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The Definition of a “Project”
Project Management • A temporary endeavor undertaken to create
a unique product, service, or result (PMI)
• In its early days, project management was
used mainly for large complex projects
• As the tools and techniques were
developed, the use of project organization
began to spread
1-2
Three Project Objectives: The “Triple Constraint” Direct Project Goals: Scope, Cost, Time
• Time
• Cost
• Scope
• Time, cost, and performance are all related to
a project
1-3 Figure 1-1 1-4
The Project Life Cycle Time Distribution of Project Effort
Figure 1-3 1-5 Figure 1-4 1-6
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Another Possible Project Life Cycle Risk During at the Start of the Life Cycle
Figure 1-5 1-7 Figure 1-6 1-8
Risk During the Life Cycle Part I: Project Initiation
• Projects in Contemporary Organizations
• Strategic Management and Project Selection
• The Project Manager
• Managing Conflict and the Art of Negotiation
• The Project in the Organizational Structure
Figure 1-7 1-9 1-10
Part II: Project Planning Part III: Project Execution
• Project Activity and Risk Planning • Monitoring and Information Systems
• Budgeting: Estimating Costs and Risks • Project Control
• Scheduling • Project Auditing
• Resource Allocation • Project Termination
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Types of Project Selection Models Types of Nonnumeric Models
• Nonnumeric models • Sacred Cow
• Numeric models • A project, often suggested by the top management,
that has taken on a life of its own
• Operating Necessity
• A project that is required in order to protect lives or
property or to keep the company in operation
• Competitive Necessity
• A project that is required in order to maintain the
company’s position in the marketplace
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Types of Nonnumeric Models Continued Numeric Models
• Product Line Extension • Models that return a numeric value for a
• Often, projects to expand a product line are evaluated project that can be easily compared with other
on how well the new product meshes with the existing projects
product line rather than on overall benefits
• Two major categories:
• Comparative Benefit • Profit/profitability
• Projects are subjectively rank ordered based on their • Scoring
perceived benefit to the company
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Profit/Profitability Models Payback Period
• Models that look at costs and revenues • The length of time until the original investment
• Payback period has been recouped by the project
• Discounted cash flow (NPV) • A shorter payback period is better
• Internal rate of return (IRR)
• Profitability index
• NPV and IRR are the more common methods
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Payback Period Example Payback Period Drawbacks
• Does not consider time value of money
• More difficult to use when cash flows change
Project Cost over time
Payback Period
Annual Cash Flow • Less meaningful for longer periods of time
(due to time value of money)
$100,000
Payback Period 4
$25,000
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Discounted Cash Flow Discounted Cash Flow Continued
• The value of a stream of cash inflows and • Requires a percentage to use to reduce future
outflows in today’s dollars cash flows
• Also know as discounted cash flow or just • This is known as the discount rate
discounting • The discount rate may also be known as a
• Widely used to evaluate projects hurdle rate or cutoff rate
• Includes the time value of money • There will usually be one overall discount rate
• Includes all inflows and outflows, not just the for the company
ones through payback point
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NPV Formula NPV Formula Terms
A0 Initial cash investment
Ft Cash flow in time period t (negative for
outflows)
n
Ft
NPV (project) A0
k The discount rate
1 k
t t The number of years of life
t 1 • A higher NPV is better
• Higher the discount rate lower the NPV
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NPV Example Internal Rate of Return [IRR]
• The discount rate (k) that causes the NPV to be
equal to zero
8
$25,000 • The higher the IRR, the better
NPV (project) $100,000
t 1 1 0.15 0.03t • While it is technically possible for a series to have
multiple IRR’s, this is not a practical issue
$1,939 • Finding the IRR requires a financial calculator or
computer
• In Excel “=IRR(Series,Guess)”
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Profitability Index Scoring Models
• a k a Benefit cost ratio • Unweighted 0–1 factor model
• NPV divided by initial cash investment • Unweighted factor model
• Ratios greater than 1.0 are good • Weighted factor model
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Assignment
• Your company wins a bid for developing a
Project Planning certain software package. You are assigned the
project, as project manager.
a. Outline the action plan (include team formation, finding
the activities, delegating the activities etc.)
Copyright 2009 John Wiley
9-29
& Sons, Inc.
