Project Management

Introduction to Project
Management, Basics & Scope, Project Organization Structure,
Project Selection, Developing the Project Network, Scope,

Class 1, 2, 3 and 4
P R O F. A R N A B A D H I K A R I
Importance of Project
Management

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 Project Management Statistics
Over 1 in 3 (34%) projects have no baseline.
For every $1 billion invested in the United States, $122 million was wasted due
to lacking project performance.
 75% of business and IT executives anticipate their software projects will fail.
50% of all Project Management Offices (PMOs) close within just three years.
Fewer than a third of all projects were successfully completed on time and on
budget over the past year.
Source :https://blog.capterra.com/surprising-project-management-statistics/

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 Real Life Examples-Project
Failure

Source: https://www.workfront.com/blog/project-failure-10-famous-failures-and-5-
ways-to-spot-them-before-they-happen

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What is a Project?
Project is defined as
◦ A complex, non-routine, one-time effort limited by time, budget,
resources, and performance specifications designed to meet customer
needs.
◦ Project is a temporary endeavor undertaken to create a unique product,
service or result (PMI).
Major characteristics of a project
◦ Has an established objective.
◦ Has a defined life span with a beginning and an end.
◦ Typically requires involvement of several departments and professionals.
◦ Involves doing something that has never been done before.
◦ Has specific time, cost, and performance requirements.

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Project Attributes
A project:
◦ Has a unique purpose.
◦ Is temporary.
◦ Is developed using progressive elaboration.
◦ Requires resources, often from various areas.
◦ Should have a primary customer or sponsor.
◦ The project sponsor usually provides the direction and funding for
the project.
◦ Involves uncertainty.

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Program and Portfolio
Program
◦ Group of related projects designed to accomplish a common goal over an extended period
of time.
◦ Managed in a coordinated way
◦ Managed to obtain synergy in benefits and control which are not available if managing
projects individually
◦ Some common related work outside the scope of the discrete projects in a program

Portfolio
◦ Collection of projects and programs that are grouped together for pursuing objectives
focused on some specific business strategy.
◦ Scope of portfolio is wider than project and program.
◦ Example: Setting up and operating petroleum refinery

6
 The Life Cycle of Projects
All organisms have a life cycle (i.e., they are born, grow, wane, and die) … and so do
the projects

Some projects follow an S-shaped curve … they start slowly, develop momentum,
and then finish slowly

Other project follow a J-shaped curve … they start slowly , proceed slowly, and then
finish rapidly

The time span between the start and end of a project in which work to be carried out
is called project life cycle.

The set of inter-related project activities carried out sequentially during the project
life cycle is called a project phase or stage.

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Project life cycle stages
Defining/Conceptualization (Starting the project)

Planning/Development (Organizing and preparing the project)

Executing (Carrying out the project work)

Closing (Delivering the project)

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Project Life Cycle

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 Characteristics of Project
Phases
The work content, staffing and cost are small in the early life cycle phases. They
rise to high level in the middle phases and drop off near the closing phases.

The level of uncertainty, or risk, to the project success is highest in the early
phases of the life cycle.

The ability of stakeholders to influence the project is highest during the early
phases and gradually diminishes as project draws to a close.

The cost of correction or change of scope is small at the project start and it
increases very rapidly as the project progresses.

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Project Management
 The application of knowledge, skills, tools, and techniques to a broad
range of activities in order to meet the requirements of a particular
project.
It includes:
 Planning
◦ What has to be done, when and by whom
 Organizing
◦ Resources need to be organized through activities such as
procurement and recruitment
 Directing
◦ Directing their activities towards a coherent objective
 Controlling
◦ It ensures that they fit within the limits

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 Roles and Responsibilities of
Project Manager
 Coordinating and integrating activities across multiple functional lines

Defining and maintaining the integrity of the project

Developing the project execution plan

Organizing for the execution plan

Setting targets for accomplishment of project objectives

Negotiating with the suppliers, clients and the project members

Directing, coordinating and controlling the project activities

Maintaining the balance between technical and managerial project functions

Coping with risk associated with project management

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The Challenge of Project
Manager
The Project Manager
 Manages temporary, non-repetitive activities and frequently acts
independently of the formal organization.
 Organizes resources for the project
 Provides direction, coordination, and integration to the project team
 Manages a diverse set of project stakeholders
 Dependent upon others for technical answers
 Is responsible for performance and success of the project
 Must induce the right people at the right time to address the right
issues and make the right decisions.

