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FOREWORD

the 1996 Summer Olymp~c


In Atldnta, Georg~a,exemphfles a
project. The c ~ t yof A t l a n t ~ ,
k.;g;;-J- *
~ii~g!jt~jurict~on
w ~ t hthe Olympic Plann~ngCommtttee, had to plan and execute a wide variety of tasks,
including the construction of buildings to house
some of the events, arrangement of housing and sec u r ~ t yfor the athletes, organization of a transportation system for millions of spectators, and
coordination of all the athletic events. More than
2000 athletic events had to be scheduled for the 15day period of the games. Logical constraints, such as
scheduling the semifinals before the finals and not
scheduling two events for the same time and place,
compl~catedthe planning process. Traditions also
had to be considered, such as running the marathon
on the last day and ensuring that swimming and
track and field did not g o on at the same time. International TV networks also imposed conditions, such
as having events popular with their home audiences
take place in prime time. O f course, not all events
could be run when the TV networks wanted because
different countries in different time zones enjoy the
same sports. Only careful project scheduling and
control would enable the athletic events to take
place on time and ensure the availability of the resources to run them properly.

rojects like the 1996 Summer Olympics are unique operations with a finite
life span. Generally, many interrelated activities must be scheduled and
monitored within strict time, cost, and performance guidelines. In this
chapter we consider methods for managing complex projects. We begin with a
general introduction to the basic project management tools and some of the managerial aspects of project scheduling and control. We then explore the use of network methods for managing projects and end with an assessment of their
limitations.

MANAGING PROJECTS

The Olympic Committee is responsible for scheduling and controlling a large


project. We define a project as an interrelated set of activities that has a definite
starting and ending point and that results in a unique product or service. Examples of large projects include constructing a building, ball park, road, dam, or oil
pipeline; renovating a blighted urban area; developing a prototype for a new airplane; introducing a new product; organizing a state fair; and redesigning the layout of a plant or office.
Project management is goal oriented: When the team accomplishes its assigned objectives, it disbands. Team members might move o n to other projects or
return to their regular jobs. The project manager must motivate and coordinate
the personnel assigned to the project to deliver the project on time. Complex
projects such as organization of the Olympic games involve thousands of interrelated, often unique, activities. Thus the project manager may have difficulty
falling back on prior experience or established procedures. The personnel come
from diverse backgrounds and have many different skills. Furthermore, many
team members will not be associated with the project for its full duration. They
may view the project as disruptive to their regular work relationships and routines. Others will experience conflicts in loyalty or in demands on their time between their projects and department supervisors. But, despite these potential
difficulties, working on projects offers substantial rewards: the excitement of dynamic work, the satisfaction of solving challenging problems, the status of membership on an elite team, and the opportunity to work with and learn from other
skilled professionals.
Project managers must stay on top of their projects t o meet schedules and
keep costs within budget. Unexpected problems can cause delays, requiring
rescheduling and reallocation of resources-and often resulting in severe financial repercussions. For example, Microsoft announced a delay in the release of
Windows 95 because preliminary testing results unexpectedly uncovered " bugsn
in the program. The problems had t o be corrected before further tests could be
conducted. The delay dealt a blow t o third-party software developers, who also
had to delay the. release of their products. After the delay announcement, Microsoft's stock closed down 2%points on Nasdaq trading.

3 What

tools are available to schedule and control projects?

Frequently, managers must make quick decisions on the basis of incomplete


information. Network planning models can help project managers maintain control, giving them the capability t o evaluate the time and cost implications of resource trade-offs. , Gantt charts have long been used t o schedule and control
projects - For large projects, however, Gantt charts present difficulties:
They don't directly recognize
precedence relationships between activities, and they don't indicate which activities are crucial to completing the project on time.

Two network planning methods were developed in the 1950s to deal with
some of the shortcomings of Gantt charts. Both methods look at a project as a set
of interrelated activities that can be visually displayed in a network diagram,
which consists of nodes (circles) and arcs (arrows) that depict the relationships
between activities. Working with a network diagram, an analyst can determine
which activities, if delayed, will delay the entire project.
The program evaluation and review technique (PERT) was created for the
U.S. Navy's Polaris missile project, which involved 3000 separate contractors
and suppliers. Because many of the project's activities had never been performed
before, PERT was developed t o handle uncertain time estimates. In retrospect,
PERT generally is credited with reducing the project's completion time by at least
18 months.
J. E. Kelly of Remington-Rand and M. R. Walker of Du Pont developed the
critical path method (CPM) as a means of scheduling maintenance shutdowns at
chemical processing plants. Because maintenance projects were routine in the
chemical industry, reasonably accurate time estimates for activities were available. Thus CPM was based on the assumption that project activity times can be
estjmated accurately and do not vary.
Although early versions of PERT and CPM differed in their treatment of
time estimates, today the differences between PERT and CPM are minor. Basically, either approach can cope with uncertainty. For purposes of our discussion, we
simply refer to them collectively as PERT/CPM.

@ NETWORK METHODS
Managing a complex project requires identifying every activity to be undertaken
and planning when each activity rnus.t begin and end to complete the overall
project on time. The degree of difficulty in scheduling a complex project depends
on the number of activities, their required sequence, and their timing. Typically,
managing projects with networks involves four steps:

1.
2.
3.
4.

describing the project,


diagramming the network,
estimating time of completion, and
monitoring project progress.

Describing the Project


The project manager must first describe the project in terms that everyone involved will understand. This description should include a clear statement of the
project's end point. For example, the end point for a software development team
would be publication of the completed software package. With the input of the
team, the project manager must carefully define all project activities and precedence relationships. An activity is the smallest unit of work effort consuming
both time and resources that the project manager can schedule and control. A

precedence relationship determines a sequence for undertaking activities; it specifies that one activity cannot start until a preceding activity has been completed.
For example, brochures announcing a conference for executives must first be designed by the program committee (activity A) before they can be printed (activity
8). In other words, activity A must precede activity B.
Just what constitutes an activity will vary. For example, suppose a divisional
vice-president is put in charge of a project to start manufacturing a product i n a
foreign country. Her list of activities may include "construct the plant." This
item indicates that completion of construction will have a major bearing on when
operations can begin. However, the construction supervisor's list of activities
must include a greater level of detail such as "pour foundation" and "wire for
electrical service." In general, a manager's project description should reflect only
the level of detail that he or she needs in order to make scheduling and resource
allocation decisions.

Diagramming the Network


Diagramming the project as a network requires establishing the precedence relationships between activities. For complex projects this task is essential because
incorrect or omitted precedence relationships will result in costly delays. The
precedence relationships are represented by a network diagram, consisting of
nodes (circles) and arcs (arrows) that depict the relationships between activities.
Two different approaches may be used to create a network diagram. The first approach, the activity-on-arc (AOA) network, uses arcs to represent activities and
nodes to represent events. An event is the point at which one or more activities
are to be completed and one or more other activities are to begin. An event consumes neither time nor resources. Because the AOA approach emphasizes activity
connection points, we say that it is event oriented. Here, the precedence relationships require that an event not occur until all preceding activities have been completed. A convention used in AOA networks is to number events sequentially
from left to right.
The second approach is the activity-on-node (AON) network, in which the
nodes represent activities and the arcs indicate the precedence relationships between them. This approach is activity oriented. Here, the precedence relationships require that an activity not begin until all preceding activities have been
completed.
1 shows the AOA and AON approaches for several activity relaFigure
tionships commonly encountered. In Fig.
l ( a ) , activity S must be completed
before activity T, which in turn must be completed before activity U can be started. For example, in the AOA diagram, event 1 might be "the start of the project," and event 2 might be "the completion of activity S." The arrows in the
AOA diagram denote both precedence and the activity itself. The arrow for activity S starts from event 1 and ends at event 2, ~ndicatingthat the sequence of
events is from 1 to 2. In the AON diagram, the arrows represent precedence relationships only. The direction of the arrows indicates the sequence of activities,
from S t o T to U.

