Project and Portfolio Management (PPM)

Sudhir M Chadha (Course of 20 lectures)

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Uncertainty

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Questions
Given the uncertainties in accurately estimating project durations, what is the probability of completing the project by the deadline (47 weeks)?

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PERT Three Estimate Approach

The duration of each activity is a random variable having some probability distribution. The three estimates to be obtained for each activity are:
Most likely estimate (m) = estimate of the most likely value of the duration; Optimistic estimate (o) = Estimate of the duration under the most favourable conditions; Pessimistic estimate (p) = Estimate of the duration under the most unfavourable conditions
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Model of Probability Distribution

= Mean of probability distribution 2 = Variance of the probability distribution

Beta distribution

Elapsed time

is the average of the various activity durations and is the standard deviation that measures the variability of the durations about the mean.
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Approximate Formulas for and 2

For most probability distributions, such as the distribution, essentially all the durations would lie in the interval -3 and +3, i.e., the spread of durations is about 6. (For example, for a normal distribution 99.73% of the distribution lies inside this interval).
2 = [(p-o)/6 ]2 = (o+4m+p)/6

Note that the mean and the most likely estimate is not the same, because the possibility of much higher durations pushes the mean up.
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 and For Activity Durations

Activity A B C D E F G o 1 2 6 4 1 4 5 m 2 3.5 9 5.5 4.5 4 6.5 p 3 8 18 10 5 10 11 = (o+4m+p)/6 2 4 10 6 4 5 7 =(p-o)/6 1 4 1 1 1

H
I J K

5
3 3 4

8
7.5 9 4

17
9 9 4

9
7 8 4

4
1 1 0

L
M
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1 5

5.5
2 5.5

7
3
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2 6

1

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Path Lengths When Duration = p

Path StartABCDGHMFinish StartABCEHMFinish Length (weeks) 70 54

StartABCEFJKNFinish
StartABCEFJLNFinish StartABCIJKNFinish StartABCIjLNFinish

66
69 60 63

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Probability Distribution of Project Duration

The next step is to estimate the probability of meeting the deadline of 47 weeks, which requires making three simplifying approximations. For the project duration we need:
The mean p, The standard deviation p, The form of the distribution.

The mean critical path is the path through the project network that would be the critical path if the duration of each activity were equal to its mean. Thus the mean critical path is the same as before:
StartABCEFJLNFinish = 44 weeks
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Three Simplifying Approximations

Approximation 1: Assume that the mean critical path will turn out to be the longest path through the project network. As we have just seen this may not be true. This implies that
p = Sum of the means of the durations for the activities on the mean critical path.

Approximation 2: Assume that the duration of the activities on the mean critical path are statistically independent. This would not be true if the same cause produces deviations in the durations of two or more activities.
p2 = Sum of the variances of the durations for the activities on the mean critical path.

Approximation 3: Assume that the form of the distribution of the project duration is the normal distribution (one form of the centrallimit theorem). This is justified if the number of activities for the mean critical path is, say, 5.
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p and p for Reliable Project

Activities on Mean Critical Path A B C E F J Mean 2 4 10 4 5 8 Standard Deviation 1 2 1 1

L
N Project Duration

5
6 p = 44

1
p = 3

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Probability of Meeting the Deadline

The three simplifying approximations lead to the probability duration of the project being approximated by a normal distribution. d = 47 weeks = Deadline for the project; Number of standard deviations by which d exceeds p = (d - p)/p = 1. P(T d) = Probability that the project duration (T) does not exceed the deadline (d) = 0.84.

44 (Mean)

47 (Deadline) Project Duration (in weeks)

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Managerial Evaluation of PERT/CPM

The P(T d) is only a rough approximation of the true probability of meeting the project deadline. Since the true critical path of the project is usually longer than the mean critical path (i.e., more than 44 weeks), the real probability of meeting the deadline is less than that obtained from using the simplifying assumptions. The approximations made in estimating the mean and variance of activity durations, as well as the simplifying approximations to get to the project duration probability distribution are questionable. Nevertheless, the method allows an understanding of uncertainty in activity durations. Another deficiency is that PERT/CPM does not allow an activity to begin until all its immediate predecessors are completely finished. However, an extension called the precedence diagramming method does allow dealing with overlapping activities. For example, although activity H (do the exterior painting) follows activity G (put up the exterior siding) in Reliables project network, it would be better to have a start-to-start relationship with some lag.