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 Rules for Project Managers
Understand the problems, opportunities, and expectations from a project

Recognize that project teams will have conflicts, but this is a natural part of
group development.

Understand who the stakeholders are and their agendas.

Realize that organizations are very political and use politics to your advantage.

Realize that project management is “leader intensive” but that you must be
flexible.

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Project Managers

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 Project Management
Processes
The knowledge, skills, tools and techniques associated with good project
management practices, the desired results or outputs, and the necessary data or inputs
are collectively identified as project management processes.

Project Management Process groups

◦ Initiating: Defines and authorizes a project
◦ Planning: Defines and refines objectives, prepares detailed action plan for
project activities to meet project objectives on scope, time, cost, and quality
◦ Executing: Manages people and use of other resources to carry out project
activities
◦ Monitoring & Controlling: Continually measures the performance against the
standards and takes corrective actions
◦ Closing: Formal acceptance of the project product or result and orderly end of
the project activities.

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 CHAPTER 2 AND 4-
ORGANIZATION STRATEGY,
PROJECT SELECTION, AND
DEFINING THE PROJECT
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Project Selection
Projects are vehicles of change for an organization creating a new product,
service or result useful for implementing the organization’s business
strategy.
Non-financial criteria Financial criteria

• Meeting legal or social obligations, • Projects for setting up new

compulsion based on competitive
economic pressure for survival
• Continuation of business (market
trends, new products, or cost saving
and adoption of new technology),
• Management’s vision for new
direction
manufacturing facility
• Infrastructural set up for providing
a new product or service,
• major expansions for raising the
production level, backward
• Forward integration of operations,
and major diversifications are
usually selected on the basis of
financial criteria

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Importance of Rigour in Application of
Financial Criteria
Rigour in application of financial criteria is important,
because:
◦ Projects are usually large and investments are huge compared to
routine operations.
◦ Investment decisions are irreversible.
◦ Large risks involved with future operations viability – a wrong move
may cripple a healthy organization.

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Cash Flows
Project selection methods using financial criteria are based on
estimating the future cash flows related to the project.

The future cash flows for a project are estimated using certain principles
and calculation procedures.

Project cash flows may be classified as investment for fixed assets,

margins for working capital, surplus generated from project
operations and economic recovery from the project’s assets at the end
of project life.

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Selection Methods using
Financial Criteria
Raw Cash Flows (Without Discounted Cash Flows:
Discounting)

Return on Investment (ROI) Net Present Value (NPV)

Payback Period (PBP) Internal rate of Return (IRR)

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Calculation of ROI and PBP
Measures Description Implication
Return on 𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝐴𝑛𝑛𝑢𝑎𝑙 𝐶𝑎𝑠ℎ 𝐹𝑙𝑜𝑤 The higher the
𝑅𝑂𝐼 % = × 100%
Investment 𝑃𝑟𝑜𝑗𝑒𝑐𝑡 𝐼𝑛𝑣𝑒𝑠𝑡𝑚𝑒𝑛𝑡 percentage, the more
(ROI) Method: attractive the investment

Pay-back 𝑃𝑟𝑜𝑗𝑒𝑐𝑡 𝐼𝑛𝑣𝑒𝑠𝑡𝑚𝑒𝑛𝑡 The shorter the period,

𝑎)𝑃𝐵𝑃 =
Period (PBP) 𝐶𝑢𝑚𝑢𝑙𝑎𝑡𝑖𝑣𝑒 𝐴𝑛𝑛𝑢𝑎𝑙 𝑃𝑟𝑜𝑗𝑒𝑐𝑡 𝑅𝑒𝑡𝑢𝑟𝑛𝑠 the more attractive the
investment
𝐸𝑠𝑡𝑖𝑚𝑎𝑡𝑒𝑑 𝑃𝑟𝑜𝑗𝑒𝑐𝑡 𝐶𝑜𝑠𝑡
𝑏)𝑃𝐵𝑃 =
𝐴𝑛𝑛𝑢𝑎𝑙 𝑆𝑎𝑣𝑖𝑛𝑔𝑠

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 Discounting Cash Flows
 Future cash flows are discounted to equate them with their present values using a pre-
selected annual discounting factor.

 The most common factor is 14 % to 16 % per annum.