FIGURE

AOA and AON Approaches to Activity Relationships

Figure
l ( b ) shows that activities S and T can be worked simultaneously,
but both must be completed before activity U can begin. In Fig.
l(c), both activities T and U cannot begin until activity S has been completed. Multiple dependencies also can be identified. Figure
I(d) shows that U and V cannot begin
until both S and T have been completed.

Sometimes the AOA approach requires the addition of a dummy activity to


clarify the precedence relationships between two activities. Figure
l ( e ) shows
an example of this situation. Activity U cannot begin until both S and T have
been completed; however V depends only on the completion of T. A dummy activity, which has an activity time of zero and requires no resources, must be used
to clarify the precedence between T and V and between S and T and U. A dummy
activity also is hsed when two activities have the same starting and ending nodes.
For example, in Fig.
l ( f ) , both activities T and U cannot begin until S has been
completed, and activity V cannot begin until both T and U have been completed.
The dummy activity enables activities T and U to have unique beginning nodes.
This distinction is important for computer programs because activities often are
identified by their beginning and ending nodes. Without dummy activities, activities with identical beginning and ending nodes could not be differentiated from
each other, which becomes important when the activities have different time
requirements.

Example 1: Diagramming a Hospital Project

In the interest of better serving the public in Benjamin County, St. Adolf's Hospital has decided to relocate from Christofer to Northville, a large suburb that a t
present has n o primary medical facility. The move to Northville will involve constructing a new hospital and making it operational. Judy Kramer, executive direci tor of the board of St. Adolf7s, must prepare for a hearing, scheduled for next
i week, before the Central Ohio Hospital Board (COHB) on the proposed project.
I The hearing will address the specifics of the total project, including time and cost
:
estimates for its completion.
With the help of her staff, Kramer has identified 11 major project activities.
She also has specified the immediate predecessors (those activities that must be
completed before a particular activity can begin) for each activity, as shown in
j the following table.

Activity

Description

Immediate
Predecessorfs)

Select administrative and medical staff.


Select site and do site survey.
Select equipment.
Prepare final construction plans and layout.
Bring utilities to the site.
Interview applicants and fill positions in nursing,
support staff, maintenance, and security.
Purchase and take delivery of equipment.
Construct the hospital.
Develop an information system.
Install the equipment.
Train nurses and support staff.

a. Draw the AON network diagram. h. Draw the AOA network diagram.

Solution

a. The AON network for the hospital project, based on Kramer's 11 activi2. It depicts acties and their precedence relationships, is shown in Fig.
tivities as circles, with arrows indicating the sequence in which they are to
be performed. Activities A and B emanate from a start node because they
have no immediate predecessors. The arrows connecting activity A to activities C, F, and 1 indicate that all three require completion of activity A
before they can begin. Similarly, activity B must be completed before activities D and E can begin, and s o on. Activity K connects to a finish node
because n o activities follow it. The start and finish nodes do not act~ially
represent activities. They merely provide beginning and ending points for
the network.

FIG u R E

A ON Network for the St. Adolf's Hospital Project

b. The AOA diagram is shown in Fig.


3. Event 1 is the start of the project. Activities A and B have no immediate predecessors; therefore the arrows representing those activities both have event 1 as their base. Event 2
signals the completion of activity A. As activities C, F, and I all require the
cornpletioh of A, the arrows representing these activities leave the node
F1G u a E

A OA Network for the St. Adolf's Hospital Proiect

represenring event 2. Similarly, the arrows for activities L) and E leave the
node for event 4, which signals the completion of activity B. The arrow
for activity G leaves event 3, and event 6 is needed to tie activities G, H,
and E together because they must be completed before activity J can
begin.
Properly representing the relationship for activity K requires the use of
a dummy activity. Activities I and F both emanate from event 2, and both
must be completed before K can begin. Activities I and F will have the same
beg~nningand ending nodes unless a dummy activity is used. Hence event 7
signals the end of activity I, and event 8 signals the end of activity F, with a
dummy activity joining them. Now all activities are uniquely defined, and
the network shows that activities F, I, and J must be completed before activity K can begin. Event 9 indicates the completion of the project.

Both the AON and the AOA approach can accurately represent all the activities and precedence relationships in a project. However, the AOA approach often
1, the AON diarequires fewer nodes than the AON approach. In Example
gram has 13 nodes whereas the A O A diagram has only 9. In contrast, the AON
approach doesn't need dummy activities. Regardless of the approach used, modeling a large project as a network forces managers to identify the necessary activities and recognize the precedence relationships. If this preplanning is skipped, a
project often experiences unexpected delays.
In the remainder of our discussion o f PERTICPM, we will use the AON convention, although AOA diagrams also can be applied to all the ~rocedures.

Estimating Time of Completion


Project managers next must make time estimates for activities. When the same
type of project has been done many times before, time estimates are apt to have a
higher degree of certainty and are said to be deterministic estimates. If a project
has never been done before, time estimates invoive uncertainty and are called
probabilistic estimates. For now, assume that the time estimates used in the St.
Adolf's Hospital relocation problem are deterministic estimates. Figure
4 on
the next page shows the estimated time for each activity of the St. ~ d o l f ' sproject.

a Which activities determine the direction of an entire project?


A crucial aspect of project management is estimating the time of completion.
If each activity in relocating the hospital were done in sequence, with work proceeding on only one activity at a time, the time of completion would equal the
4 indicates
sum of the times for all the activities, o r 175 weeks. However, Fig.
that some activities can be carried on simuItaneously. We call each sequence of
activities between the project's start and finish a path. Figure
5 shows that the

Fl G uRE

Network for St. Adolf's


Hospital Project, Showing
Activity Times

Finish

network describing the hospital relocation project has five paths: A-I-K, A-F-K,
A-C-G-J-K,
B-D-H-J-K, and B-E-J-K. The critical path is the sequence of activities between a project's start and finish that takes the longest time to complete. Thus the activities along the critical path determine the completion time of
the project; that is, if one of the activities on the critical path is delayed, the entire
project will be delayed. The expected times for the paths in the hospital project
network are
Path
A-F-K
A-I-K
A-C-G-J-K
ED-H-J-K
BE-J-K

Expected Time (wk)


28

33
67

69
43

The activity string RD-H-J-K is expected to take 69 weeks to complete. As


the longest, it constitutes the critical path for the hospital project and is shown in
.,! . . I Fig- 5.
As the critical path defines the completion time of the project, Judy Kramer
should focus on these activities in managing the project.-However, projects can
have more than one critical path. If activity A, C, or G were to fall behind by two
weeks, the string A-C-G-J-K
would be a second critical path. Consequently,
managers should be aware that delays in activities not on the critical path could
cause delays in the entire project.

