Engineering Management

Optimal operation of the projects as measured by

stability, ease of operation, and economic returns
LECTURE NOTE
DR OLUWAROTIMI M. OLOFINNADE
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Content (Module 1)
a. Management of engineering project environment.
b. Analysis and design of engineering projects from the viewpoint of the
whole.
c. Interaction between the individual components (subsystems) and the
effect of such on the overall system.
d. Optimal operation of the projects as measured by stability, ease of
operation, and economic returns.
e. The learning process and motivation factors
f. Job evaluation
g. Transportation problems.
h. Queuing theory and application.
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 Week 3 – Optimal operation of the projects
The objectives of this module are to:
• Introduce the key concept of optimal operation of project;
• Show project stability, ease of operation, and economic returns, and
articulate why these dimensions are critical to the overall success of a
project.

At the end of this module, the student should be able to

• Students should be able to demonstrate clear understanding on the key
concept of optimal operation of project;
• Students will be able to clearly define project stability, ease of operation, and
economic returns, and articulate why these dimensions are critical to the
overall success of a project.
• Solve practical engineering management problem and proffer solutions.
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• Optimal operations in engineering management involve optimizing
processes, resources, and performance to achieve efficiency,
quality, and cost-effectiveness, often through required
methodologies, and by focusing on areas like strategic planning,
resource allocation, and continuous improvement

• The goals of operations management are about maximizing the

organization's efforts, mainly around producing goods and/or
services and managing the supply chain and infrastructure.

• The focus is on controlling costs, maximizing profitability and

properly allocating resources.
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• In today’s dynamic business environment, projects must operate not only
within schedule and budget constraints but also in a way that is stable, easy
to manage, and economically rewarding.
• Optimal operation means that a project is reliable over its lifecycle, user-
friendly in day-to-day management, and delivers a favorable economic
outcome relative to its costs.
• This lecture note explores these three (3) critical dimensions:

1. Stability: the consistency and resilience of project performance over time.

2. Ease of Operation: the simplicity and efficiency with which a project or its
systems can be monitored and controlled.
3. Economic Returns: The financial benefits derived from a project, evaluated
using metrics such as RETURN ON INVESTMENT (ROI) and NET PRESENT
VALUE (NPV).
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• Understanding
these factors
holistically is
essential and
important to
maximize benefits,
reduce risks, and
ensure sustainable
long-term success
of projects.

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 1. Project Stability
• Stability in project operations refers
to the project’s ability to maintain
consistent performance with
minimal fluctuations.
• This may include technical stability
(e.g., system reliability),
organizational stability (e.g., low
turnover and clear reporting
structures), and process stability
(e.g., robust risk controls).
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• Projects that perform stably are less
. likely to be derailed by unexpected
disruptions.
• Stability minimizes downtime, reduces
the frequency of rework, and builds
stakeholder trust.
• It also provides a predictable baseline
that supports continuous improvement.
• It involves minimizing disruptions and
ensuring that the project adheres to its
planned scope, schedule, and budget.
• Achieving stability is crucial for delivering
successful outcomes and meeting
stakeholder expectations.
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 Some of the key aspects of project stability
a. Scope control – maintaining a well-defined project scope and managing
changes effectively to prevent scope creep/disruption. ​
b. Schedule adherence - ensuring that project activities are completed on
scheduled timelines by monitoring progress and addressing delays
promptly.
c. Cost management - keeping project expenditures within the approved
budget through careful planning and continuous monitoring.
d. Risk management - proactively identifying potential risks and
developing mitigation strategies to prevent disruptions.
e. Quality assurance - Implementing processes to ensure that project
deliverables meet the required standards and fulfill stakeholder’s
expectations. ​
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Evaluating Project Stability
To evaluate project stability, focus should be on monitoring key metrics like
schedule adherence, cost management, resource utilization, and risk mitigation,
while also considering stakeholder satisfaction and the quality of deliverables.
Among the tools used are;
• Schedule Variance (SV) - measures the difference between planned and actual
progress to identify delays. Schedule Variance (SV) is a key metric in project
management that quantifies the difference between the work actually
performed and the work planned up to a specific point in time. It is calculated
using the formula:​
• SV = Earned Value (EV) – Planned Value (PV)
Where: Earned Value (EV) is the value of the work actually completed. Planned
Value (PV) is the value of the work planned to be completed by that time.​
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Example 1
A project with a total budget (Budget at Completion, BAC) of $120,000 is
scheduled to be completed in 6 months.
At the 3-month mark, the project manager assesses the progress:​
• Planned Completion: 50% (since 3 out of 6 months have passed)​
• Actual Completion: 35%
Estimate the percentage Schedule Variance (SV) for the project