 The advanced financial investment theory recommends use of weighted average cost of
capital to be used as discounting factor.

if r % = annual discounting factor,

pv = present value of cash flow and

pf = raw estimated value of future cash flow in the nth year

pv = pf / ( 1 + r) n and pf = pv * ( 1 + r) n

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Calculation of NPV and IRR
Calculation of NPV:
◦ If CF1, CF2, … CFn are the estimated cash flows in the first, second and nth
year of the operation and I is the initial project investment in the first year, r is
the rate of return.
NPV = CF1 /(1+r) + CF2 /(1+r)2 + … +CFn /(1+r)n - I
◦ Implication : The higher the positive value of NPV, more attractive the
project investment.

Calculation of IRR:
◦ In the above equation of NPV, that value of r , which makes NPV equal to
zero is the internal rate of return for the project.
◦ Implication : The higher the internal rate of return, the more attractive the
project investment is.

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 Problem 1
Let Project A and B has an initial investment of $700000 and $400000, respectively. The projected
cash inflows of project A and B is $225000 and $110000, respectively for 5 years. The discount
rate or the rate of return is 15%. The acceptance criteria of any project is given below:

•Payback period should be less than 5 years

•ROI should be more than or equals to 15%

•NPV should be positive

Determine the payback periods and ROI of Project A and B. Comment on the acceptance of the
projects for each of the criteria

Determine the payback periods, ROI, and NPV of Project A and B. . Comment on the acceptance
of the projects

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Problem 1
Part 1 Project A Project B
Investment 700000 400000
Annual Savings 225000 110000
Payback Period (in years) 3.111111111 3.636363636
Rate of Return (%) 32.14285714 27.5
Acceptance Criteria (PBP) Aceepted Aceepted
Acceptance Criteria (Rate of
return) Aceepted Aceepted

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Problem 1
Part 2 Project A Project B
Cash Outflows -700000 -400000
Cash Inflow-year 1 225000 110000
Cash Inflow-year 2 225000 110000
Cash Inflow-year 3 225000 110000
Cash Inflow-year 4 225000 110000
Cash Inflow-year 5 225000 110000
Discount rate 0.15 0.15
NPV 54234.89705 -31262.93922
Acceptance Criteria (PBP) Aceepted Not accepted

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 Problem 2
There are two projects that a company is reviewing. Management must decide whether
to move forward with one, none or both of the projects. The cash flow patterns for each
project are as follows:

Project A

Initial Outlay = $5,000, Year one = $1,700, Year two = $1,900, Year three = $1,600,
Year four = $1,500, Year five = $700

Project B

Initial Outlay = $2,000, Year one = $400, Year two = $700, Year three = $500, Year four
= $400, Year five = $300

What are the IRR of Project A and B? If the company's cost of capital is 10%, What
management should do?
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Problem 2-Solution
IRR Project A: $0 = (-$5,000) + $1,700 / (1 + IRR) ^ 1 + $1,900 / (1 +
IRR) ^ 2 + $1,600 / (1 + IRR) ^ 3 + $1,500 / (1 + IRR) ^ 4 + $700 / (1 +
IRR) ^ 5
IRR Project B: $0 = (-$2,000) + $400 / (1 + IRR) ^ 1 + $700 / (1 + IRR)
^ 2 + $500 / (1 + IRR) ^ 3 + $400 / (1 + IRR) ^ 4 + $300 / (1 + IRR) ^ 5
IRR Project A = 16.61%
IRR Project B = 5.23%
If the company's cost of capital is 10%, management should proceed
with Project A and reject Project B.

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Project Evaluation Method
Different organizations have preferences for different project evaluation
methods. However, two important points should always be borne in mind:

Whatever analytical method is used, the integrity and accuracy of data used
plays a very important role.

The analysis can provide some objective basis for decision making, but in the
final analysis, it is the knowledge, experience, judgment, and entrepreneurial risk
taking capability of the decision maker that lies behind successful investment
decisions.