F IG v R t

Activity Paths for the Hospital


Project, with the Critical Path
Shown in Heavy lines

Manually finding the critical path in this way is easy for small projects; however, computers must be used for large, complex projects. Co~nputerscalculate
activity slack and prepare periodic reports for managers to monitor progress. Activity slack is the maximum length of time that an activity can be delayed without
delaying the entire project. Activities on the critical path have zero slack. Constantly monitoring the progress of activities with little or no slack enables managers to identify activities that need to be expedited to keep the project on
schedule. Activity slack is calculated from four times for each activity: earliest
start time, earliest finish time, latest start time, and latest finish time.

Earliest Start and Earliest Finish Times. The earliest start and earliest finish
times are obtained as follows.
The earliest finish time (EF) of an activity equals its earliest start time plus
its expected duration, t, or EF = ES + t.
The earliest start time (ES) for an activity is the earliest finish time of the
immediately preceding activity. For activities with more than one preceding
activity, ES is the latest of the earliest finish times of the preceding
activities.
To calculate the duration of the entire project, we determine the EF for the last
activity on the critical path.

Example 2: Calculating Eeadliest Start and Earliest Finish Times


Calculate the earliest start and finish times for the activities in the hospital proj5 contains the activity times.
ect. Figure

II

We begin at the start node at time zero. Activities A and B have no


predecessors, so the earliest start times for these activities are also zero. The earliest finish times for these activities are
Solution

EFA = 0 + 12 = 1 2

and

EFB= 0

+9=9

Because the earliest start time for activities I, F, and C is the earliest finish time of
activity A,
ES, = 12,
ESF = 12,
and
ES, = 12
Similarly,

ESD = 9

I
I

and

ESE = 9

After placing these ES values on the network diagram (see Fig.


we determine the EF times for activities I, F, C, D, and E:

EFD=9+10=19,
FIGURE

and

EFE=9+24=33

Network f o ~the Hospitul Project, Showing Earliest Start


and Earliest Finish Times

The earliest start time for activity G is the latest EF time of all immediately preceding activities, so
ESH = EFD
ESG = EFc

Activity J has several predecessors, so the earliest time activity J can begin is
the latest of the EF times of any of its preceding activities: EF,, EF,, EF,. Thus
EF, = 59 + 4 = 63. Similarly, ESK = 63 and EFK = 63 t 6 = 69. Because activity K is the last activity on the critical path, the earliest the project can be completed is week 69. The earliest start and finish times for all activities are shown in
Fig.
6.

Latest Start and Latest Finish Times. To obtain the latest start and latest finish
times, we must work backward from the finish node. We start by setting the latest finish time of the project equal to the earliest finish time of the last activity on
the critical path.
The latest finish time (LF) for an activity is the latest start time of the activity immediately following it. For activities with more than one activity following, LF is the earliest of the latest start times of those activities.
The latest start time (LS) for an activity equals its latest finish time minus
its expected duration, t, or LS = LF - t.

Example 3: Calculating Latest Start and Latest Finish Times


For the hospital project, calculate the latest start and latest finish times for each
activity from Fig.
6.
J

We begin by setting the latest finish activity time of activity K at week


2. Thus the latest start
69, its earliest finish time as determined in Example
time for activity K is
LSK = LFK - t = 69 - 6 = 63

Solution

If activity K is to start no later than week 63, all its predecessors must finish no
later than that time. Consequently,
LF, = 63,

LFF = 63,

and

LFJ = 6 3

The latest start times for these activities (See Fig.


LSI = 63 - 15 = 48,

LSp = 6 3 - 10 = 53,

and

7) are
LSJ = 63

4 = 59

After obtaining U,, we can calculate the latest start times for the immediate
predecessors of activity J:
LS, = 59 - 35 = 24,

LSH= 59

40

19,

and

LS,

= 5 9 - 24 = 35

FIGURE

Network for the Hospital Project, Showing Data Needed


for Activity Slack Calculation

Earliest start time

Earllest f~n~sh
t~me

I Similarly, can calculate latest times for activities C and D:


Sc=24-10=14
and
LSD=19-10=9
I Activity A hasL more
than one immediately following activity: I, F, and C. The
we

now

start

earliest of the latest start times is 14 for activity C, so

Similarly, activity B has two immediate followers, D and E. The earliest of the

latest start times of these activities is 9, so


LSB=9-9~0
This result implies that activity B must be started immediately if the project is to
be completed by week 69. The latest start and latest finish times for all activities
7.
are shown in Fig.

Adivity Slack. Information on slack is useful to project managers because it


helps them make decisions regarding reallocation of resources. Activities with
zero slack are on the critical path. Resources could be taken from activities with
slack and given to other activities that are behind schedule until the slack is used
up. Activity slack can be calculated in one of two ways for any activity:

S=LS-ES

or

S=LF-EF

Example 4: Calculating Activity Slack


Calculate the slack for the activities in the hospital project. Use the data in Fig.

7.
-

Solution We can use either starting times or finishing times. The following table

shows the slack for each activity, LS - ES.


Node

Duration

ES

LS

Slack

Activities B, D, H, J, and K are on the critical path because they have zero slack.
The slack at an activity depends on the performance of activities leading to
it. If the time for activity A had to be 14 weeks instead of 12 weeks, the slack for
activities C and G would be zero. Thus slack is shared among all activities on a
particular path.

PROBABILISTIC TIME ESTIMATES


2How can uncertainty in time estimates be incorporated into

project planning?
To this point, we have assumed that the time estimates for the project were certain. Many times, however, managers must deal with uncertainty caused by labor

shortages, weather, supply delays, or accidents. To incorporate uncertainty into


the network model, probabilistic time estimates can be used.
With the probabilistic approach, activity times are stated in terms of three
reaqona ble time estimates.
1. The optimistic time (a) is the shortest time in which the activity can be
completed, if all goes exceptionally well.
2. The most likely time (m)is the probable time required to perform the activity.
3. The pessimistic time (b) is the longest estimated time required to perform
an activity.

Calculating Time Statistics


With three time estimates-the optimistic time, the most likely time, and the pessimistic time-the manager has enough information to estimate the probability
that the activity will be completed in the scheduled amount of time. To do so, the
manager must first calculate the mean and variance of a probability distribution
for each activity. In PERTICPM, each activity time is treated as though it were a
random variable derived from a beta probability distribution. This distribution
can have various shapes, allowing the most likely time estimate ( m )to fall anywhere between the pessimistic ( b ) and optimistic (a) time estimates. The most
likely time estimate is the mode of the beta distribution, or the time with the
highest probability of occurrence. This condition isn't possible with the normal
distribution, which is symmetrical, as it requires the mode to be equidistant from
8 shows the difference between the
the end points of the distribution. Figure
two distributions.
Two other key assumptions are required. First, we assume that a, m, and b
can be estimated accurately. The estimates might best be considered values that

define a reasonable time range for the activity duration, negotiated between the
manager and the employees responsible for the activities. Second, we assume that
the standard deviation, a, of the activity time is one-sixth the range b - a. Hence
the chance that actual activity times will fall below a or above b is slim. The assumption makes sense becaase, if the activity time followed the normal distribution, six standard deviations would span approximately 99.74 percent of the
normai distribution.
Even with these assumptions, derivation of the mean and variance of each
activity's probability distribution is complex. These derivations show that the
mean of the beta distribution can be estimated by using the following weighted
average of the three time estimates:
a+4m+b
t, =

FIGURE

Differences Between
Beta and Normal
Distributions for
Project Analysis

rn

Mean
Time

(a) Beta distribution: The most likely time (m) has the highest
probability and can be placed anywhere between the
optimistic (a) and pessimistic (b)times.

m
Mean
Time
(b) Normal dlstributlon: The mean and most likely times must be
the same. Ifa and b are chosen to be 6u apart, there is a 99.74
percent chance that the actual activity time will fall between them.

