessthan
anormal
completion
time, then coordination ofdifferentactivitiesand
alsoovertime
and
shiftworks
become
more
costlyand
the progresscost ofeach
unitprojects should rise.At
theextreme,
to get the
completion
time close to zero, the unit cost shouldapproach
infinity. Inordertocapturethis characteristicofthe progress cost, thebasic
model
ismodified
tocreateModel
2as sketched inFigure4. In the
new
model,
two
negative loops areadded
that willcontroltheexponential
decay
behavior.The
new
variablesand
connectionsrelative to Figure 2 areshown
in bold.np
—
».PBR
—
*»-uFigure4:
Model
2 witha variable unit project progresscost.In the
new
model,
the followingtwo
equa.lons areadded
tocapture the vT-jnhjiifyofthe unitcost:
uit)
=
f{PBR{t))
=
a
+
(5iPBR{t))
A(9)
PBR=£mm
(10)np
In which:
PBR
=
Progress BudgetRatio(Dimensionless)np
= NormalAnnualProgressBudgetper Project (SA'ear/Project)DevelopmentProjects CostDynamics
Equations 9 and
10indicate thatwhen
progressbudget
perproject is at itsnormal
value, then
PBR=I
and
"~
^
.However,
when
progressbudget
per projectbecomes
largerthan normal,
PB/P
>~np
and
PBR
>
1, thenu>
a+fi
thatmeans
progress cost tocomplete
a unit projectbecomes more
than itsnormal
value.At
theextreme
when
PB
>o=
=>
PBR —
>°oand
«—
>oowhich means
it is impossible tocomplete
a project inzero time.
The
new
model,
consistingof
Equations
1 to4
and Equations 9
and
10, is anonlinear first order differential equation. It
may
be
solved for specificparameter
valueswith
computer
simulationusing a simulation softwaresuch
asVensim
21. Figure 5shows
the
behavior of
themodel
forthefollowingparameter
values in addition tothoseparameter
values set for
Figure
3:a=.9,
|3=.l,X=3,
np=.25.
The
two assumptions
that thenecessary progress cost to
complete
a projectis 1and
thenormal
annual progressbudget
for a project, np, is .25,
imply
a thirdassumption,
which
is that thenormal
time
toprogress cost of a unit project rises
and
does
not allow thecompletion
rate to rise to infinity.Although
Model
2improved
the basicmodel
to face adrop
in the starting rate, itsbehavioris notstill realistic
when
the starting rate increasesby
a step function.Such
arise,as
shown
inFigure 5, unrealisticallycauses thenumber
ofprojects togo
to infinityand
thecompletion
rate todrop
exponentially.In the real
world
the starting rate is not disconnectedfrom
the stateof
the system.As
the starting rateresponds
to the conditionof
thedevelopment
projects in thesystem,
neither the
number
of
projectsnor
completion
time willgo
to infinity. In the next section,Model
2ismodified
toconsidersuch
forces actingon
thestarting rate.Model
3:Endogenous
Starting
Rate
The
starting rateof
new
projects is themost
important rate tobe decided
by
thosewho
manage
adevelopment
budget.On
one
hand, decisionmakers
are usuallyunder
pressure
from
different national or regional organizations to startnew
projects inorder tofoster sectoral or regional
development.
Due
to populationgrowth and
a desire toimprove
the
low
standard of living, these pressures are high indeveloping
countries.On
the otherhand,
when
budget
availability forexisting projects dropsand completion time of
projectsbecome
too long, social, political,and
economic
pressures buildup
todecrease the starting rateof
new
projects sothat existing projectscan
becompleted
beforenew
ones
are started.As
will be discussedlater, it turns outthatthe policy thatgoverns
the starting rate decisionhas a
profound impact
on
theperformance
ofdevelopment
projects regardless ofthequalityof
management
at theproject level.The
starting rate that influences theperformance
ofthesystem
and
isbeing
influencedby
thatperformance,
becomes
an important
endogenous
variable inthe model.
