Project and Portfolio

Management (PPM)
Sudhir M Chadha
(Course of 20 lectures)

Uncertainty

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

are not the same, because the possibility of much
higher durations pushes the mean up.
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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.
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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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Probability of
Meeting the Deadline
The three simplifying
approximations lead to the
probability duration of the
project being approximated
by a normal distribution.
D = 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)
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p (Mean)

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D (Deadline)
Project Duration
(in weeks)

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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Budget and Cash Flow

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) costs. 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 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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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.

5,000,000
4,500,000
4,000,000
3,500,000

Feasible region
for project costs

3,000,000

ET project cost
schedule

2,500,000

LT project cost
schedule

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

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Time-Cost Trade-off

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.

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Crash
Crash cost

Normal

Normal cost

Crash time

Normal time

Activity duration

A typical time-cost graph for

an activity
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Project Network for Reliable

Activity Code

Activity Code

A. Excavate

I. Electrics

B. Foundation
C. Rough wall
D. Roof

L
J
8

Start
0

A
2

B
4

C
10

E
4

F
5

J. Wallboard
K. Flooring
N

K
4

6
Finish
0
M

E. E plumbing

F. I plumbing

G. E siding

H
9

L. I painting

M. E fixtures
N. I fixtures

H. E painting
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Time-Cost Trade-Off Data

Activity

Normal
weeks

Crash
weeks

Normal
Cost

Crash Cost

Max Reduction
in Time

Crash Cost per

Week Saved

$180,000

$280,000

$100,000

320,000

420,000

50,000

10

620,000

860,000

80,000

260,000

340,000

40,000

410,000

570,000

160,000

180,000

260,000

40,000

900,000

1,020,000

40,000

200,000

380,000

60,000

210,000

270,000

30,000

430,000

490,000

30,000

160,000

200,000

40,000

250,000

350,000

50,000

100,000

200,000

100,000

N
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sudhir510,000
chadha

60,00018

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

ABCEHM

ABCEFJKN

ABCEFJLN

ABCIJKN

ABCIJLN

Crash
Cost

ABCDGHM

Activity
to
Crash

40 Weeks

31

43

44

41

42

$30,000

40

31

42

43

40

41

30,000

40

31

41

42

39

40

40,000

40

31

40

41

39

40

40,000

40

31

39

40

39

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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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.
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. 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.. 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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