Note that the most likely time has four times the weight of the pessimistic and
optimistic estimates.
The variance of the beta distribution for each activity is

a2

ibiaj'

The variance, which is the standard deviation squared, increases as the difference between b and a increases. This result implies that the less certain a person is in estimating the actual time for an activity, the greater will be the

variance.

Example 5: Calculating Means and Variances


Suppose that Judy Kramer has arrived at the following time estimates for activity
B (site selection and survey) of the hospital project:
a = 7 weeks,

m = 8 weeks,

and

15 weeks

a. Calculate the expected time for activity B and the variance.


b. Calculate the expected time and variance for the other activities
Solution

a. The expected time for activity B is

t, =

7 + 4(8) t 15
6

54
-

9 weeks

Note that the expected time (9 weeks) doesn't equal the most likely
time ( 8 weeks) for this activity. These times will be the same only when
the most likely time is equidistant from the optimistic and pessimistic
times. We calculate the variance for activity B as

b. The following table shows expected activity times and variances for the
activities listed in Kramer's project description. Note that the greatest uncertainty lies with the time estimate for activity I, followed by the estimates for activities E and G. The expected time for each activity will
prove useful in determining the critical path.
Time Estimates (wk)
Optimistic
Activity

(a)

MostLikely
(m)

Activity Statistics

Pessimistic

(4

Expected
Time (t,)

Variance
(a2)

Analyzing Probabilities
Because the time estimates for activities involve uncertainty, project managers are
interested in determining the probability of meeting the project completion deadline. To develop the probability distribution for the project completion time, we
assume that the duration time of one activity doesn't depend on that of any other
activity. This assumption enables us to estimate the mean and variance of the
probability distribution of the time duration of the entire project by summing the
duration times and variances of the activities along the critical path. However, if
one work crew is assigned two activities that can be done at the same time, the
activity times will be interdependent. In addition, if other paths in the network
have small amounts of slack, we should calculate the joint probability distribution for those paths as well. We discuss this point later.
Because of the assumption that the activity duration times are independent
random variables, we can make use of the central limit theorem, which states
that the sum of a group of independent, identically distributed random variables
approaches a normal distribution as the number of random variables increases.
The mean of the normal distribution is the sum of the expected activity times on
the path. In the case of the critical path, it is the earliest expected finish time for
the project:

TE= C(Activity times on the critical path) = Mean of normal distribution


Similarly, because of the assumption of activity time independence, we use
the sum of the variances of the activities along the path as the variance of the
time distribution for that path. That is,
a2 = I ( ~ a r i a n c e of
s activities on the critical path)

To analyze probabilities of completing a project by a certain date using the


normal distribution, we use the z-transformation formula:

where

T = due date for the project


TE= earliest expected completion date for the project

The procedure for assessing the probability of completing any activity in a


project by a specific date is similar to the one just discussed. However, instead of
the critical path, we would use the longest time path of activities from the start

node to the activity node in question.

Example 6: Calculating the probability of completing project by


a Given Date
Calculate the probability that the hospital will become operational in 72 weeks,
using ( a ) the critical path and (b) path A-C-G-J-K.

I Solution
a. The critical path B-D-H-J-K has a length of 69 weeks. From rhe table in
5, we obtain the variance of path B-D-H-J-K: o2= 1.78 -fExample
1.78 + 2.78 + 5.44 -t- 0.1 1 = 11.89. Next, we calculate the z-value:

Using the normal distribution table in Appendix 2, we find that the probability is about 0.81 that the length of path B-D-H-J-K will be no greater
than 72 weeks. Because this pat11 is the critical path, rhrre is a 19 percent
probability that the project will take longer than 72 weeks. This probabil9.
i t y is shown graphically in Fig.

Probability of Completing the Hospital Project on


Schedtlle
Normal distribution:
u = 3.45 weeks

weeks is 0.1 922

69 72

Project duration (weeks)

b. From the table in Example


5, we determine that the sun1 of the activity
is 6 7 weeks and that a2 = 0.1 1 + 2.78 +
times on path A-C-G-J-K
7.11 + 5.44 + 0.1 1 = 15.55. The z-value is

The probability is about 0.90 rhat the length of path A-C-G-J-K


will be
no greater than 72 weeks. However, this analysis implies chat there is a 10
percent chance rhat t h ~ spath will cause a delay in the project. It also
demonstrates the importance of monitoring paths that have durations
close to that of the critical path.

As Example
6 demonstrated, one or more network paths for a project
may be shorter than the critical path but have enough variance in activity time estimates to become the critical path sometime during the project. In the hospital
project, path A-C-G-J-K
will become the critical path if its length equals or exceeds 69 weeks or if the length of path B-D-H-J-K
equals 67 weeks or less. Figure
1 0 shows the considerable overlap between the probability distributions
for these two paths. Computing the probability that path A-C-G-J-K
will
become the critical path requires the estimation of the joint probability that path
A-C-G-J-K 2 69 weeks and rhat path B-D-H-J-K
5 6'7 weeks, as indicated by
the shaded areas. The two paths are dependent on each other (share common activities), so the calculation of the joint probability requires computer simulation.
Nonetheless, close actention to activities A, C, and G, in addition to activities B,
D, H, J, and K, seems warranted. If a project has multiple critical paths, the critical path with the largest variance should be used in the denominator of the z-

FIGURE

Normal distribution

10

Probability
Distributions for the
Critical Path and Next
Longest Path for the
Hospital Project

F =

Normal distribution

/ for path ED-H-J-K:

Mean = 69 weeks;
u = 3.45 weeks

3.94 weeks

B-D-H-J-K

is

.i
i::
,

!,

..

;; 5

i:-. 1

67 69

Project duration (weeks)

transformation formula. This approach allows the probability estimate to reflect


the correct amount of uncertainty in the project duration.

COST CONSIDERATIONS
3 How

do project planning methods increase the potential to


control costs and provide better customer service?

Keeping costs at acceptable levels almost always is as important as meeting


schedule dates. In this section we discuss the use of PERT/CPM methods to obtain minimum-cost schedules.
The reality of project management is that there are always time-cost tradeoffs. For example, a project often can be completed earlier than scheduled by hiring more workers or running extra shifts. Such actions could be advantageous if
savings or additional revenues accrue from completing the project early. Total
project costs are the sum of direct costs, indirect costs, and penalty costs. These
costs are dependent either on activity times or on the project completion time.
Direct costs include labor, materials, and any other costs directly related to project activities. Managers can shorten individual activity times by using additional
direct resources such as overtime, personnel, or equipment. Indirect costs include
administration, depreciation, financial, and other variable overhead costs that
can be avoided by reducing total project time. The shorter the duration of the

project, the lower the indirect costs will be. Finally, a project ~ncurspenalty costs
if it extends beyond some specific date, whereas a bonus may be provided for
early completion. Thus a project manager may consider crashing, or expediting,
some activities to reduce overall project completion time and total project costs.
To assess whether crashing some activities would be beneficial - from either
a cost or a schedule perspective-the manager needs to know the following times

and costs.
I. The norn~altime (NT) is the time to complete the activity under normal
condit~ons.Normal time equals the expected time t,, calculated earlier.
2. The normal cost (NC) is the activity cost associated with the normal
time.

