WORK PACKAGES: DEFINITION AND USE

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WORK PACKAGES: DEFINITION AND USE
Introduction

At the lowest levels of the WBS and OBS, integration between the two hierarchical structures takes place. The assignment of specific work content (project scope) to a specific individual or organization creates the building bocks of the project-management framework: the work packages. In the following section, a detailed discussion of the definition and meaning of work packages is presented along with a discussion of the cost accounts that accompany each work package, translating its work content into monetary values for the purpose of budgeting and cost control.

Definition of Work Packages

The PERT Coordinating Group (1962) defined a work package (WP) as ‘‘The work required to complete a specific job or process, such as a report, a design, a documentation requirement or portion thereof, a piece of hardware, or a service.’’ PMI (1996) states: ‘‘[A] work package is a deliverable at the lowest level of the WBS.’’ Unfortunately, there is no accepted definition of the WPs nor accepted approach to link them with other related structures (foremost among them the OBS). In most cases, the WPs are defined in an informal, intuitive manner and without proper feedback loops to verify their definition.

One of the difficulties in defining the WPs is the trade-off between the level of detail used to describe the WPs and the managerial workload that is involved. On the one hand, one wishes to provide the project team with an unambiguous description of each work element to avoid unnecessary confusion, overlap, and so on. On the other hand, each WP requires a certain amount of planning, reporting, and control. Hence, as we increase the level of detail, we also increase the overhead in managing the project. To overcome this problem, some organizations set guidelines in terms of person-hours, dollar-value, or elapsed time to assist WBS designers in sizing the WPs. These guide- lines are typically set to cover a broad range of activities, and therefore they ignore the specific content of each WP. Hence, they should be applied with care and with appropriate adjustments in places where the work content requires them.

Planning the work by the WPs and structuring it through the WBS is closely related to another important planning activity—costing the project. By dividing the project into small, clearly defined activities—the WPs—we provide a better information basis to estimate the costs involved. For ex- ample, consider the activity of design of the FAB processes. It is much easier to estimate its com- ponents when they are considered separately (designing the silicon melting and cooling process, silicon cutting, grounding and smoothing, etc.). Furthermore, the separate components may require different cost-estimation procedures or expertise.

Another consideration is related to the statistical nature of the cost-estimation errors. The esti- mation of the cost for each WP involves a random error that, assuming no particular bias, can be either positive or negative. As the cost estimates are aggregated up the WBS hierarchy, some of these errors cancel each other and the relative size of the aggregated error decreases. This observation holds as long as there is no systematic bias in the estimation procedure. If such a bias exists (e.g., if all the time and cost estimates were inflated to protect against uncertainties), then further decom- position of the WPs may eventually have a negative effect on the overall cost estimate.

In practice, in many scenarios there are limits to the precision that can be achieved in time and cost estimations. Beyond these limits, the errors remain constant (or may even grow). Thus, from the precision perspective, division into smaller WPs should be carried out as long as it improves the estimation accuracy, and not beyond that point.

Definition of Cost Accounts

Cost accounts are a core instrument used in planning and managing the financial aspects of a project. Three fundamental processes depend on the cost accounts: costing individual activities and aggre- gating them to the project level for the purpose of preparing project cost estimates; budgeting the project; and controlling the expenses during the project execution.

The first issue, costing the project and its activities, requires the project planner to choose certain costing procedures as well as cost classification techniques. Costing procedures range from the tra- ditional methods to state-of-the-art techniques. For example, absorption cost accounting, a traditional method that is still quite popular, relates all costs to a specific measure (e.g., absorbing all material, equipment, energy, and management cost into the cost of a person-hour) and cost new products or services by that measure. An example of a more advanced cost accounting technique is activity-based costing (ABC), which separately analyzes each activity and measures its contribution to particular products or services.

Cost classification can be done in many ways. Each organization builds its own hierarchy of cost accounts, which is also known as the cost breakdown structure (CBS). In many cases, the CBS is closely linked to the OBS. This means that each organizational unit at the bottom level of the OBS is associated with a cost account. All the expenses planned for the various activities are accounted for through these accounts. Often we find that these cost accounts are further broken down along general accounting principles (e.g., variable vs. fixed costs or manpower, material, equipment, and subcontracting costs). Some organizations prefer to construct the CBS according to the WBS. That is, each WP is associated with a unique cost account. The latter method enables easier control over the individual activities, therefore lending itself more easily to project structure. The former approach might fit better functional structures because it is geared to maintain control over functions rather than activities. It is possible to combine these two approaches by defining the cost accounts at the lowest level of the OBS–WBS level. Then one can aggregate these accounts either by the OBS or by the WBS structures and still obtain consistent estimates at the project-wide level.

Other organizations create the CBS according to the project life cycle. Each of the major life- cycle stages (conceptual design, detailed design, production, operation, divestment) is a major cost account that is further broken down into finer accounts according to secondary criteria (e.g., detailed schedules, functional association). This form of CBS allows the most straightforward control of cost accumulation over time.

The second process, budgeting, uses the cost accounts as a vehicle to generate the project budget. A popular way to generate a budget is through a bottom-up aggregation. The cost accounts associated with individual WPs are aggregated towards a complete budget. Along the way, management may intervene in many ways that may alter the original cost estimates. For example, a ‘‘crashing’’ policy may be adopted in order to expedite certain activities as a result of exogenous considerations. This will make the respective budget line larger than the original estimate stated in the cost account. Similarly, a decision to hold certain amounts as ‘‘management reserve’’ (a common practice) will also inflate the budget above the original cost accounts. Thus, gaps may exist between the budget and the cost estimate of WPs and the WBS as a whole. However, even with these gaps, the cost accounts are the basis for building and maintaining the budget for every project.

Based on cost estimates, allocated budget, and other considerations (primarily competitive pres- sure), the pricing of the project is established. The project price may be above or below its cost or its budget, depending on management policies and extraneous constraints.

The third process, financial control of the project, is again based on the cost accounts. The basic control method is an ongoing comparison between actual and planned cost accumulation. Methods such as the earned value technique develop ratio measures that help the controller to analyze the schedule and cost deviations over time and employ control limits as triggers for corrective action. The control is usually performed at the WP cost account level.

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