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Problem 3
An organization is evaluating six projects on seven different criteria. The
weights of the criteria and scores of different project in various criteria is given
below. Determine the rank of the projects
C1 C2 C3 C4 C5 C6 C7
Weight 2 3 2 2.5 1 1 3
Proj 1 1 8 2 6 0 6 5

Proj 2 3 3 2 0 0 5 1
Proj 3 9 5 2 0 2 2 5
Proj 4 3 0 10 0 0 6 0
Proj 5 1 10 5 10 0 8 9
Proj 6 6 5 0 2 0 2 7

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Problem 3- Solution
C1 C2 C3 C4 C5 C6 C7 Score Rank
Weight 2 3 2 2.5 1 1 3
Proj 1 1 8 2 6 0 6 5 66 2
Proj 2 3 3 2 0 0 5 1 27 6
Proj 3 9 5 2 0 2 2 5 56 3
Proj 4 3 0 10 0 0 6 0 32 5
Proj 5 1 10 5 10 0 8 9 102 1
Proj 6 6 5 0 2 0 2 7 55 4

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Project Scope
The work that must be performed to deliver a product, service or result
with specified features, functions and satisfaction criteria.

Scope is the process of developing a detailed description of the project

and the product of the project, the output of this process is project scope
statement.

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Key issues in project scope
management
Prevent indiscriminate scope creep.

Include all deliverables in project work and complete satisfactorily.

Use discretion in permitting some scope changes which are crucial for
meeting the project objectives though they may not have been properly spelt
out at the stage of defining scope.

Verification of scope: Process of formalizing the acceptance of completed

project deliverables.

Control scope: The process of monitoring the status of the project and
product scope and managing changes to scope baseline.

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Contents of Project Scope
Statement
 Project Objectives
Product scope description
Project boundaries – inclusions/exclusions
Project deliverables and project acceptance criteria
Project Constraints & assumptions
Project Management Guidelines
◦ Project Cost
◦ Major milestones & project schedule
◦ Quality aspects and acceptance requirements
◦ Project management team & project organization

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Issues related to project scope
management
Drive Scope Changes Based on Delivery Date Impact
Truth be known, when push comes to shove, delivering a project on time is more
important than delivering it on budget about 99 percent of the time. This is because
any project that sports an attractive ROI is worth having sooner than later.

Allow for a Deliverables Trade-off Process

Sometimes, requested increases to the scope of a project can be accompanied with
offsetting scope reductions. This is often the case when budget is rigid and, in
essence, the organization wants as much as it can get for a finite investment.

Create a "Time Boxes" Releases Strategy

"Time boxing" is a well-accepted method for chunking deliverables into a series of
smaller groups that can be delivered quickly. Not all projects lend themselves to time
boxing, but many do.

Source: https://www.projecttimes.com/articles/coping-with-project-scope-eight-
real-world-strategies.html

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Nature of Project Integration
Management Processes
Initiating Process : Develop Project Charter
Planning Process : Develop Project Management Plan
Executing Process : Direct and Manage Project Execution
Monitoring & Controlling Process:
 Monitor & Control Project Work
 Perform Integrated Change Control

Closing Process: Close Project or Phase

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Purpose of Initiation
Formally authorizing a new project and informally ensuring that an
existing project continues in the next phase.

Documenting the business needs and new product or service to be

created by the project.

Linking the project undertaken to the on-going operations of the

business.

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Develop Project Management
Plan
Project Management Plan is an integrated result of all project planning.
It is meant to define and refine project objectives and work out in sufficient
details the course for effective execution of all project activities.
Monitor & Control Project Work : The process for tracking, reviewing
and regulating the project work in order to meet the performance objectives
and standards defined in the project plan.
Integrated Change Control
This process is at the heart of managing changes.
The process should on one hand try to permit minimal changes and prevent
the frittering away of resources and project focus on peripheral objectives.
It should ensure that all changes proposed from thoughtful review of project
should be incorporated.

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 CHAPTER 3-
ORGANIZATIONAL
STRUCTURE AND
CULTURE

40
 Project Management
Organization Structures
Challenges to organize projects
◦ The uniqueness and short duration of projects relative to ongoing longer-term
organizational activities
◦ The multidisciplinary and cross-functional nature of projects creates authority and
responsibility dilemmas

Choosing an appropriate project management organization structure

◦ The best system balances the needs of the project with the needs of the
organization.

Organization of project teams and their leadership structures differ according to

certain characteristics of projects.
◦ Some of the important differences are:
◦ Who the project leader is,
◦ Who has certain responsibilities and
◦ Who makes the decisions.

