The Over-Management Issue, Part 1: Risky Business

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Many years ago while working on an Air Force contract, I became familiar with the over-management versus under-management issue. One of the primary benefits of project management (especially for projects being performed in a matrix organizational structure) is that we must be willing to share resources among several projects. From a cost management perspective, this certainly seems like the right thing to do. But from a risk management perspective, the sharing of critical resources could be an invitation for problems.

Let’s assume that you are managing a three-year contract that was priced out at $50 million. Part of the contract requires R&D. To keep the R&D cost at a minimum, you priced out five critical resources as spending only 75 percent of their time on your project. These five resources are needed only for the first year of the contract. The average hourly salary of the five resources is $60 per hour and the overhead rate is 150 percent. Therefore a fully loaded, billable hour charged against the contract for each of these five resources would be $150 per hour.

For simplicity’s sake, let’s say the resources work only 1740 hours per year. The remaining hours are vacation time, sick leave, holidays, and jury duty. This assumes of course that we do not consider overtime hours. If these five people were to work 100 percent of their time on this contract, then the cost would be:

(5 people) x (1740 hours) x ($150 per loaded hour) = $1,305,000

If the workers are assigned only 75 percent of their time on this contract, then the billable cost against the contract would be:

(75%) x ($1,305,000) = $978,750

The cost difference between 100 percent on the contract and 75 percent on the contract is $326,250.

From our perspective as the contractor, we were saving the Air Force $326,250 by assigning these five critical resources only 75 percent of their time on the contract. But the Air Force viewed this differently. The cost of $978,750 was viewed as the cost of under-managing the contract and the cost of $1,305,000 was seen as the over-management cost.

From a financial point of view, the cost savings of $326,250 was insignificant when considering the risks on the contract. The Air Force’s argument was simple: “What if the resources are actually needed full time because of unexpected issues, but they are not available because of work requirements on other contracts?” The Air Force was unwilling to take this risk and increased the cost on the contract by $326,250 in order for the resources to be committed full time.

Over-management versus under-management is an important issue on all projects. On this contract, the following conclusions were drawn:

  • Matrix organizational structures do not necessarily imply that all resources should be shared among several projects.
  • For some project functions such as R&D, people may find it difficult to be truly creative on a part-time basis and full-time assignments may be necessary.
  • There is a breaking point where critical resources must be shared with more than one project. The breaking point is based on the length of the project, the amount of time that resources are committed to full-time assignments, and the quality of the other resources in the company.
  • The dollar value of the contract usually determines if the customer will pay the over-management cost. In this case, the Air Force felt that increasing the contract price by $326,250 was worthwhile since the contract cost was $50 million.

Finally, the ultimate decision of whether to under-manage or over-manage a contract is based on the risk to the contract; specifically, needing the resources and discovering that they are not available.

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