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Project Management: Lecture Note: 4 Probabilistic Time Estimates
Project Management: Lecture Note: 4 Probabilistic Time Estimates
Lecture Note: 4
Probabilistic Time Estimates
MG 8203
New York University
Department of Technology Management and Innovation
1
Course Progress
2
Uncertainty
Every project faces uncertainty
Projects are complex
They include interfaces, interdependencies, and assumptions,
which may turn out to be wrong
Uncertainty cannot be eliminated, but it can be
minimized by recognizing the sources and managing
them.
Types of Uncertainties
Time required to complete a project
Availability and cost of key resources
Timing of solutions to technological problems
Macroeconomic variables
The whims of clients
Actions taken by competitors
3
Managing Risk
Effective project management requires an ability to deal
with uncertainty and risks associated with uncertainties.
Risk management planning
A continuous planning process for the management of risks through
proper allocation of resources in a timely manner
Risk identification
Identify potentially uncertain events and likelihood of their occurrence,
and what are the risks when they do occur
Risk analysis Qualitative and Quantitative
Determine the impact of risks and evaluate the desirability of alternate
managerial decisions
Qualitative Scenario Analysis and FMEA Analysis
Quantitative Expected Value and Simulations
Risk response planning
Decide on which risks to prepare for and which to ignore
Create contingency plans and logic charts
Risk monitoring and control
Response to risk
4
Risk Analysis
5
PERT Probabilistic Analysis
6
PERT Probabilistic Analysis
7
Activity Probability Analysis
Variance =
6
8
General Foundry-Time Estimates
Most Probable Expected Variance
Optimistic Pessimistic
Activity a m b E(t) 2
3 1
2
A 1 2 3 2 1
=
6 9
4 2
2
1
B 2 3 4 3 =
6 9
3 1
2
C 1 2 3 2 =
1
6 9
6 2
2
D 2 4 6 4 4
=
6 9
E 1 4 7 4 7 1
2
= 1
6
9 1
2
16
F 1 2 9 3 =
6 9
11 3
2
G 3 4 11 5 =
16
6 92
3 1 1
H 1 2 3 2 =
6 9
9
Project Probability Analysis
Expected project completion time.
It is the sum of the time taken by each activity on the critical path
General Foundry
Critical path = A-C-E-G-H
2 + 2 + 4 + 5 + 2 = 15
Expected Project completion time = 15 weeks
Project variance
It is the sum of the variances of the activities on the critical path
General Foundry
Critical path = A-C-E-G-H
1/9 + 1/9 + 1 + 16/9 + 1/9 = 28/9
Project variance = 3.111
Project standard deviation
It is the square root of the project variance
General Foundry
Square root of 3.111
Project standard deviation = 1.76 week
10
Probability of Project Taking a Longer Time
What would be the probability of the General Foundry
project completion within 16 weeks rather than within 15
weeks?
Calculate z-value (the number of standard deviations by which the
due/target date lies from the expected project completion time)
Standard deviation, sigma - = project variance
11
Probability of Project Taking a Longer Time
15 16 Time - weeks
12
Find Probabilities
P(t 18 weeks)
18 - 15
z= = 1.14
1.76
13
Find Probabilities
P(t 18 weeks)
18 - 15
z= = 1.14
1.76
So, the probability of the project completion taking longer than 18 weeks
is 12.71%
14
Find Probabilities
P(t 14 weeks)
14 - 15
z= = - 0.57
1.76
15
Find Probabilities
P(15 t 18 weeks)
18 - 15
z= = 1.14
1.76
For this z value, the probability
15 18 is 0.8729. But since we are
interested between 15 and 18
Time - weeks weeks, it would be
0.8729 0.5 = 0.3729
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Find Completion Date
For 95% certainty that a project would complete within a
certain time, what would be that completion time?
17
Find Completion Date
For 99% certainty that the project would complete within
a certain time, what would be that completion time?
18
Find Completion Date
For 80% certainty that the project would complete within
a certain time, what would be that completion time?
19
Is it Really the Critical path
24
Traditional Statistics vs. Simulation
Both approaches assume that activity times or costs are
statistically independent
Sometimes, they may be interrelated.
For example, what affected one activity and caused delays in it,
may also affect another activity in the same manner and cause
delays in it.
Both approaches assume the paths are independent
A simulation can circumvent the assumption of statistical
independence by including the activity or path dependencies as
part of the model
Simulation requires less computational effort and much
faster than statistical tools
Project Management
Lecture Note: 4 Probabilistic Time Estimate
Summary
Every project faces uncertainty, which cannot be eliminated.
Risk related to uncertainty can be managed by proper risk management.
Quantifying and factoring in the probability and impact related to risk is
essential.
In probabilistic time estimate analysis, we use three types of time
estimates: Optimistic, pessimistic and most likely
Using beta probability distribution, we can calculate expected time and
variance for each activity and the whole project. We can also apply the
same concept for project costs.
Using statistical tools and simulation, we can find the probability for
different times for the completion of a project as well as the probability
for various overall project costs.
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