Model
3,sketched
inFigure 6, isdeveloped
tocapturethe starting rate processand
the
feedback
from
the stateofthesystem
on
the startingrate. InModel
3,two
new
negativefeedback
loops areadded
toModel
2 thatcontrol the exponentialgrowth
ofthenumber
of
projects
and completion
time.The
new
variablesand connections
inFigure 6
relative toFigure
4
are in bold.The
starting rate in Figure6
isbased
on
a policyunder which
the starting rate isinfluenced
by
an
exogenous
desired starting rate as well asby
budget
availability
and completion
time.The
starting ratedecisiondoes
nothave
tobe
made
under
such
a policy.This
policy isone
possible alternativewhich might
be
more
broadly
exercised, as
was
thecasein Iranaccording
tomy
observationand
experience,and
willbe
DevelopmentProjects CostDynamics
examined
here. After theconsequences
ofsuch
a policy is discussed, thenan
alternative policy formulation willbe examined.
np
-PBR
—
^^u
^
ES
Figure 6:
Model
3 withendogenous
starting rate.Equations
of thenew
model
consistof
equations 1 to 4, 9, 10,and
thefollowing
equations: (11) (12)
S{t)^
ES{t)-EB(t)- ET(t)
EB(t)
=
MPRit))
/, (•)>
(>,/,(0)=
fr
=
0;/,"'^(l)=
Id{PR{t))
/
"
= {PBR{t)-PR{t))/T,
d^ (13)ET{t)
=
f,{PT{t))
^ /,(•)<0;/,(.v
<
1)=
fr
-
l;/2(-)
=
/a™"=
(^4)d{PT{t))
dtCTit)
=
= {CT{t)-PT{t))/r,
P{t)IC(t) (16) Inwhich:CT
=
CompletionTime
Ratio,ET
=EffectofCompletionTime
on StartingRate,Tn =
NormalCompletion Time,Pi?
=
PerceivedBudgetRatio,PT
=
PerceivedCompletionTime
Ratio,r T
' and - aretime constants
The
starting rate ofnew
projects inEquation
11 is equal to theexogenous
starting rate, ES, multipliedby
the effectof
budget
availability,EB,
and
the effect ofcompletion
time,
ET.
The
effectof
budget
availability,EB,
is set asan
increasing functionof
thePerceived
Budget
Ration,PR,
inEquation
12.The
effectofbudget
availability isassumed
to
be
bounded
between
zeroand
one.When
budget
availability is zero,EB
willbe
zerotomake
the startingrate zero.When
thePerceived
Budget
Ratio,PBR,
isone
or larger thanone,
EB
reaches itsmaximum
atone and does
nothave any impact
on
the starting rate.The
effect of
completion
timeon
the starting rate,ET,
is set as an decreasing functionof
thePerceived
Completion
Time
Ratio,PT,
inEquation
14. Effect ofcompletion time
isassumed
tobe
bounded between
zeroand
one.When
PerceivedCompletion
Time
Ratio isless than one,
ET
willbe
one
to indicate thatcompletion
timedoes
not affect the startingrate.
When
completion
time ratioapproaches
infinity,EB
reaches itsminimum
at zeroand
makes
the starting rate equal tozero.Equations
13and
15 representan
exponential adaptive process toupdate
theperceived information
about
budget
availabilityand completion
time ratioof the projects.T
T1
and
- are time constants for thetwo
exponential averaging processes.Equation
16calculates the
completion time
ratio,CT.
The
numerator
ofEquation
16 estimates thecurrent
completion
timeby
dividing thenumber
of projectsby
thecompletion
rate.The
denominator
ofEquation
16 isNormal
Completion Time.
The
overallperformance of
thesystem
ismeasured
by
the ratiosofcompletion time
and completion
costofprojects tonormal
or standardcompletion
timeand completion
cost.The
Completion
Time
Ratio,CT,
is calculated inEquation
16.The
followingequation
isadded
to calculate the ratioof
thecompletion
cost to thenormal completion
cost,CR.
