Analyzing Project Cost Reduction Strategies: Price Escalation Clauses

This document provides an analysis of project cost reduction methods and the importance of price escalation clauses in project contracts. It addresses the benefits and drawbacks of including price escalation clauses, highlighting their role in managing risks associated with fluctuating material costs. Furthermore, the document offers recommendations for a client facing project management challenges, focusing on key areas such as team composition, technology investment, vendor partnerships, risk management, project planning, knowledge management, training, and staff turnover. The analysis emphasizes the need for skilled project teams, efficient technology use, strategic vendor relationships, proactive risk assessment, realistic project planning, effective knowledge management, targeted training programs, and low staff turnover rates to achieve successful project delivery within budget. The document concludes by underscoring the interconnectedness of these factors in ensuring project success and cost-effectiveness.

Running head: PROJECT MANAGEMENT
Project Management
Name of Student
Name of University
Author Note

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Table of Contents
Answer 1..............................................................................................................................2
Answer 2..............................................................................................................................4
Introduction......................................................................................................................4
1. The project team..........................................................................................................4
2. Technology..................................................................................................................4
3. Vendor/Supplier Partnering.........................................................................................5
4. The Risk Management Function..................................................................................5
5. Project initiation + Planning........................................................................................6
6. Project Knowledge Management.................................................................................6
7. Investment in Training.................................................................................................7
8. Staff Turnover..............................................................................................................7
Conclusion...........................................................................................................................8
References............................................................................................................................9

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Answer 1
A price escalation clause in a contract guarantees a change in the contract price, if in
case, a particular factor is a contract goes beyond the estimation. This in turn can increase or
decrease the entire cost of the project. The escalation clause is included in a contract mainly
because in the implementation phase of a long term project, the prices of the goods might
fluctuate. An increase in the price of goods can result in significant trouble within the execution
phase of a project. The price escalation clause in a contract can significantly help in dealing with
the sudden change in the price of raw materials in a project. Price escalation clause is important
of project, especially construction projects. Repeated price escalations have been affecting the
construction industry during the last few years causing serious problems in project
implementation. Since price escalation causes significant delays in the project, addressing the
issue or finding solution to this problem becomes a necessity.
A price escalation clause helps in management of the agreement price of a project if a
particular factor goes beyond control in the project (Trauner, Theodore et al.). Therefore, I think
price escalation clause is definitely a good idea in a project contract. Without the presence of a
price escalation clause in a project, the adjustment to the contract price is not possible even if
there is an unexpected rise in the market price of key construction materials (Moynihan, Gary
and Mohammad Ammar Al-Zarrad).. It there is no escalation clause indicated in a project, a
contractor will not have any respite from the increase of cost in the project.
The presence of escalation clause in a contract guarantees a change in the price
mentioned in an agreement, if a particular factor in an agreement goes beyond control. I consider
price escalation as a good idea particularly because the presence of escalation clause within a

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contract helps in adjusting the price of the project with inflation (Chaphalkar, Iyer and Patil). In
case, the price of raw materials changes, the absence of an escalation clause in the contract can
severely affect the value that has been determined in a contract (Iyer, Chandrashekhar and
Ratnesh Kumar). The escalation clause is considered vital for construction projects and
construction contracts as sharp fluctuation in the price of raw materials, fuel and labor needs is
experienced in construction projects.
Thus the key advantages of escalation clause are as follows-
1. Escalation clause considerably reduces delays in the project
2. Presence of escalation clause in a contract makes all the parties liable to pay for the
increase in material cost.
For example, the projects, that are controlled and guided by Associated General
contractors of America (AGC), are benefitted by the presence of escalation clause. AGC
maintains a sample price escalation clause that can be customized for certain individual projects.
However, there are certain disadvantages of presence of escalation clause in a contract.
The main disadvantage of the presence of escalation clause in a contract is that, it can increase
the cost of the project by a huge margin (Moynihan, Gary and Mohammad Ammar Al-Zarrad).
The costs incurred may not always be legitimate and therefore, it indicates the major
disadvantage of the contract.

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Answer 2
Introduction
The aim of this document is to provide recommendations to a client about efficient
project delivery methods that can be implemented in their project. The client had earlier suffered
serious project management issues in their project leading to their projects going over-budget. In
order to help the client with their upcoming project and to reduce the operational cost of the
project, certain project areas are shortlisted, on which the recommendations of cost reduction in
the project are made. The detailed recommendations of effective project management and cost
reduction in a project is indicated in the sections below.
1. The project team
The project team is an important consideration of a successful project. Therefore, it is
quite necessary to include only skilled human resources in the project team. Unskilled labors can
significantly delay a project leading to increase in the project cost (Kerzner, Harold and Harold
Kerzner). Furthermore, unavailability of the resources in a project team can result in project
delays as well. Therefore, it is recommended to the client to choose human resources or the
members of the project team in an efficient manner by judging their skills and competencies.
Furthermore, the client should ensure a 100% resource availability during project execution to
ensure successful project completion within the allocated budget. For example, in a software
project, team members with skills in coding and programming language is necessary.
2. Technology