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In Summary
From project definition
Project Rules

PLANNING

Scope and deliverables

PREPLANNING
Risk management

Development approach Risk management tasks

STEP 1
Develop a work breakdown structure

STEP 2
Sequence the tasks

STEP 3
Estimate the work packages

STEP 4
Calculate an initial schedule

Resource constraints
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STEP 5
Assign and level resources

Realistic schedule Resource forecast

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STEP 6
Develop budget

Materials cost from product specifications

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Uncertain Activity Durations

Learning Points
Activity durations are always uncertain. For this reason one must develop a most likely estimate (m), an optimistic estimate (o), and a pessimistic estimate (p) for these durations; Under simplifying approximations, PERT/CPM provides a method for calculating the probability that a project will be completed by a given deadline; The probability calculated above is only a rough approximation and overestimates the true probability for completing the project. The method does not provide information on the size of the error, which is modest in most cases but can be large.
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Time-Cost Trade-off

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Questions
If extra money is spent to expedite the project, what is the least expensive way of attempting to meet the target completion date (40 weeks)?

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Time-Cost Trade Offs

Crashing an activity refers to special costly measures to reduce the duration of an activity below its normal value. These special measures might include using overtime, hiring additional temporary help, using special time-saving materials, obtaining special equipment, or anything else to expedite an activity. Crashing the project refers to crashing a number of activities to reduce the duration of a project to below its normal value. The CPM method of time-cost tradeoffs is concerned with determining how much (if any) to crash each of the activities to reduce the anticipated duration of the project down to a desired value.
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Crashing
The normal point on the time-cost graph shows the time (duration) of an activity when it is performed in the normal way. The crash point shows the time and cost when the activity is fully crashed; i.e., it is fully expedited with no cost spared to reduce its duration as much as possible. The options for each activity are to be at its crash point, its normal point, or somewhere on the line segment between these two points.

Crash

Crash cost

Normal cost

Normal

Crash time

Normal time

Activity duration

A typical time-cost graph for an activity

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Time-Cost Trade-Off Data

Activity A B C D E F G Normal weeks 2 4 10 6 4 5 7 Crash weeks 1 2 7 4 3 3 4 Normal Cost $180,000 320,000 620,000 260,000 410,000 180,000 900,000 Crash Cost $280,000 420,000 860,000 340,000 570,000 260,000 1,020,000 Max Reduction in Time 1 2 3 2 1 2 3 Crash Cost per Week Saved $100,000 50,000 80,000 40,000 160,000 40,000 40,000

H
I J K L M N 01/2011

9
7 8 4 5 2 6

6
5 6 3 3 1 3

200,000
210,000 430,000 160,000 250,000 100,000 330,000

380,000
270,000 490,000 200,000 350,000 200,000
sudhir510,000 chadha

3
2 2 1 2 1 3

60,000
30,000 30,000 40,000 50,000 100,000 60,00020

Marginal Cost Analysis

Summing the normal cost and the crash cost in the timecost trade-off table gives:
Sum of normal costs = $4.55 million; Sum of crash costs = $6.15 million; Anticipated duration of the project if all the activities are performed in the normal way = 44 weeks; If all the activities are fully crashed, then the project duration (assuming no delays) = 28 weeks.

Marginal cost analysis (MCA) finds the least expensive way to reduce project duration one week at a time. MCA becomes unwieldy for large networks. Linear programming (LP) provides a more efficient alternative to marginal cost analysis, for large projects.
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Performing MCA on Reliable Project

ABCDGHM ABCEFJKN

ABCEFJLN

ABCEHM

ABCIJKN

ABCIJLN

Activity to Crash

Crash Cost

40 Weeks J $30,000 40

31 31

43 42

44 43

41 40

42 41

J
F F

30,000
40,000 40,000

40
40 40

31
31 31

41
40 39

42
41 40

39
39 39

40
40 40

Cost of the partially crashed project = $4.69m

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Linear Programming
Restatement of the problem:
Consider the total cost of the project, including the extra cost of crashing activities. The problem then is to minimize the total cost, subject to the constraint that the project duration is less than or equal to the time desired by the project manager.