Normal
completion
cost, thedenominator
ofthe equation, is thecompletion
costof
a unit projectwhen
progressbudget
availability,PBA,
isone and completion
timeof
the projectis
normal and
equal to T^.The
numerator
is the actualcompletion
cost,which
isequal
tounit progress cost,
given
inEquation
9,plus annual base cost for a unit project multipliedby
completion time
that isapproximated by
dividing thenumber
of
projects to thecompletion
rate.uj^jr^b^iPitmrn
a
+
(5+
bT„
,.. Development ProjectsCost Dynamics
The new
model
is a set ofthird order non-linear differential equations. In additionto the
parameter
values presentedforModel
2, the following numerical values for thenew
parameters
were
assumed
to solve themodel
throughsimulation:T,
=
2, Tt=
2,r„=
4, allin years.The two
functional relationship asshown
below:
equilibrium, pressures
from low
budget
availabilityand
longcompletion time
force thesystem
tolower
the starting rate tobecome
equal to thecompletion
rateand
thesystem
settles in a
new
equilibrium.But
thenew
equilibriumachieved under such
pressures ischaracterized
by
low
efficiencyand low
effectiveness.30 ProjecLs
6 Projecis/Year 25 Projecis
DevelopmentProjects CostDynamics 25 Projects 6 Projects/Yeiir 12 S/Year 15 ProjecLs ProjectsA'ear 4 $/Year
1
calculate the
completion
time ratioas aperformance
index.According
to thenew
policy, adesired
number
ofprojects,DP,
is calculatedby
Equation
18based
on
the availableannual
development
budget,D(t),and
the requiredannual budget foraunit project tobe
completed
in
normal completion
timewith
the required progressbudget
available, orPBR=
1.Then
inEquation
17,the starting rate is setequal to thecompletion
rate plusan adjustment
term
toadjust the
number
ofprojectstoward
the desirednumber
ofprojectsby
an adjustment time
of
Tj.DP{t)-
Pit) S{t)=C(t)+-^' (17) D(t)DP{t)=
^ '*.(«-%
^«
(18) Inwhich:DP(t)
=
DesiredNumber
ofProjects (Projects)^3
= Time
to AdjustNumber
ofProjects to DesiredNumber
(Years)The new
model
is a first order differential equation. Sixmain
equations
of
themodel
can bereduced
tothe followingsimple differential equation:P(f)=-—
P(r)+—
-I^-^^^-pP+^DlO
Tj
t^Tnb
+
a+p
,.g.1 1
T
In
which
p
=
and
17=
.The
general solution toequation 19 is:r, Tj
T^-b
+
a
+ p
Pit)
=
PiO)-e-"
+1^-""-^'
DiT)dT
(20)
Suppose
thesystem
startsfrom
an
equilibrium inwhich
P(0)
=
-. If attime
'• theP
development
budget drops
by
a step functionfrom
its initial equilibrium,Dq
, toD^-
n,then the solution for
P
after t^ willbe:P(f)
=
2LA_iZ_iL(l_g-p('-'.))
forr>/,
(21)P
P
As
Equation
21shows,
based
on
thenew
policy, as f—
><», P(/)=
-i 2which
isP
equal to the desired
number
of
projects for thenew
level ofdevelopment
budget.At
thenew
equilibrium level,budget
willbe
available to finishthe projects atanormal
timewith
anormal
cost.During
the transitionfrom
initial equilibriumtothenew
equilibriumwhen
thenumber
of project is not yet adjusted to the desired level, thecompletion time
and
DevelopmentProjects CostDynamics
completion
cost willbe
more
than normal.The
completion
time ratioand
thecompletion
costratio
can
be
calculated usingEquations
2, 16,and
17.The
behavior
of themodel
with
thenew
starting rate policycan be
examined by
simulation for particular
parameter
values.Figure 1 1shows
the behaviorof
themodel
with
the
new
startingrate policywhen
theinitial equilibriumis disturbedby
astep reduction in thedevelopment
budget.The
parameter
valuesforthe behaviorshown
in Figure 1 1 are thesame
as those forthe Figure9 and
the value of adjustmenttime, ^3^ is setequal
to2
years.These
parameter valuesmake
P~
and ^
~
^^°
.10 $/Year
1.6 Ratio
Summary
and
Conclusion
The
efficiencyand
effectiveness ofcapital investment, in addition totheamount
ofinvestment, is the important
determinant
of
growth
of productioncapacity. In asystem of
development
projectswhere
limitedresources supportongoing
projects, the efficiencyand
effectiveness
of
theinvestment
process to createnew
capacity is influencedby
decisionsbeyond
the levelof
projectmanagers.