3. The crash time (CT)is the shortest possible time to complete tke activity.
4. The crash cost (CC) is the activity cost associated with the crash time.
Our cost analysis is based on the assumption that direct costs increase linearly as activity time is reduced from its normal time. This assumption implies that
for every week the activity time is reduced, direct costs increase by a proportional
amount. For example, suppose that the normal time for activity C in the hospital
project is 10 weeks and is associated with a direct cost of $4000. If, by crashing
activity C, we can reduce its time to only 5 weeks at a crash cost of $7000, the
net time reduction is 5 weeks at a net cost increase of $3000. We assume that
crashing activity C costs $300015 = $600 per week-an assumption of linear
marginal costs that is illustrated in Fig.
1I . Thus, if activity C were expedited
by two weeks (i.e., its time reduced from 10 weeks to 8 weeks). the estimated direct costs would be $4000 + 2($600) = $5200. For any activity, the cost to crash
an activity by one week is
CC - NC
Cost to crash per week =

NT

FIGURE

CT

11

Cost-Time
Relationships in Cost
Analysis

Crash cost (CC)


,
7000
U)

Linear cost assumption

Estimated costs for


------------I
I

4000
I

3000

Normal cost (NC)

I
1

5
I

(Crash time)

9 1 0 1 1

I
(Normal time)

Time (weeks)
Table
2 contains direct cost and time data and the costs of crashing per week
for the activities in the hospital project.
The objective of cost analysis is to determine the project completion time
that minimizes total project costs. Suppose that project indirect costs are $8000
per week. Suppose also that, after week 65, St. AdolfS incurs a penalty cost of
$20,000 per week if the hospital isn't fully operational. With a critical path completion time of 69 weeks, the hospital faces potentially large penalty costs. For
every week that the project is shortened-to week 65-the hospital saves one
week of penalty and indirect costs, or $28,000. For reductions beyond week 65.
the savings are only the weekly indirect costs of $8000.

TABLE

Activity

Direct Cost and Time Data for the Hospital Project

Normal
Time
(NT)

A
B
C
D
E
F
G
H

Normal
Cost
(NC)

Crash
Time
(CT)

Maximum
Time
Reduction
(wk)

Crash
Cost
(cc)

Cost of
Crashing per
Week

12
9
10
10
24
10

35
40
15
4

I
J

6
Totals

In determining the minimum-cost schedule, we start with the normal time


schedule and crash activities along the critical path, because the length of the critical path equals the length of the project. We want to determine how much we
can add in crash costs without exceeding the savings in indirect and penalty
costs. The procedure involves the following steps.
Step 1. Determine the project's critical path(s).
Step 2. Find the cheapest activity or activities on the critical path(s) to
crash.
Step 3. Reduce the time for this activity until (a) it cannot be further reduced, (b) another path becomes critical, or (c) the increase in direct costs exceeds the savings that result from shortening the project. If more than one
path is critical, the time for an activity on each path may have to be reduced
simultaneously.
Step 4. Repeat this procedure until the increase in direct costs is less than
the savings generated by shortening the project.

Example 7: Finding a Minimum Cost Schedule

Determine the minimum-cost schedule for the hospital project. Use the information in Table
2 and Fig. . 7.
Solution The projected completion time of the project is 6 9 weeks. The project
costs for that schedule are $1,992,000 in direct costs, 69($8,000) = $552,000 in
indirect costs, and (69 - 65)($20,000) = $80,000 in penalty costs, for total project costs of $2,624,000. The five paths in the network have the following normal
times.

A-I-K

A-F-K:
A-C-G-J-K:

33 weeks

B-D-H-J-K:

28 weeks
67 weeks

RE-J-K

6 9 weeks
43 weeks

If all activities on A-C-G-J-K

were crashed, the path duration would be 47


weeks. Crashing all activities on ELD-H-J-K results in a duration of 56 weeks.
The normal times of A-I-K, A-F-K, and B-E-J-K are less than the minimum
times of the other two paths, so we can disregard those three paths; they will
never become critical regardless of the crashing we may do,
Stage 1
Step 1. The critical path is B-D-H-J-K.
Step 2. The cheapest activity to crash per week is J at $1000, which is much
less than the savings in indirect and penalty costs of $28,000 per week.
Step 3. Crash activity J to its limit of 3 weeks because the critical path remains unchanged. The new expected path times are

A-C-G-J-K:
64 weeks
B-D-H-J-K:
66 weeks
The net savings are 3($28,000) - 3($1000) = $81,000. The total project costs
are now $2,624,000 - $81,000 = $2,543,000.
Stage 2
Step 1. The critical path is still B-D-H-J-K.
Step 2. The cheapest activity to crash per week now is D at $2000.
Step 3. Crash D by two weeks. The first week of reduction in activity D saves
$28,000 because it eliminates a week of penalty costs, as well as indirect
costs. Crashing D by a second week saves only $8000 in indirect costs because, after week 65, there are no more penalty costs. These savings still exceed the cost of crashing D by two weeks. The updated path times are
A-C-G-J-K:

64 weeks

B-D-H-J-K:

64 weeks

The net savings are $28,000 + $8000 - 2($2000) = $32,000. The total project
costs are now $2,543,000 - $32,000 = $2,511,000.
Stage 3

Step 1. After crashing D, we now have two critical paths. Both critical
paths must now be shortened to realize any savings in indirect project costs.
If one is shortened and the other isn't, the length of the project remains
unchanged.

Step 2. Our alternatives are to crash one of the following combinations of


activities-(A, B), (A, H), (C, B), (C, H), (G, B), (G, H)--or to crash activity
K, which is on both critical paths (J has already been crashed). We consider
only those alternatives for which the cost of crashing is less than the potential savings of $8000 per week. The only viable alternatives are (C, 8)at a
cost of $7600 per week and K at $4000 per week. We choose activity K to
crash.
Step 3. We crash activity K to the greatest extent possible-a reduction of
one week - because it is on both critical paths. The updated path times are

A-C-G-J-K:

63 weeks

The net savings are $8000 - $4000


$2,511,000 - $4000 = $2,507,000.

B-D-H-J-K:
=

63 weeks

$4000. The total project costs are

Stage 4
Step 1. The cr~tical

are B-D-H-J-K

and A-C-G-J-K.

Step 2. The only viable alternative at this stage is to crash activities B and C
simultaneously at a cost of $7600 per week. This amount is still less than the
savings of $8000 per week.
Step 3. Crash activities B and C by two weeks, the limit for activity B. The
updated path times are

61 weeks

A-C-G-J-K:

R-D-H-J-K:

61 weeks

The net savings are 2($8000) - 2($7600) = $800. The total project costs are
$2,507,000 - $800 = $2,506,200.
Any other combination of activities will result in a net increase in total project costs because the crash costs exceed weekly indirect costs. The minimum-cost
schedule is 61 weeks, with a total cost of $2,506,200. To obtain this schedule, we
crashed activities 8 , D, J, and K to their limits and activity C to 8 weeks. The
other activities remain a t their normal times. This schedule costs $117,800 less
than the normal-time schedule.