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Starting the Project Plan: The WBS Starting the Project Plan: The WBS Continued
• What is to be done • Some activities must be done sequentially
• When it is to be started and finished • Some activities may be done simultaneously
• Who is going to do it • Many things must happen when and how they
are supposed to happen
• Each detail is uncertain and subjected to risk
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Hierarchical Planning The Work Breakdown Structure (WBS)
• Major tasks are listed • A hierarchical planning process
• Each major task is broken down into detail • Breaks tasks down into successively finer levels
• This continues until all the activities to be of detail
completed are listed • Continues until all meaningful tasks or work
• Need to know which activities “depend on” other packages have been identified
activities • These make tracking the work easier
• Need separate budget/schedule for each task or
work package
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WORK BREAKDOWN STRUCTURE (WBS)
WBS Example
WBS LEVELS
LEVEL DESCRIPTION 1 PROGRAM 1.00.00
1 Total Program
2 Project(s) 2 PROJECT 1.1.0 1.2.0 1.3.0 1.4.0
3 Task(s)
4 Subtask(s) 3 TASK 1.2.1 1.2.2 1.2.3
5 Work Package(s)
6 Level of Effort 4 SUBTASK [Link] [Link] [Link]
Most common type: Six-Level Indentured Structure 5 WORK [Link].1 [Link].2 [Link].3 [Link].4
PACKAGE
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Project
Work Breakdown Structure
Project #
Steps to Create a WBS
Project manager Sponsor 0
Project artifacts Updated
1. List the task breakdown in successive
levels
Dependencies
Estimate
Effort Start
Planned to
Completi Completi Actual Resou
2. Identify data for each work package
ID Task
ID # of
Status Hours Cost Date on on Completion rce
3. Review work package information
task
4. Cost the work packages
1
3 5. Schedule the work packages
4
6. Continually examine actual resource use
5
6 7. Continually examine schedule
7
9
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Human Resources Responsibility Assignment Matrix
• Useful to create a table that shows staff needed
to execute WBS tasks
• One approach is a organizational breakdown • Organizational
Breakdown
structure Structure (OBS)
• Organizational units responsible for each WBS • a chart that
element shows which
organizational
• Who must approve changes of scope units are
responsible for
• Who must be notified of progress work items
• WBS and OBS may not be identical • Responsibility
Assignment
Matrix (RAM)
• shows who is
responsible for
work in a
project
Copyright 2009 John Wiley
6-39 9-40
& Sons, Inc.
The Responsibility (RACI) Matrix Sample RACI Matrix
• Another approach is the Responsible,
Accountable, Consult, Inform (RACI) matrix
• Also known as a responsibility matrix, a linear
responsibility chart, an assignment matrix, a
responsibility assignment matrix
• Shows critical interfaces
• Keeps track of who must approve what and who
must be notified
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Budgeting Budgeting Continued
• A plan for the costs of project resources • The budget for an activity also implies
• A budget implies constraints management support for that activity
• Thus, it implies that managers will not get • Higher the budget, relative to cost, higher the
everything they want or need managerial support
• The budget is also a control mechanism
• Many organizations have controls in place that
prohibit exceeding the budget
• Comparisons are against the budget
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Estimating Project Budgets Estimating Project Budgets Continued
• On most projects • Like any forecast, this includes some uncertainty
• Material + Labor + Equipment + Capital + Overhead + • There is uncertainty regarding usage and price
Profits = Bid • Especially true for material and labor
• In other words • The more standardized the project and
• Resources + Profits = Bid components, the lower the uncertainty
• So we are left with the task of forecasting • The more experienced the cost estimator, the
resources lower the uncertainty
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Rules of Thumb Types of Budgeting
• Some estimates are prepared by rules of thumb • Top-down
• Construction cost by square feet • Bottom-up
• Printing cost by number of pages
• Lawn care cost by square feet of lawn • Negotiated
• These rules of thumb may be adjusted for
special conditions
• However, this is still easier than starting the
estimate from scratch
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Top-Down Budgeting Bottom-Up Budgeting
• Top managers estimate/decide on the overall • Project is broken down into work packages
budget for the project • Low level managers price out each work
• These trickle down through the organization package
where the estimates are broken down into • Overhead and profits are added to develop the
greater detail at each lower level budget
• The process continues to the bottom level
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Work Element Costing
• Labor rates include overhead and personal time
• Direct costs usually do not include overhead
• General and administrative (G&A) charge
Project Scheduling
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Network Scheduling Techniques: PERT (ADM)
and CPM (PDM)
Terminology Continued
• PERT was developed for the Polaris • Path - A series of connected activities
missile/submarine project in 1958 • Critical - An activity, event, or path which, if
• CPM developed by DuPont during the same delayed, will delay the completion of the project
time
• Initially, CPM and PERT were two different • Critical Path - The path through the project
approaches where, if any activity is delayed, the project is
• CPM used deterministic time estimates and allowed delayed
project crunching • There is always a critical path
• PERT used probabilistic time estimates • There can be more than one critical path
• Microsoft Project (and others) have blended
CPM and PERT into one approach
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Terminology Continued AON and AOA Format
• Activity on Arrow - Arrows represent activities
while nodes stand for events
• Activity on Node - Nodes stand for events and
arrows show precedence Figure 8-2
Figure 8-3
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Solving the Network The AON Network from the previous table
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Table 8-1 Figure 8-13
Calculating Activity Times The Results
TE
a 4m b
6
b a
2
2
6
2
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Table 8-2
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Critical Path and Time Critical Path and Time Continued
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Figure 8-15 Figure 8-16
Slack Slack Values
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Figure 8-16 Table 8-3
Critical Path Method—Crashing a Project What is Crashing / Crunching?
• Time and costs are interrelated • To speed up, or expedite, a project
• Faster an activity is completed, more is the cost • Of course, the resources to do this must be
• Change the schedule and you change the available
budget • Crunching a project changes the schedule for all
• Thus many activities can be speeded up by activities
spending more money • This will have an impact on schedules for all the
subcontractors
• Crunching a project often introduces
unanticipated problems
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Activity Slope An Example of Two-Time CPM
Crash Cost Normal Cost
Slope
Crash Time Normal Time
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Table 9-1
Activity Slopes—Cost per Period for Crashing Crashing the Project
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Table 9-2 Figure 9-1a
Seven Day Schedule Six Day Schedule
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Figure 9-1b Figure 9-1c
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Five Day Schedule Four Day Schedule
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Figure 9-1d Figure 9-1e
Cost-Crash Curve
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Figure 9-2
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