The
starting rate of thenew
project isone
such
decision.
The
starting rate decisionchanges
the balancebetween
thenumber
of
projectsand
available
common
resourcesand
hasimportantdynamic
implications forthe efficiencyand
effectiveness
of
theinvestment
process.The
dynamic
arisesfrom
the cost structureof
theinvestment projects as presentedin thispaper.
Investment
project cost is divided intotwo
categories:progress
costand base
cost.The
base
costconsistsof
those costelements
thatshould
be paid tokeep
the projectready
forrealphysical progress.
The
progress
costconsists of those costelements
thatshould
be
paid to create physical progress in the projects that are ready for
such
progress.A
unitof
project
was
defined
as a project that requires a certainamount
of progress cost tobe
completed
at anormal completion
time.Each
projectcan be
measured
interms of
a unit project.The
number
of projectsunder
construction is increasedby
startingnew
projectsand
isreduced
by
the rate of completion.The
starting rateon
thenew
project is themajor
management
decisionin the system.The
costmodel shows dynamic
implications forthe efficiencyand
effectivenessof
projects
which
are notrelated to the qualityof
management
at the project level.The
paper
showed
thatan
imbalance
between
thecommon
resourceand
thenumber
ofprojectsmoves
thesystem of
projects into atrapof
inefficiencyand
ineffectiveness ifthe starting rate isdecided based on
exogenous
pressureand
inreactiontobudget
availabilityand completion
time.
Under
such
a decision rule,completion
costand completion time of
development
projects
would
be
more
thannormal
and
efficiencyand
effectivenessof
theinvestment
project declines.
The
paper
shows
thatwhen
the startingrate adjusts thenumber
of
projects toanumber
that isbased
on
availablebudget, the inefficiency trapcan be
avoided.One
areaof
applicationof
thismodel
is themanagement
ofdevelopment budgets
indeveloping
countries.Development
budgets
represent investmentsmade
by governments
in differentdevelopment
projects to create infrastructureand
production capacity in orderto accelerateeconomic growth
and development.
Due
to populationgrowth
and
the largegap
between
thedeveloped
and
underdeveloped
world, there is usually a lotof
socio-politicalpressure to foster
development by
startingnew
development
projects in different sectorsand
regions.The
pressure to startnew
projects createsan
imbalance
between
theDevelopmentProjects Cost Dynamics
development budget and
thenumber
ofdevelopment
projects.Such
an
imbalance
decreasesthe efficiency
of
limitedinvestment
resources available to thegovernment
of
thosecountries.
To
increase the efficiencyoftheirscarceinvestmentresources,governments
thatare responsible for
development
budgets should
make
sure that thenumber
of
ongoing
projects are inbalance withavailable budget.
The
applicationof
the result is notUmited
to themanagement
of
development
projects,
and
thecommon
resourceis not limitedtothebudget.The
resultsof
thispaper
are applicabletoany
situationinwhich
an organizationisengaged
in anumber
ofsimultaneous
development
projectsand
acommon
resourceis requiredby
the projects,and
each
projecthas
base
costand.progress
cost interms
ofthatcommon
resource.The
common
resourcecould be
management
time
inmanaging
different projects,programmers' time
to createdifferentsoftware, orresearchers' time topursuedifferent research projects.
The
responsibility for creatingbalancebetween
thenumber
ofprojectsand
availablecommon
resources isabove
the level of a single projectmanager.
In thecase of
adevelopment
budget, thebody
thatpreparesand
approves the totaldevelopment budget
hasthe responsibility of
keeping
thisbalance.The model
presented herecan
beexpanded
todivideongoing
projects into differentstages of
development.
Such
disaggregationcan be
useful in discussing the allocation ofthe
common
resourcebetween
different stages of projects during the transitionfrom
an
unbalanced and
inefficientsystem
to abalancedand
efficientone.References:
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Domar
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