RESOURCE LIMITATIONS
The project management approaches discussed so far consider only activity times
in determining overall project duration and the critical path. An underlying assumption in the use of PERTICPM is that sufficient resources will be available
when needed to complete all project activities on schedule. However, developing
schedules without considering the load placed on resources can result in inefficient resource use and even cause project delays if capacity limitations are
exceeded.
3 What

is the effect of Limited resources on project duration?

12. Each
For purposes of discussion, consider the project diagram in Fig.
of the five activities involves a certain amount of time and has a resource requirement. The critical path is A-B-E, and the total time to complete the project, ignoring resource limitations, is nine days.

Start

Project Diagram,
Showing Resource
Requirements, Activity
Times, and Critical
Path

Although AON or AOA network diagrams are i~sefulfor displaying an entire


project and showing the precedence relationships between activities, they aren't
especially useful for showing the implications of resource requirements for a
schedule of activities. Gantt charts are more helpful in this regard.
We want to generate a schedule that recognizes resource constraints, as well
as the precedence relationships between activities. Let's suppose that we are limited to a small number of workers per day.

A very useful approach is the following procedure, developed by Weist (1966).

1. Start with the first day of the project and schedule as many activities as
possible, considering precedence relarionships and resource limitations.
Continue with the second day, and so on, until all activities have been
scheduled.
2. When several activities compete for the same resources, give preference
to the activities with the least slack, as determined with standard
PERTICPM met hods.

3. Reschedule noncritical activities, if possible, to free resources for critical


or nonslack activities.
The intent of this procedure is to minimize total project time, subject to resource
constraints.

Gantt chart software may


be used to schedule each
step m a market survey
project. This project has
three phases: plan, prepart
v implement. Specific
mities are shown under
each phase. Some activit~es
can be executed
simtlltaneously, whereas
others must be sequenced.

..

Example 8 :Developing a Resource - Constrained Schedule


*

Generate a resource-constrained schedule for the project depicted in Fig.


Assume that only six workers per day are available.

12.

Solution

Step 1. Schedule activity A first because all other activities depend on its
completion.
Step 2. The choice is among activities B, C, and D because their predecessor has been scheduled. Activities C and D have slack, but activity B doesn't
because it's on the critical path. Therefore schedule B next. So far, we have
committed five workers on day 1 and two workers on days 2-6.
\

Step 3. We have a choice between activities C and D, but we must choose C


next. It requires only four workers per day, and we can schedule it on days 2
and 3 without violating the resource constraint of six workers per day. Activity D requires six workers per day, but we have already scheduled activity B,
which needs two workers.
Step 4. The remaining activities to schedule are D and E. We must schedule
D first because of precedence constraints. The resulting schedule is shown in
13.
Fig.
FIGURE

I3

Resource-Constrained Schedule

This schedule results in the shortest project time possible under the resource
I
constraints. Activity C can be delayed three days without delaying the compietion of the project or exceeding the resource constraints. The critical path based
on resource requirements and time estimates is A-B-D-E. Howeveq the usk of
the procedure will not always be s o successhl. We can only say that it will generally produce solutions ciose t o the optimum.

BENEFITS AND LfMlTATIONS OF PERTICPM SYSTEMS


PERTICPM systems offer a number of benefits to project managers. However,
they also have limitations.
Benefits
We have already discussed the benefits of network planning models for large,
complex projects. In summary, they include the following.

1. Considering projects as networks forces managers to organize the required data and identify the interrelationships between activities. This
process also identifies the data to be gathered and provides a forum for
managers of different functions to discuss the nature of the various activities and their requirements.
2. PERTICPM computer packages provide graphic displays of the project
diagram and progress reports.
3. Networks enable managers to estimate the completion time of the project, which can be useful in planning other events o r in contractual negotiations with customers.
4. Reports highlight the activities that are crucial to completing the project
on schedule. These reports can be updated periodically over the life of
the project.
5. Reports also highlight the activities that have slack, thereby indicating
resources that may be reallocated to more urgent activities.
6. Networks enable managers to analyze cost-time trade-offs.

Limitations
Let's now turn to the limitations of PERTICPM.
Network Diagrams. The methods used in PERTICPM are based on the assumption that project activities have clear beginning and ending points, that they are
independent of each other, and that the activity sequence relationships can be
specified in a network diagram. In reality, two activities may overlap, o r the outcome of one activity may determine the time and resources required for another

activity. Also, a network diagram developed a t the start of a project may later
limit the project manager's flexibility to handle changing situations. At times, actual precedence relationships cannot be specified beforehand because of some dependencies between activities.

Control. A second underlying assumption in PERTJCPM methods is that managers should focus only o n the activities along the critical path. However, managers also must pay attention to near-critical paths, which couln become critical
if the schedules of one or more of the activities slip. Project managers who overlook near-critical paths may find their project's completion date slipping.

Time Estimates. A third assumption-that

uncertain activity times follow the


beta distribution-has brought a variety of criticism. First, the formulas used to
calculate the mean and variance of the beta distribution are only approximations
and are subject to errors of up to 10 percent for the mean and 5 percent for the
variance. These errors could give incorrect critical paths. Second, arriving at accurate time estimates for activities that have never been performed before is extremely difficult. Many project managers p e f e r to use a single time estimate,
arguing that pessimistic time estimates often are inflated and vary far more from
the most likely time estimate than do the optimistic time estimates. Inflated pessimistic time estimates build a cushion of slack into the schedule. Finally, the
choice of the beta distribution is s o m e w h a t arbitrary, a n d the use of another dis-

tribution would result in a different expected time and variance for each activity.

Resource Limitations. A fourth assun~ptionof PERT/CPM is that sufficient resources will be available when needed to complete all project activities on schedule. However, managers should consider the load placed on resources to ensure
efficient resource use and avoid project delays caused by exceeding capacity. Network diagrams don't show the implications of resource limitations for a schedule
of activities.
Although PERTICPM has shortcomings, its skillful application t o project
management can significantly aid project managers in their work.

COMPUTERIZED PROJECT SCHEDULING AND CONTROL


Computerized network planning methods are used extensively for projects in
government, construction, aerospace, entertainment, pharmaceuticals, utilities,
manufacturing, and architectural engineering.

1 discusses the project scheduling software used in a


Managerial Practice
large construction company.

Managerial Practice

-,

he M. W. Kellogg Company is one of the world's


leading engineering contractors specializing in the
engineering design and construction of petroleum
and petrochemical facilities. Maintaining promised delivery dates of such large and complex facilities is a difficult task. The typical project involves 1500 engineering
activities, 1100 materials requisitions and purchase or-

ders, 4000 cost accounts, 150 project change notices,


and 400,000 work hours. A project may cost anywhere

from $10 million to $300 million, and delays can cost


the customer millions in lost revenues. The Kellogg
Company may have up t o 20 of these projects ongoing
at any point in time.
A sophisticated computer package with CPM at the
core, called Artemis@,was purchased to assist managers
with complex scheduling problems. When the company
gets a new job, the following tasks are performed.

A master schedule is developed with CPM and approved by management. This schedule contains the
completion times of the various components of the
project and becomes a commitment to the customer.
Derailed engineering and procurement schedules
are established, reviewed by management, and finalized. Approved budgets for each department

are broken down into cost accounts and integrated


with existing schedules and workloads.
Performance is tracked every two weeks by measuring progress and actual hours used against the
baselines provided by CPM. Schedule updates are
distributed internally and to customers at least
once a month.
The approach taken by the Kellogg Company provides
an early warning system for detection of slippage in the
schedule.