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 Key Characteristics and Classification
Classification Key Characteristics
Functional • Project team is formed within the functional units.
project • Nobody is responsible for the entire project.
organization • Leadership occurs within functional units (expertise centers). Leadership belongs to
technical experts.
• Example : human resources, sales and marketing, creative departments, accounts and
finance, advertising, etc.
Pure or • Project requiring major changes.A small, self-sufficient and full-time team is set up.
dedicated • The team leader is like an entrepreneur. Leader has full responsibility over the project.
project teams • Functional units are stable, provide support to project teams.
organization
Matrix project • A hybrid form that combines both some characteristics of functional and pure project
organization organization forms.
• Project manager and functional managers share responsibility.
• Project manager decides what tasks will be done, and when they will be done.
• Functional manager decides who will work in the project and which technologies will be
used.
• Members of the project team have two “bosses” that they report to.
• Team members could be working on multiple projects.

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Functional Organization
Structure

43
Pure or Dedicated Project
Teams Organization

44
Matrix Project Organization

45
 Characteristics of projects suitable for
this organization structure
Classification Key Characteristics
Functional • Solution of technical problems is important.
project • Integration of different functional units’ work is not necessary.
organization • Success depends on application of narrow technical know-how.
• Usually one functional unit is dominant (due to technical reasons).
Pure or Projectitis
dedicated • a strong divisiveness occurs between the project team and the parent
project teams organization.
organization • Project team members have difficulty in going back to their functional units
when the project is over.

Matrix project • Integration of work done by different functional units is very important.
organization • Changes (instability) both inside and outside the company.
• Success does not depend on application of a narrow expertise.

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Advantages and Disadvantages
Advantages Disadvantages

Functional • No change in the design and • Lack of focus

project operation • Pure integration
organization • Flexibility • Slow
• In-depth expertise • Lack of ownership
• Easy post-project transition
Pure or • Simple • Expensive
dedicated • Fast • Internal strife
project teams • Cohesive • Limited technological expertise
organization • Cross-functional integration • Difficult post-project transition

Matrix project • Efficient • Dysfunctional conflict

organization • Strong project focus • Infighting
• Easier post-project transition • Stressful
• Flexible • Slow

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Matrix Project Organization
Matrix structures differ according to the “weight or the authority ” of the
project manager (relative to functional managers) :
(1) “Lightweight or Weak Matrix”

(2) “Middleweight or Balanced Matrix” - the traditional one

(3) “Heavyweight or Strong Matrix”

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Lightweight Matrix Project
Organization
Representatives from each functional unit
◦ Perform coordination and support.

Functional managers have real power.

◦ They provide functional input.
◦ Decides who does what and when the work is completed.

Project coordinator
◦ Is responsible for the coordination/intergration of inputs from different
functional units, draws schedule and check list, collect information on
status of work, and facilitates project completion.
◦ Does not have direct authority over the workers

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Balanced Matrix
The project manager is responsible for defining “what needs to be
accomplished”.
The functional manager is concerned with “how it will be
accomplished”.
What and how requires both parties to work closely together and jointly
approve technical and operational decisions.

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Heavyweight Matrix Project
Structure
In heavyweight structures,
◦ Integration is very important and is the key responsibility of the project
leader.
◦ Objective is to provide a perfect system solution, not technical excellence
within a narrow functional area.
◦ Project leader works with a core team of functional leaders. They have
power to get things done within their units.
Characteristics of the project leader
◦ A effective manager who is experienced in more than one functional area.
◦ Works like a general manager (CEO) within the project. Can influence
details.
◦ Works like the conductor of an orchestra:
◦ Keeps track of how certain critical tasks are done and coordinated as a
whole.

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52
Division of Project Manager and
Functional Manager Responsibilities
in a Matrix Structure
Project Manager Negotiated Issues Functional Manager

• What has to be done? • Who will do the • How will it be done?

• When should the task task? • How will the project
be done? • Where will the task involvement impact
• How much money is be done? normal functional
available to do the • Why will the task activities?
task? be done? • How well the
• How well has the • Is the task functional input been
total project been satisfactorily integrated?
done? completed?

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Choosing the Appropriate Project
Management Structure
Focus Issues to be considered
Organization Considerations • How important is the project to the firm’s
success?
• What percentage of core work involves
projects?
• What level of resources (human and physical)
are available?

Project Considerations • Size of project

• Strategic importance
• Novelty and need for innovation
• Need for integration (number of departments
involved)
• Environmental complexity (number of external
interfaces)
• Budget and time constraints
• Stability of resource requirements

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 CHAPTER 5-
PROJECT ESTIMATION

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Estimating Projects
Estimation
◦ The process of forecasting or approximating the time and cost of completing
project deliverables.