The following decisions will appear in the changing cells:

The start time of each activity; The reduction in the duration of each activity due to crashing; The finish time of the project (must not exceed 40 weeks for Reliable). The start-time constraints specify that an activity cannot start until each of

its immediate predecessors have finished. Although the start-time constraints allow a delay in starting an activity, an optimal solution would not allow this to happen for any activity on the critical path.

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Mr Pertys Conclusions
The CPM method of time-cost trade-offs ignores the considerable uncertainty in activity times, so the predicted project duration under any crashing plan may miss the actual duration by a considerable amount. Conclusion 1. The plan for crashing the project only provides a 50% chance of actually finishing the project within 40 weeks, so the extra cost of the plan ($140000) is not justified. Therefore Mr Perty rejects any crashing at this stage. It is sometimes useful to postpone a decision on crashing an activity until near its start time. Information on how well the project schedule is progressing can then influence this decision. Conclusion 2. The extra cost of the crashing plan can be justified if it almost certainly would earn the bonus of $150000 for finishing the project within 40 weeks. Therefore Mr Perty will hold the plan in reserve to be implemented if the project is running well ahead of schedule before reaching activity F. Conclusion 3. The extra cost of part or all of the crashing plan can be easily justified if it likely would make the difference in avoiding the penalty of $300000 for not finishing the project within 47 weeks.. Therefore Mr Perty will hold the crashing plan in reserve to be partially or wholly implemented if the project is running far behind schedule before reaching activity F or activity J.

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Budget and Cash Flow

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Questions
How should ongoing costs be monitored to try to keep the project within budget?

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Project Costs
The following terminology is used for project costs:
Baseline costs. The original planned task, resource, or assignment costs saved as part of a baseline plan; Current (or scheduled) tasks. The calculated costs of tasks, resources, and assignments in a project plan. As adjustments are made to the baseline plan (such as assigning or removing resources) , the recalculated costs are the current costs. The current cost equals the actual cost plus the remaining cost per task, resource, or assignment. Actual costs. The costs that have been incurred for tasks, resources or assignments. After the project incurs actual costs (typically by tracking actual work), the current cost equals the actual cost plus the remaining cost per task, resource, or assignment. Remaining costs. The difference between the current or scheduled costs and the actual costs for tasks, resources, or assignments.

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Scheduling Project Costs

PERT/Cost is a systematic procedure (included within Project) to help the project manager plan, schedule, and control project costs. A common assumption when using PERT/Cost is that the costs of performing an activity are incurred at a constant rate throughout its duration, i.e., prorated. This assumption can be changed. PERT/Cost provides a weekly schedule of expenses so that the project manager can monitor whether the project is staying within budget. Postponing activities to their latest start times also postpones the costs of these activities, which is helpful when cash is short, but this also increases the risk of missing the scheduled project completion date.

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Project budget for Reliable Project

Activity A B C Est. Duration (Weeks) 2 4 10 Estimated Costs $180,000 320,000 620,000 Cost per week of its Duration $90,000 80,000 62,000

D
E F G H I J K L M
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4 5 7 9 7 8 4 5 2 6
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260,000
410,000 180,000 900,000 200,000 210,000 430,000 160,000 250,000 100,000 330,000

43,333
102,5000 36,000 128,571 22,222 30,000 53,750 40,000 50,000 50,000 55,000
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Earliest Time Project Cost Schedule

ID 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 Task Name April Fixed Cost Fixed Cost Accrual Details 25/04 May 02/05 09/05 16/05 23/05 June 30/05 06/06 13/06 20/06

Reliable Construction
Excavate Lay the foundation Put up the rough wall Put up the roof Install the exterior plumbing Install the interior plumbing Put up the exterior siding Do the exterior painting Do the electrical work Put up the wallboard Install the flooring Do the interior painting Install the exterior fixtures Install the interior fixtures

0
180,000 320,000 620,000 260,000 410,000 180,000 900,000 200,000 210,000 430,000 160,000 250,000 100,000 330,000

Prorated Cost
Cum. Cost Prorated Cost Cum. Cost Prorated Cost Cum. Cost Prorated Cost Cum. Cost Prorated Cost Cum. Cost Prorated Cost Cum. Cost Prorated Cost Cum. Cost Prorated Cost Cum. Cost Prorated Cost Cum. Cost Prorated Cost Cum. Cost Prorated Cost Cum. Cost Prorated Cost Cum. Cost Prorated Cost Cum. Cost Prorated Cost Cum. Cost Prorated Cost Cum. Cost