The M. W. Kellogg Company had to purchase a sophisticated software package because of the complexity of its scheduling problems. However, with the advent of personal computers, "off-the-shelf" project management software has
become accessible to many companies. Large as well as small projects are routinely managed with the assistance of standard computerized scheduling packages. Software costs have come down, and the user interfaces are friendly.
Standard software programs may differ in terms of their output reports and may
include one or more of the following capabilities:

Gantt charts and PERTICPM diagrams. The graphics capabilities of


software ~ a c k a g e sallow for visual displays of project progress on Gantt
charts and PERTICPM network diagrams. Most packages allow the user
to display portions of the network on the video monitor to analyze specific problems.
Project status and summary reports. These reports include budget variance reports that compare planned to actual expenses at any stage in the
project, resource histograms that graphically display the usage of a particular resource over time, status reports for each worker by task performed,
and summary reports that indicate project progress to top management.

Tracking reports. These reports identify areas of concern such as the


percentage of activity completion with respect to-time, budget, or labor resources. Most software packages allow multiple projects to be tracked at
the same time. This feature is important when resources m u s t be shared
jointly by several projects.
Almost any project requiring significant resources will be aided by the use of
project management software. However, despite today's user-friendly packages,
extensive employee training might be needed for an organization to benefit fully
from these systems.
2 pj

CHAPTER REVIEW
Solved Problenl 1
14
An advertising project manager has developed the network diagrams shown in Fig.
for a new advertising campaign. In addition, the manager has gathered the time information for each activity, as shown in the accompanying table.
F iG u R

I4

Network Diagrams for an Advertising Program

(b) AOA network

(a) AON network

a. Calculate the expected time and variance for each activity.


b. Calculate the activity slacks and determine the critical path using the expected activity
times.
c. What is the probability of completing the project within 23 weeks?
Time Estimates (wk)

Activity

Solution

Optimistic

Most
Likely

Pessimistic

Immediate
Predecessor(s)

a. The expected time for each activity is calculated as follows:

Activity

Expected Time (wk)

Variance

b. We need to calculate the earliest start, latest start, earliest finish, and latest finish times
for each activity. Starting with activities A and B, we proceed from the beginning of the
network and move to the end, calculating the earliest start and finish times (shown
graphically in Fig.
15 for the AON diagram):
FIGURE

15

A ON Diagram with
Earliest Start and

Earliest Finish Times

Activity

'

Earliest Start (wk)

Earliest Finish (wk)

Based on expected times, the earliest finish for the project is week 20, when activity G
has been completed. Using that as a target date, we can work backward through the
16):
network, calculating the latest start and finish times (shown graphically in Fig.

FIGURE

16

AON Dfagram with All


Ttme Estrrnates Needed
to Calculate Slack

Start

Activity

Latest Start (wk)

Latest Finish (wk)

We now calculate the activity slacks and determine which activities are on the critical
path.
Start

Finish

Activity

Earliest

Latest

Earliest

Latest

Activity
Slack

Critical
Path

A
3

0.0
0.0

4.0
0.0

5.5

5.5

D
E
F

4.0
9.0
5.5
15.5

8.0
9.0
6.5
15.5

4.0
5.5
9.0
16.0
15.5
14.5
20.0

8.0
5.5
9.0
20.0
15.5
15.5
20.0

4.0
0.0
0.0
4.0
0.0
1.O
0.5

No
Yes
Yes
No
Yes

No
Yes

The paths, and their total expected times a n d varrances, are

Path

A-D
A-E-G

RC-E-G
B-F-G

Total Expected
Time (wk)

4 + 12 = 16
+ 6.5 + 4.5 = 15

5.5+3.5+6.5+4.5=20
5.5 t 9 + 4.5 = 19

Total
Variance

1.00 t 1.78 = 2.78


1.OO + 2.25 + 0.69 = 3.94
0.69+0.25+2.25+0.69=3.88
0.69 + 2.78 + 0.69 = 4.16

The critical path is B-C-E-G, with a total expected time of 20 weeks. However, path
B-F-G is 19 weeks and has a large variance. In [his solution we used the AON notation, showing the start and finish rimes with~nthe node circles. The same results can be
obtained with the AOA notation, except that the times typically are shown in a box
drawn near the arc (arrow). For example:

c. We first calculate the z-value:

Using Appendix 2, we find that the probability of completing the project in 23 weeks
o r less is 0.9357. Because the length of path ELF-G is very close to that of the critical
path and has a large variance, it might well become the critical path during the project.

Solved Problem 2
Your company has just received an order from a good customer for a specially designed
electric motor. The contract states that, starring on the thirteenth day from now, your firm
will experience a penalty of $100 per day until the job is corripleted. Indirect project costs
amount to $200 per day. The data on direct costs and activity precedence relationships are
3.
given in Table
a. Draw the project network diagram.
b. What completion date would you recommend?
Solution

a. The AON network diagram, including normal activity times, for this procedure is
17. Keep the following points in mind while constructing a network
shown in Fig.
diagram.
Always have srarr and finish nodes.
Try to avoid crossing paths to keep the diagram simple.
Use only one arrow to directly connect any two nodes.

TABLE

Activity

Electric Motor Project Data

Normal
Time
(days)

Normal
Cost
($)

Crash
Time
(days)

Crash
Cost

Immediate

($)

Predeces:nr(s)

None
None
None
A

B
C
D, E
F, G

FIGURE

17

A ON Diagram for the


Electric Motor Project

Put the activities with no predecessors at the left and point the arrows from
left t o right.
Use scratch paper and be prepared to revise the diagram several times before
you come u p with a correct and uncluttered diagram.
b. With these activity durations, the project will be completed in 19 days a n d incur a
$700 penalty for lateness. Determining a good completion date requires the use of the
minimum-cost schedule procedure. Using the data in Table
.3,you can determine the
maximum crash time reduction and crash cost per day for each activity. For example,
for activity A:
Maximum crash time = Normal time - Crash time = 4 days - 3 days = 1 day

Crash cost - $1300 - $1000 = $300


- Crash cost - Normal cost - CC - NC per day
Normal time - Crash time
NT - CT 4 days - 3 days

Activity

Crash Cost
per Day ($)

Maximum Time
Reduction (days)

I contains a summary of the analysis and the resultant project duration and
Table
total cost. The critical path is C-F-H at 19 days-the longest path in the network. The
cheapest of these activities to crash is H, which costs only an extra $100 per day to
crash. Doing s o saves $200 + $100 = $300 per day in indirect and penalty costs. If
you crash this activity two days (the maximum), the lengths of the paths are now

A-D-G-H:

B-E-G-i-1:

15 days

JSdays

C-F-H:

17 days

The critical path is still C-F-H. The next cheapest critical activity t o crash is F at $250
per day. You can crash F only two days because at that point you will have three critical
paths. Further reductions in project duration will require simultaneous crashing of more
than one activity (D, E, and F). The cost to d o so, $650, exceeds the savings, $300. Consequently, you should stop. Note that every activity is critical. The project costs are minimized when the completion date is day 15. However, there may be some goodwill costs
associated with disappointing a customer that wants delivery in-12 days.
TABLE