◦ The task of balancing expectations of stakeholders and need for control while
the project is implemented.

Types of Estimates
◦ Top-down (macro) estimates: Analogy, group consensus, or mathematical
relationships

◦ Bottom-up (micro) estimates: Estimation of elements

of the work breakdown structure (WBS).

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 Example
Let’s say you are building a fence. The project has two tasks:
Set posts
Build fence
The local hardware store suggests a fencepost cost of roughly $75/post. Since
there are 10 posts, that equates to $750. This is called a parametric estimate.
Next, your colleague, who built a fence last month tells you that their fence cost
about $5,000 (excluding the fenceposts) for a fence that was 100 feet
long. Thus, since your fence is half as long, it would cost roughly $2,500. This
is an analogous estimate.
For the entire project, we add the two together. This is called bottom
up estimating and results in the overall project cost
Source: https://www.projectengineer.net/bottom-up-estimating/

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Why Estimating Time and Cost are
Important
 To support good decisions.
To schedule work.
To determine how long the project should take and its cost.
To determine whether the project is worth doing.
To develop cash flow needs.
To determine how well the project is progressing.
To develop time-phased budgets and establish the project baseline.

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Factors Influencing the Quality of
Estimates

Planning Horizon
Other Project
(Non-project) Duration
Factors
Quality of
Organization Estimates People
Culture

Padding Project Structure

Estimates and Organization

59
 Estimating Guidelines for Times,
Costs, and Resources
Have people most familiar with the tasks make the estimate.
Use several people to make estimates.
Estimation should be based on normal conditions, efficient methods, and a
normal level of resources.
Use consistent time units in estimating task times.
Treat each task as independent, don’t aggregate.
Don’t make allowances for contingencies.
Adding risk assessment to the estimate helps to avoid surprises to stakeholders.

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Top-Down versus Bottom-Up Estimating
Top-Down Estimates
◦ Are usually derived from someone who uses experience and/or information to
determine the project duration and total cost.
◦ Are made by top managers who have little knowledge of the processes used
to complete the project.

Bottom-Up Approach
◦ Can serve as a check on cost elements in the WBS
by rolling up the work packages and associated cost accounts to major
deliverables at the work package level.

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Top-Down versus Bottom-Up
Estimation
Conditions for Preferring Top-Down or Bottom-up Time and Cost Estimates
Condition Top-Down Estimates Botttom-upEstimates
Strategic decision making X
Cost and time important X
High uncertainty X
Internal, small project X
Fixed-price contract X
Customer wants details X
Unstable scope X

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Estimating Projects: Preferred
Approach
Make rough top-down estimates.
Develop the WBS/OBS.
Make bottom-up estimates.
Develop schedules and budgets.
Reconcile differences between top-down and bottom-up estimates

63
Top-Down Approaches for Estimating
Project Times and Costs
Consensus methods (Expert discussion
Ratio methods
Apportion methods
Function point methods for software and system projects
Learning curves

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Apportion Method of Allocating
Project Costs Using the Work
Breakdown Structure

65
Simplified Basic Function Point Count
Process for a Prospective Project or
Deliverable

66
Example :Function Point Count Method

67
Bottom-Up Approaches for Estimating
Project Times and Costs
Template methods
◦ Similar to the past project

Parametric procedures applied to specific tasks

◦ Cost per square foot from top down estimate can be applied to specific task

Range estimates for the WBS work packages

◦ Works best when work packages have significant uncertainty associated with
the time and cost to complete.

A hybrid: Phase estimating

◦ It is used when an unusual amount of uncertainty surrounds a project and it is
impractical to estimates times and costs for the entire project.

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Range Estimating Templates

69
Phase Estimating over Project Life Cycle

70
Top-Down and Bottom-Up Estimates

71
 Level of Detail
Level of detail is different for different levels of management.
Level of detail in the WBS varies with the complexity of the project.
Excessive detail is costly.
Fosters a focus on departmental outcomes.
Creates unproductive paperwork.
Insufficient detail is costly.
Lack of focus on goals.
Wasted effort on nonessential activities.

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Types of Costs
Direct Costs
 Costs that are clearly chargeable to a specific work package.
 Labor, materials, equipment, and other

Direct Project Overhead Costs

 Costs incurred that are directly tied to an identifiable project deliverable
or work package.
 Salary, rents, supplies, specialized machinery

General and Administrative Overhead Costs

 Organization costs indirectly linked to a specific package that are
apportioned to the project.