175,833 1,295,833 180,000 320,000 620,000 43,333 43,333 102,500 102,500

175,833 1,471,667 180,000 320,000 620,000 43,333 86,667 102,500 205,000

175,833 1,647,500 180,000 320,000 620,000 43,333 130,000 102,500 307,500

175,833 1,823,333 180,000 320,000 620,000 43,333 173,333 102,500 410,000

109,333 1,932,667 180,000 320,000 620,000 43,333 216,667 410,000 36,000 36,000

109,333 2,042,000 180,000 320,000 620,000 43,333 260,000 410,000 36,000 72,000

194,571 2,236,571 180,000 320,000 620,000 260,000 410,000 36,000 108,000 128,571 128,571

164,571 2,401,143 180,000 320,000 620,000 260,000 410,000 36,000 144,000 128,571 257,143

164,571 2,565,714 180,000 320,000 620,000 260,000 410,000 36,000 180,000 128,571 385,714

30,000 30,000

30,000 60,000

30,000 90,000

30,000 120,000

30,000 150,000

30,000 180,000

30,000 210,000

210,000

210,000

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Latest Time Project Cost Schedule

ID 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 Task Name April Fixed Cost Fixed Cost Accrual Details 25/04 May 02/05 09/05 16/05 23/05 June 30/05 06/06 13/06 20/06

Reliable Construction
Excavate Lay the foundation Put up the rough wall Put up the roof Install the exterior plumbing Install the interior plumbing Put up the exterior siding Do the exterior painting Do the electrical work Put up the wallboard Install the flooring Do the interior painting Install the exterior fixtures Install the interior fixtures

0
180,000 320,000 620,000 260,000 410,000 180,000 900,000 200,000 210,000 430,000 160,000 250,000 100,000 330,000

Prorated Cost
Cum. Cost Prorated Cost Cum. Cost Prorated Cost Cum. Cost Prorated Cost Cum. Cost Prorated Cost Cum. Cost Prorated Cost Cum. Cost Prorated Cost Cum. Cost Prorated Cost Cum. Cost Prorated Cost Cum. Cost Prorated Cost Cum. Cost Prorated Cost Cum. Cost Prorated Cost Cum. Cost Prorated Cost Cum. Cost Prorated Cost Cum. Cost Prorated Cost Cum. Cost

102,500 1,222,500 180,000 320,000 620,000

102,500 1,325,000 180,000 320,000 620,000

132,500 1,457,500 180,000 320,000 620,000

132,500 1,590,000 180,000 320,000 620,000

109,333 1,699,333 180,000 320,000 620,000 43,333 43,333 410,000 36,000 36,000

109,333 1,808,667 180,000 320,000 620,000 43,333 86,667 410,000 36,000 72,000

109,333 1,918,000 180,000 320,000 620,000 43,333 130,000 410,000 36,000 108,000

109,333 2,027,333 180,000 320,000 620,000 43,333 173,333 410,000 36,000 144,000

109,333 2,136,667 180,000 320,000 620,000 43,333 216,667 410,000 36,000 180,000

102,500 102,500

102,500 205,000

102,500 307,500

102,500 410,000

30,000 30,000

30,000 60,000

30,000 90,000

30,000 120,000

30,000 150,000

30,000 180,000

30,000 210,000

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Cumulative Project Costs

The top curve is the schedule of cumulative project costs when all activities begin at their earliest start times. The bottom curve is the schedule of project costs when all activities begin at their latest start times. The areas between the two curves shows the only feasible week by week budget that will not delay project completion.
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5,000,000 4,500,000 4,000,000 3,500,000 3,000,000 2,500,000 2,000,000 1,500,000 1,000,000 500,000 1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31 33 35 37 39 41 43

Feasible region for project costs ET project cost schedule LT project cost schedule

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Budget and Cash Flow

Learning Points
How to schedule project costs; Earliest and latest time project cost schedules, and the feasible region for project costs; Time-Cost trade-offs; Which activities should be crashed?
Marginal cost analysis; Linear Programming to make crash decisions.

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