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• Planned Value (PV): PV = Planned Completion (%) × BAC PV
= 50% × $120,000 = $60,000
• Earned Value (EV): EV = Actual Completion (%) × BAC EV
= 35% × $120,000 = $42,000
• Schedule Variance (SV): SV = EV – PV
SV = $42,000 – $60,000 = -$18,000
A negative SV of -$18,000 indicates that the project is behind schedule. To
express this as a percentage
• SV% = (SV / PV) × 100 SV% = (-$18,000 / $60,000) × 100 = -30%​This means
the project is 30% behind its planned schedule at the 3-month mark.
• Regular evaluation of Schedule Variance allows project managers to detect
schedule deviations early and implement corrective actions to realign the
project with its planned timeline.
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Example 2: The following data on a software development project was before
you as the project manager;
• Total Project Duration: 10 months
• Total Budget (Budget at Completion, BAC): $500,000
• At the 5-month mark:
• Planned completion: 60% of the project work
• Actual completion: 50% of the project work
i. Estimate the PV, EV and SV for the project
ii. What is the Schedule Variance Percentage (SV%) for the project
iii. Estimate the Schedule Performance Index (SPI)
iv. As the project manager, interpret the findings from your estimation and
provide actionable points/recommendations towards ensuring project
stability.
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• Cost Variance (CV) –
evaluates the difference between budgeted and actual expenditures to detect
budget overruns.
• The Cost variance (CV) is the difference between the earned value (EV) and
the actual cost (AC) of a project. It's a way to measure if the project is under
or over budget.
• If CV is positive, the project is under budget; if it's negative, it's over budget.

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 Example 3
The Green Hebron Valley Residential Complex development is a 12-month construction
project with a budget of $5 million. The project includes designing and constructing a
50-unit residential building, divided into phases: design, site preparation, foundation,
superstructure (structural framing), MEP (mechanical, electrical, plumbing)
installations, interior finishing, landscaping, and final inspections.
Status at 6 months
Budget and timeline
Actual progress: 40% completion. Delays occurred due to:
Total Budget (BAC): $5 million.
Unstable soil discovery: additional pilings and soil stabilization needed
• Phased budget allocation: during the foundation phase.
Design: $800,000
Site Preparation: $500,000 Labour shortages: sub-contractor delays increased labor costs.
Foundation: $1,200,000 Material price surge: steel prices rose by 15%.
Superstructure: $1,000,000 Earned Value (EV): 40% of $ 5 M = $ 2 million
MEP: $700,000
Interior Finishing: $500,000 Actual Cost (AC): $2.8 million (exceeding the phased budget due to
Landscaping: $200,000 unforeseen costs).
Contingency Reserve: $100,000 What is the cost variance (CV)

• Planned progress at 6 months: 50% completion (phases up to superstructure).

• Planned Value (PV) at 6 months: 50% of $5 M = $2.5 million
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 Cost Variance (CV)
CV = EV − AC
= $2M − $2.8M = −$800,000
The project is $800,000 over budget
Cost Performance Index (CPI)
CPI = EV/AC = 2M/2.8M = 0.71
For every 1 spent, only 0.71 of value is earned
Estimate at Completion (EAC)
EAC = BAC/CPI = 5M/0.71 ≈ $7.04M

Without corrective action(s), the project could exceed its budget by $2.04M
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Possible impact on project stability includes;
i. Budget instability because the $800K negative CV erodes the
contingency reserve and risks funding shortfalls.
ii. Schedule delays progress is 10% behind plan (EV of 2M vs. PV of 2.5M),
causing cascading delays in later phases.
iii. Stakeholder confidence will be seriously affected as investors and future
homeowners may lose trust if costs escalate further.