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Contract Bid Summary Costs

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Three Views of Cost

75
Refining Estimates
Reasons for Adjusting Estimates
◦ Interaction costs are hidden in estimates
◦ Normal conditions do not apply
◦ Things go wrong on projects
◦ Changes in project scope and plans
◦ Overly optimistic
◦ Strategic misrepresentation
◦ Effective organization adjust estimates of specific tasks once risks, resources,
and particulars of the situation become more clearly defined.

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Creating a Database for Estimating

77
 CHAPTER 6-
Developing a Project Plan

78
Developing the Project Network
The Project Network
 The tool used for planning, scheduling, and monitoring project progress.
 A flow chart that graphically depicts the sequence, interdependencies, and start and
finish times of the project activities along the critical path through the network.
Information and insights:
◦ Provides the basis for scheduling labor and equipment.
◦ Enhances communication among project participants.
◦ Provides an estimate of the project’s duration.
◦ Provides a basis for budgeting cash flow.
◦ Identifies and highlights activities that are critical.
◦ Help managers get and stay on plan.

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 Activity-on-Node Fundamentals
 Two Approaches
• Activity-on-Node (AON) :Uses a node to depict an activity.
• Activity-on-Arrow (AOA) : Uses an arrow to depict an activity.
Predecessor: Activities must be completed before this activity
Successor: activities must immediately follow this activity
Concurrent or parallel: Activities can occur while this activity is taking place.

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Activity-on-Node
Fundamentals

81
Activity-on-Node
Fundamentals

82
 Constructing a Project Network

Terminology
◦ Activity: An element of the project that requires time.
◦ Merge Activity: An activity that has two or more preceding activities on which it depends.
◦ Burst Activity: An activity that has more than one activity immediately following it (more than one
dependency arrow flowing from it).
◦ Parallel (Concurrent) Activities: Activities that can occur independently and, if desired, not at the
same time.
◦ Event: A point in time when an activity is started or completed. It does not consume time.
◦ Path: a sequence of connected, dependent activities.
◦ Critical path: The longest path (duration) through the activity network that allows for the
completion of all project-related activities
◦ Delays on the critical path will delay completion of the entire project.
A B
B D A C
C D
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 Basic Rules to Follow in Developing
Project Networks
 Networks typically flow from left to right.
An activity cannot begin until all of its preceding connected activities are
complete.
Arrows on networks indicate precedence and flow and can cross over each
other.
Each activity should have a unique identification number.
An activity identification number must be larger than that of any activities that
precede it.
Looping is not allowed.
Conditional statements are not allowed. (if not,…)
Use common start and stop nodes.

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Network Techniques
CPM (Critical Path Method)
 Deterministic Time estimate
 One time estimate
PERT (Program Evaluation and
Review Technique)
 Probabilistic Time Estimate
 Three Time estimate
 Optimistic time (a)
 Pessimistic time (b)
 Realistic time (m)
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Problem 6-CPM method

86
Problem 6-Solution-Step 1
(Network Formulation)

87
Problem 6-step 2 (Network
Computation Process)
Forward Pass—Earliest Times
 How soon can the activity start? (early
start—ES)
 How soon can the activity finish? (early
finish—EF)
 How soon can the project finish? (expected
time—ET)
Backward Pass—Latest Times
 How late can the activity start? (late start—
LS)
 How late can the activity finish? (late
finish—LF)
 Which activities represent the critical path?
 How long can it be delayed? (slack or
float—SL)
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Problem 6-step 2 (Network
Computation Process)
Forward Pass Computation Backward Pass Computation
 Add activity times along each path in the  Subtract activity times along each path in the
network (ES + Duration = EF). network (LF - Duration = LS).

 Carry the early finish (EF) to the next activity  Carry the late start (LS) to the next activity
where it becomes its early start (ES) unless… where it becomes its late finish (LF) unless

 The next succeeding activity is a merge  The next succeeding activity is a burst
activity, in which case the largest EF of all activity, in which case the smallest LF of all
preceding activities is selected. preceding activities is selected.

