COST OPTIMISATION

Introduction
There can be circumstances where a project is required to complete earlier than normal
time which can be achieved by reducing the duration of critical activities-----
“Crashing”
How to achieve???
This can be achieved by either of the following,

a) By deploying more resources for early completion

b) By relaxing the technical specifications for such activities
Latter cannot be done.
Time – Cost Relation
• In a project there may arise situation where it would be desirable to cut down the project
time. Policy of every Organisation is to reduce the ‘target time’ so as to the saved time
results in extra revenue
• Cost will increase if the project is delayed and if project is to be completed at an early
date, then it requires deployment of more resources which again increases the cost.
• A balance is to be struck where it is possible to complete the project within minimum
cost and corresponding optimum duration which is possible in CPM network.

Important terms
Direct Cost:
• Expenditure which are directly chargeable to and can be identified specifically
with the activities of the project. These include
– Labour cost, Material cost, Equipment cost, Subcontractor, fee for
Government permits/ approval, lawyers, consultants

Indirect Cost:
• Indirect Cost of a project are those expenditure which cannot be clearly
allocated to the individual activity of a project but is assessed as a whole.
– Expenditure related to administrative and establishment charges, overhead,
supervision, loss of revenue, lost profit, penalty, advertising etc.
 • Normal Time:
- This is the standard time that an estimator would usually allow for an activity.

• Crash Time:
– It is the minimum possible time in which an activity can be completed by
employing extra resources.

• Normal Cost:
– Direct cost required to complete the activity in Normal time.

• Crash cost:
– Direct cost corresponding to the completion of activity in Crash time.

Cost will increase if the project is delayed and if project is to be completed

at an early date, then it requires deployment of more resources which again
increases the cost.
Direct Cost-Time curve
Expenditure which are directly chargeable
to and can be identified specifically with
the activities of the project.
Cc= Crash Cost
Cn= Normal Cost
tn= Normal time
tc= Crash time

Slope of Direct cost curve

Cost slope calculation:
Cc – Cn 𝜟C
Cs= =
tn – tc 𝜟t

ΔC – Increase in Cost
Δt – Decrease in Time
Cc= Crash Cost
Cn= Normal Cost
tn= Normal time
tc= Crash time

Indirect Cost-Time curve

Indirect Cost of a project are those
expenditure which cannot be clearly
allocated to the individual activity of a
project but is assessed as a whole
Indirect Cost rises with increased duration
Total cost curve
Sum of direct and indirect costs.
Total cost increases with project
duration and if project duration is
decreased to the crash duration,
project cost will increase again.
The Optimum duration
corresponding to minimum total cost
can be observed from the curve.

Steps in time-cost optimisation- Time-scale network

1. Analyse past records and determine direct cost-time relationship for
various activities
2. Cost slope is calculated for critical activities and arranged in ascending
order.
3. Compute direct cost with normal duration.
4. Activities of Critical path are crashed as per ranking from critical activity
having least cost slope.
5. Crashing of critical activities is continued in ascending order of cost
slope.
6. The parallel non-critical activities are crashed which have become critical
by the duration of critical path due to crashing.
7. Continued till a stage is reached beyond which no further crashing is
possible.
8. At every stage of crashing, calculate the total project cost by adding
direct and indirect costs.
Note: Refer class notes for problems solved or Text books for additional
problems.
 Project Updating
The process of incorporating change and preplanning or rescheduling is called
Updating.

Reasons for changing the plan:

a. Due to the unforeseen difficulties, natural calamities and changed conditions
at the site of project.
b. To develop better and more detailed plans or reconsider time estimates
based on additional knowledge of the job.

Data required for updating

• Original network
• Progress report
• Network calculation charts
• Stage at which updating is being done
• New information and knowledge which will effect the duration in the
future.

Process of updating
Situations during progress.
1. Some or all activities are progressing according to schedule.
2. Some or all activities are ahead the schedule
3. Some or all activities are behind the schedule---delay
For problems we update in the following table format.
 Activity Whether completed or not If in Progress, Completion
Additional time
time required required
for the for
completion activities
yet to begin
Yes/No If yes time
taken for
completion
1-2
1-3
1-4
2-7
3-4
4-5
5-6
5-7
5-8
6-8
7-8

NOTE: Refer class notes for problems on updating and cost optimisation.