Now, as the project manager, provide/suggest corrective measure(s) to be

put in place to mitigate this challenge

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• The green Hebron valley project demonstrates how unforeseen risks (e.g.,
soil issues, market volatility) can destabilize budgets.
• By calculating CV and CPI, the project team identified inefficiencies early
and implemented recovery strategies.
• Continuous Earned Value Management (EVM) and proactive stakeholder
communication are critical to restoring stability and ensuring project
viability.
• This example underscores the importance of flexibility and contingency
planning in construction management.

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• Requirement Stability Index (RSI) - assesses the extent of changes in
project requirements, indicating how well the project scope is controlled. ​
• Requirement Stability Index measures how stable the project
requirements are over time.
• It is calculated using the formula: RSI = (Number of Approved
Requirements - Number of Changed Requirements) / Number of
Approved Requirements.
• A higher RSI (closer to 1) means more stable requirements, while a lower
RSI indicates frequent changes.

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RSI > 0.8 is critical for project stability.
Example 4
A HealthTrack Pro is a 12-month project to develop a HIPAA-compliant
mobile app for healthcare providers to track patient vitals, medications, and
appointments.
The project has a budget of $1.2 million and involves four phases:
1. Discovery & Requirements gathering (Months 1–2)
2.UI/UX Design & Prototyping (Months 3 – 4)
3.Development & Integration (Months 5 – 9)
4.Testing & Deployment (Months 10 – 12)
Key Stakeholders:
•Healthcare providers (end-users)
•Regulatory compliance team
•Investors

Estimate the volatility of project requirements over time 20

• Requirement Stability Index (RSI) measures the volatility of project
requirements over time

Initial approved requirements

• 150 functional requirements (e.g., real-time vital syncing, encrypted
messaging, appointment reminders).
• 50 non-functional requirements (e.g., HIPAA compliance, <1s response time,
offline functionality).

Required changes
• Regulatory updates, User feedback Technical constraints
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Requirement changes over time
Approved Changed/ RSI
Phase Month RSI
Reqs Added Reqs Calculation

Discovery &
1–2 200 0 (200−0)/200 1.0
Requirements

UI/UX Design 3–4 200 25 (200−25)/200 0.88

Development 5–7 200 40 (200−40)/200 0.80

Testing &
8–10 200 60 (200−60)/200 0.70
Deployment

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Impact of declining RSI on project stability
• Scope creep
• Schedule delays
• Budget overrun
• Team morale

Without corrective action(s), the project could exceed its budget and
there will be delays

Now, as the project manager, provide/suggest corrective measure(s) to

be put in place to mitigate this challenge

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 Read-up on

Mean Time Between Failures (MTBF) - in technical projects, this metric

gauges the reliability of systems or components by measuring the average
time between failures.

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Approaches to improve on project stability
• Robust planning - develop comprehensive project plans that account
for potential risks and include contingency measures. ​
• Effective communication - foster clear and open communication
among stakeholders to ensure alignment and promptly address
issues.
• Continuous monitoring - regularly track project performance using
key metrics and adjust strategies as needed to maintain stability. ​
• Change management – i.e. implement structured processes to
handle changes in project scope, schedule, or resources without
causing significant disruption.

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 2. Ease of operation

• Ease of operation" refers to

designing and implementing
systems, processes, and resources
that are simple, efficient, and user- • Ease of operation encompasses the
friendly, ultimately leading to simplicity, clarity, and efficiency of the
improved productivity, reduced project’s management systems.
costs, and enhanced customer • This involves user-friendly processes, clear
satisfaction. communication channels, minimal
bureaucracy, and effective technological
support. 26
• If a project or system is
easy to operate, managers
and team members can
focus more on innovation
and problem solving
rather than wrestling with
complex or outdated
systems.
• This contributes to both
higher productivity and
lower operational risks.

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Some of the key features of ease of
operation includes;
• Efficiency
• Usability
• User’s satisfaction
• User’s can understand how to use
the products or services without
extensive instructions or prior
experience.
• Low learning curve
• Low margin for errors
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3. Economic Returns
• Economic returns are measured by
the financial benefits achieved
from the project compared to its
total cost.
• Common metrics include ROI, NPV,
and payback period.
• Economic return" refers to the
benefits or gains, often monetary,
derived from an investment or
activity(ies), considering both the
costs and benefits to society as a
whole, not just individual
investors.
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• Return on Investment (ROI) is a metric that measures the
profitability of an investment relative to its cost, expressed as a
percentage

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• Return on Investment (ROI): Ratio of net profit to the
cost of investment.
• Net Present Value (NPV): Present value of future cash
flows less the initial investment cost.
• Internal Rate of Return (IRR): The discount rate at
which the NPV of an investment is zero.
• Payback Period: The period required for the project to
recoup its initial investment.