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Investment on technology consumes a large part of the project budget. Therefore, it is
quite necessary to investigate the actual technological requirements of the project. Use of modern
technology in project management is recommended to the clients, as it significantly reduces the
human efforts needed to perform a work (Schwalbe and Kathy). Lack of modern technological
equipment might result in project delays leading to a sharp increase in project cost. However, the
budget set for the project should include the maintenance cost of the equipment. For example, a
project implemented with the use of modern technology will take less time for implementation
and will be implemented in a more effective manner than those projects that are implemented
without making use of modern technology. The use of technology increases the efficiency of the
project implementation process.
3. Vendor/Supplier Partnering
Selection of correct vendor and indulging in correct supplier partnership is quite essential
to manage the project cost. This is because vendors can cost a project owner more than the actual
project. This is one aspect where cost cutting can be done and should be done during project
execution (Heagney). For project execution, the project team is largely dependent on vendors. A
contract can be made with a vendor for supplying products that align with the requirements of
the project. Unnecessary and redundant goods will not be accepted during the project execution
phase. This can save a lot of money in the project. For example, a supportive vendor supplier
partnering in a construction project will ensure ready availability of the project resources that
will in turn help in easier implementation of the project.
4. The Risk Management Function

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Risk is an uncertainty, presence of which can significantly affect the normal operation of
a project. Ineffective risk management can delay the project leading to the project going over-
budget (Harrison, Frederick and Lock). It is therefore recommended to the client that risk
assessment should be carried out in regular interval to wipe out all the risks and uncertainties in
the project. Effective risk management ensures normal and smooth implementation of the
project, saving project cost to a considerable amount. Therefore, it is recommended to the client
to design a proper risk management framework prior to project implementation. For example, in
Queensland health Payroll project, the risks in the project were not identified in the project
intuition stage resulting in project failure.
5. Project initiation + Planning
In order to execute a project, a working project plan is needed to be developed. The cost
estimation of all the tasks in a project should be done in the project initiation phase. Therefore,
the initiation phase of the project should involve cost feasibility of the project so that its actual
cost can be projected (Milosevic et al.). Based on the feasibility report, the project budget can be
estimated and is needed to be implemented in the project plan developed. The project plan
should be realistic and therefore, project planning phase plays a vital role in project execution.
For example, the Queensland Health Payroll project would not have been delayed if the accurate
project plan was developed in the project planning stage.
6. Project Knowledge Management
Majority of the projects fail due to ineffective project team and lack of implementation of
accurate project management knowledge, tools and techniques in the project. The cost
management is one important aspect of knowledge management and therefore, it is

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recommended to the client that knowledge management should be given a high priority. It is
necessary for the client to capture knowledge and experience to optimize the usefulness of
project management skills in implementation of the future project (Ahern et al.). Lack of
experience and knowledge about the project management needs can be a significant reason
behind the cost overrun in a project. For example, team member selection process in majority of
the projects is mainly based on skills possessed by the team member.
7. Investment in Training
Lack of proper knowledge and skill can be considered as one vital reason behind the
failure of a project. Investment in training might be one good option to ensure that every team
member is skilled and competent enough to handle the project. Although the cost of training is to
be considered, it will not surpass the cost overrun that might occur in a project if it is being led
by incompetent team members (Ramazani, Jalal and George Jergeas). Therefore, it is
recommended to the client to invest in training so that the project team has sufficient knowledge
about the cost allocation, resource allocation and project scheduling. This will help in execution
of the project within the set budget. For example, any new software or system implementation in
an organization is followed by training program to make the employees accustomed to the new
system. Similarly, training the project team with the basic project management knowledge can
help in better management of the project.
8. Staff Turnover
It is quite integral to maintain a low staff turnover. An increase in turnover rate can
significantly result in increase of the cost of a project. A high staff turnover indicates frequent
hiring of new staffs, which is wastage of resources (Guilding et al.). Bringing in new employees

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to the team indicates that the new staffs are to be trained, which will require a cost investment.
Therefore it is recommended to the client to maintain a low staff turnover rate by providing
incentives and benefits to the experienced staffs so that they sever the project team for a long
time. For example, an organization having experienced employees is found to be more successful
than an organization with a maximum number of inexperienced employees.
Conclusion
The document analyses certain factors associated with the implementation of a project
that can help in significantly reducing the cost of project. Certain recommendations are provided
to the client who is in need of managing their project cost as their previous projects had faced
issues of cost overrun. The discussion above points out the possible options that the client could
consider to manage their project costs.

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References
Ahern, Terence, Brian Leavy, and P. J. Byrne. "Complex project management as complex
problem solving: A distributed knowledge management perspective." International Journal of
Project Management 32.8 (2014): 1371-1381.
Chaphalkar, N. B., K. C. Iyer, and Smita K. Patil. "Prediction of outcome of constr
Guilding, Chris, Dawne Lamminmaki, and Lisa McManus. "Staff turnover costs: In search of
accountability." International Journal of Hospitality Management 36 (2014): 231-243.
Harrison, Frederick, and Dennis Lock. Advanced project management: a structured approach.
Routledge, 2017.
Heagney, Joseph. Fundamentals of project management. Amacom, 2016.
Iyer, K. Chandrashekhar, and Ratnesh Kumar. "Impact of Delay and Escalation on Cash Flow
and Profitability in a Real Estate Project." Procedia Engineering 145 (2016): 388-395.
Kerzner, Harold, and Harold R. Kerzner. Project management: a systems approach to planning,
scheduling, and controlling. John Wiley & Sons, 2017.
Milosevic, Dragan Z., and Russ J. Martinelli. Project management toolbox: tools and techniques
for the practicing project manager. John Wiley & Sons, 2016.
Moynihan, Gary P., and Mohammad Ammar Al-Zarrad. "Application of hedging principles to
materials price risk mitigation in construction projects." International Journal of Construction
Engineering and Management 4.5 (2015): 180-190.

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Ramazani, Jalal, and George Jergeas. "Project managers and the journey from good to great: The
benefits of investment in project management training and education." International Journal of
Project Management 33.1 (2015): 41-52.
Schwalbe, Kathy. Information technology project management. Cengage Learning, 2015.
Trauner, Theodore J., et al. Construction delays. Elsevier Science & Technology Books, 2017.