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 Problem 6-step 2 (Network Computation
Process) Determining Slack (or Float)
Slack (or Float)
 The amount of time an activity can be delayed after the start of a longer parallel
activity or activities.
 Negative slack occurs in practice when critical path is delayed.
Free slack (Free Float)
 The amount of time an activity can be delayed without delaying any immediately
following (successor) activity .
 Can never be negative
 occurs at the last activity in a chain of activities, where you have a merge activity, can
have free slack
Total slack
 The amount of time an activity can be delayed without delaying the entire project.
◦ SL=LS-ES or SL= LF-EF
Critical path is the network path(s) that has (have) the least slack in common. (LF-EF=0,
LS-ES=0)

90
Problem 6- Summary of all formulas
ES = Max (EF of all immediate preceding activities)
EF=ES+ Activity Time
LF = min ( LS of all immediate following activities)
LS= LF- activity time
Slack = (LS-ES) or (LF-EF)

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 Calculation of Forward pass and
Backward pass
Activities Forward pass Backward pass SLACK
(Duration)
ES EF LS LF

A (5) Starting point 5 (5-5)=0 Min(5, 10, 15) =5 -

0
B(15) 5 (5+15)=20 (20-15)=5 Min(20,185)=20 0
C (10) 5 (5+10)=15 (20-10)=10 Min(20,185)=20 5
D (5) 5 (5+5) =10 (20-5)=15 20 10
E (15) Max(20,15) (20+15)=35 (200-15)=185 200 165
=20
F (10) Max(20,15,10) (20+10)=30 (30-10)=20 30 0
=20
G (170) 30 (30+170)=200 (200-170)=30 200 0
H (35) Max(35,200) (200+35)=235 (235-35)=200 Starting point 35
=200 235

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Activity-on-Node Network Forward Pass

93
Activity-on-Node Network Backward
Pass

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 Extended Network Techniques to Come
Close to Reality
Laddering
◦ Activities are broken into segments so the following activity can begin sooner and not
delay the work.
Lags
 The minimum amount of time a dependent activity must be delayed to begin or end.
 Lengthy activities are broken down to reduce the delay in the start of successor
activities.
 Lags can be used to constrain finish-to-start, start-to-start, finish-to-finish, start-to-
finish, or combination relationships.
Lag is the minimum amount of time a dependent activity must be delayed to begin or
end. Lag is used in the project network because:
 To avoid delays and reduce network detail.
 Constraint the start and finish of an activity.
 Example: Remove concrete forms can n’t begin until the poured cement has cured for 2
time units

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Example of Laddering Using
Finish-to-Start Relationship

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 Hammock Activities
An activity that spans over a segment of a project.
Duration of hammock activities is determined after the network plan is drawn.
Used to identify the use of fixed resources or cost of a segment of a project
Hammock activities are used to aggregate sections of the project to facilitate
getting the right amount of detail for specific sections of a project.
Examples: Inspection services, consultants, or construction management
services

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Hammock Activity Example

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PERT
 PERT uses a probability distribution for activity times to allow for variability
Estimate follows beta distribution

Three Time estimate

Optimistic time (a)
Pessimistic time (b)

Realistic time (m)

Variability in Activity Times
Estimate follows beta distribution
Figure 3.11
Expected activity time:
t = (a + 4m + b)/6
Probability of 1t in =
100 (a + 4m + b)/6
of < a occurring
Probability

v = [(b − a)/6]2Probability of 1 in 100

Variance of activity completion of >times:
b occurring

v = [(b – a)/6]2 Activity

Time

Optimistic Most Likely Pessimistic

Time (a) Time (m) Time (b)
Problem 7a-Computing Variance (Source:
Heizer and Render, Operations Management)

MOST
OPTIMISTIC LIKELY PESSIMISTIC EXPECTED TIME VARIANCE
ACTIVITY a m b t = (a + 4m + b)/6 [(b – a)/6]2
A 1 2 3 2 .11

B 2 3 4 3 .11

C 1 2 3 2 .11

D 2 4 6 4 .44

E 1 4 7 4 1.00

F 1 2 9 3 1.78

G 3 4 11 5 1.78

H 1 2 3 2 .11

It is known that Critical path is ACEGH. What will be the project variance?
Probability of Project Completion
Project variance is computed by summing the
variances of critical activities

sp2 = Project variance

= (variances of activities
on critical path)
Problem 7 b
Project variance is computed by
summing the variances of critical
Project variance
activities
s2p = .11 + .11 + 1.00 + 1.78 + .11 = 3.11

Project standard deviation

sp = Project variance
= 3.11 = 1.76 weeks