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• Ultimately, projects must deliver value.
• Economic returns indicate whether the resources invested
yield an acceptable profit margin or other financial
benefits.
• Maximizing economic returns ensures that projects
contribute positively to the organization’s overall financial
health and strategic objectives.

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 Example 5
An Engineering/Real Estate firm based in Abuja is into the
construction and sales of residential luxury apartments. If the
unit cost of construction is N40 million and the fixed
operational cost of running the business per annum (inclusive of
taxes, insurance, salaries and miscellaneous expenses) is N 400
million. Meanwhile, the sales price for a unit is N 50 million.
Derive a mathematical model for predicting the profit accruable
to the company in a year

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• Profit (n, p) = Revenue (n, p) – Cost (n, p)
• Where, n = number of goods;
and p = price
In this example, let
• Let n = number of constructed residential units
• Cost of production = variable cost + fixed cost
= n x N40 million + N400 million
= 40n + 400

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• Revenue = n x selling price = n x 50 million
= n50m
• Profit = Revenue – Cost
= 50 n – (40n+ 400)
= 10n – 400
• To break even, that is, no profit or loss, 40 housing units
must be sold
• To make a profit,
P(n) = 10n – 400 > 0, hence, n > 40 36
 Classwork assignment
A renewable energy company based in Ogun State, Nigeria is evaluating a proposed investment in a wind farm project
around Ota with the following details:
• Initial investment: $80 million (includes turbines, land, and grid connection).
• Project lifespan: 15 years.
• Annual cash inflows: $12 million (from energy sales and government subsidies).
• Annual operating costs: $3 million (maintenance, labour, and insurance).
• Discount rate: 7% (reflects the company’s cost of capital).
Tasks is to calculate:
i. Net Present Value (NPV).
ii. Internal Rate of Return (IRR).
iii. Payback Period.
Evaluate Project Viability:
• Based on your calculations, should the company proceed with the project? Why or why not?
Risk Analysis:
• Identify two key risks that could threaten the project’s economic returns.
• Propose one mitigation strategy for each risk.
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Strategies for achieving optimal operation

i. Continuous enhancement of project stability

ii. Improving the ease of operation
iii. Maximizing economic returns

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• Risk management - develop detailed risk registers and contingency plans. Regularly conduct
scenario analysis and stress tests.
• Quality assurance - integrate quality control measures throughout the project lifecycle and use
statistical process control tools.
• Consistent Process Improvement through application of lean and Six Sigma methodologies to
eliminate variability in processes.
• Simplified workflows by standardizing processes and eliminate redundant tasks. Implement user-
friendly software with a modern interface.
• Continuous training – invest in training programs to improve the competency of team members
in using project management tools.
• Effective communication – establish clear reporting lines, use collaborative platforms, and
develop regular update mechanisms.
• Efficient resource allocation using techniques like resource leveling and optimization to minimize
idle capacity and reduce wastage.
• Financial monitoring by leveraging real-time financial tracking tools and incorporate earned value
management (EVM) for ongoing assessment.
• Value-Driven Decision Making – align project goals with strategic objectives and ensure that
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decision contributes to economic benefits.
In summary, optimal operation in projects is achieved by balancing
stability, ease of operation, and economic returns. This involves:
1. establishing robust systems for consistent performance (stability),
2. designing streamlined, user-friendly processes (ease of operation), and
3. ensuring that the project delivers favorable financial outcomes
(economic returns).
A comprehensive approach that incorporates advanced risk management,
continuous process improvement, and strategic resource planning will
help an organization realize these objectives.
Ultimately, the optimal operation of projects not only supports
immediate project success but also contributes to sustainable growth and
competitive advantage.
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credits

• Project Management Body of Knowledge (PMBOK® Guide)

• PRINCE2® Methods and Case studies

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