',

Project Cost Analysis

Stage

Crash
Activity

1
2

H
F

Resulting
Critical
Path(s)

C-F-H
C-F-H
A-D-G-H
B-E-G-H
C-F-H

Time
Reduction
(days)

Project
Duration
(days)

Project
Direct Costs,
Last Trial

19
17
15

2
2

Crash
Cost
Added

Total
Indirect
Costs

Total
Penalty
Costs

Total
Project
Costs

$10,100

$10,100
$10,300

$200
$500

$3,800
$3,400
$3,000

$700
$500
$300

$14,600
$14,200
$14,100

lved Problem 3
A maintenance crew at the Woody Manufacturing Company must d o scheduled machine
maintenance in the fabricating department. A series of interrelated activities must be accomplished, requiring a different number of workers each day. Figure
38 shows the
project network, the number of workers required, and the activity time. The company can
devote a maximum of six maintenance workers per day to these activities.
FIGURE

18

Network for the


Maintenance Project

, '

'--3

-.
/

Workers required per day

a. Use Weist's procedure to find a new schedule, and draw a Gantt chart for it.
b. How long will the project take and which activities are critical?
Solution

a. The critical path of this project (disregarding the resource constraint) is A-C-D-E at
1 1 weeks. Consequently, only activity B has slack. Figure
19 shows the schedule.
FI F u R E

19

Gantt Chart Schedule for the Maintenance Project

Step 1. Schedule activity A first on day 1. We cannot schedule any other activities until day 4 because of the resource constraint.
Step 2. Activities B and C are now tied. We schedule C next because it has no
slack.
Step 3. Activities B and D are tied. We choose D next because it has no slack. We
must start it on day 8 because of the resource constraint.
Step 4.. We must schedule activity B next because of its precedence relationship
to activity E.
Step 5. Finally, we schedule E for days 12 and 13. It couldn't be started earlier
because of the resource constraint.
b. The project will take 13 days, and every activity is critical. N o activity can be shifted
from its present schedule without violating the maintenance worker capacity limitation.

Formula Review
1. Start and finish times:

ES = max [EF times of all activities immediately preceding activity]

EF = ES + t
LS = LF - t
LF = min [LStimes of all activities immediately following activity]
2. Activity slack:

S=fi-E!5

or

S=LF-EF

3. Activity r ~ m estatist~cs:
t,

" + 4m

(expected activity time)

c2

(+I2

(variance)

4. z-tra~~sformation
formula:

A/$

where

T = due date for the project


TE= z(expected activity rimes on the critical path)
= mean of normal distribution

r2= z(variances of activities on the critical path)

5. Project costs:
Crash cost per unit of time =

Crash cost - Normal cost - CC - NC


Normal time - Crash time
N T - CT

: h a p e r Highlights
Projects a r e unique operations having a finite life span.
Network planning can help in managing a project. It involves (1) describing the project as a set of interrelated
activities, (2) diagramming the network to show precedence relationships, (3) estimating time of completion
by determining the critical path, and ( 4 ) monitoring
project progress.
P E R T C P M methods focus o n the critical path: the sequence of activities requiring the greatest cun~ulative
amount of time for completion. Delay in critical activities will delay rhe entire project. Uncertainty in activity
-ies can be recognized by securing three time estimates
each activity, then calculating expected activity times
and variances. Activity times are assumed to follow a
beta distribution.
PERTICPM methods can be used t o assess the probability of finishing the project by a certain date o r t o find
the minimum-cost schedule with the assurnption that
marginal costs are linear.
Computerized network planning methods are useful for
managing large projects with many activities, when frequent updates o r changes to the original project occur,

r'

and when comparisons of actual versus planned time


and resource usage are needed.
The project duration may increase if sufficient resources
aren't available when needed. Weist's procedure is a useful approach t o deriving a project schedule subject to resource constraints.
Criticisms of PERTJCPM methods focus on the validity
of four assumptions in the network model. First, activities sometimes don't have clear beginning and ending
points. Second, near-critical paths may become critical
and affect project completion. Third, use of the beta distribution may not result in good estimates for the expected times and variances, and the underlying activity
time estimates may be inaccurate. Fourth, ignoring resource capacity limitations may result in inefficient resource use and project delays.
Skillful use of PERTICPM can help managers (1) organize a project and identify activity interrelationships, (2)
report progress, (3) estimate project completion time,
(4) highlight critical activities, (5) identify slack activities and beneficial reallocation of resources, and ( 6 ) analyze cost-time trade-offs.

Studv Ouestions
I. What constitutes effective project managenlent?
2- What information is needed to construct the network
diagram for a project? Can any project be diagrammed as a network?
3. When a large project is mismanaged, it makes news.
Identify penalties associated with a mismanaged project in your experience o r in recent headlines. If possible, identify the cause of the problem. For example,
were the problems caused by inaccurate time estimates, changed scope, irnplanned o r improperly sequenced activities, inadequate resources, or poor
management-la bor relations?
4. A certain advertising agency is preparing a bid for a
promotional campaign of a type never before attempted. The project comprises a large number of interrelated activities. Explain how you would arrive a t three
time estimates for each activity s o that you could use a
network planning model t o assess the chances that the
project can be completed when the sponsor wants it.
5 . Why was the beta distribution chosen over the normal
'
clistribution for PERTICPM analyses?
6. Why is the critical path of such importance in project
management? Can it change during the course of the
project? If so, why?
7. When determining the probability of completing a
project within a certain amount of time, what assumptions are you making! What role d o the lengths and
variances of paths other than the critical path play in
such an analysis!

8. Suppose tlwt your company has accepted a project of


a type that it has completed many times before. Any
activity can be expedited with an increase in costs.
There are weekly indirect costs, and there is a weekly
penalty if project completion extends beyond a certain
date. Identify the data that you would need and explain the analytic process that you would use to determine a minimum-cost schedule. What assumptions
would you make in doing such an analysis?
9. Explain the usefulness of a slack-sorted list of
activities.
10. Suppose that you are tryrng to convince management
that methods such as PERTICPM would be useft11 t o
them. Sonie of the managers have voiced the following
cortcerns. Prepare a brief response to each of these
concerns.
a. There is a tendency for technicians t o handle the
operation of PERTKPM; thus management will
not use it often.
b. It puts pressure on managers because everyone
knows where the critical path is. Managers of activities along the critical path are in the spotlight,
and if their activities are delayed, the costs of the
delays are on their shoulders.
c. The introduction of network planning techniques
may require new communication channels and systems procedures.

@:

Problems
In the following problems, network d ~ a g r a m scan be
drawn in the AOA o r AON format. Your instructor will
indicate which is preferred.
1. Consider the following data for a project.
Activity

Activity Time
(days)

Immediate
Predecessor(s)

a. Draw the network d ~ a g r a m .


b. Calculate the critical path for this project.
c. H o w much slack is in activities G, H, and I?
2. T h e following information is known about a project.
a. Draw the network diagram for this project.
b. Determine the critical path and project duration.

Activity

A
B

C
D
E
F
G

Activity Time
(days)

4
3
1

3
4

3
2

Immediate
Predecessor(s)
-

A
A
C

B, D
E
E

P*
;J

3. A project has the following precedence relationships


and activity times.

Activity

Activity Time
(wks)

Immediate
Predecessor(s)

a. Draw the network diagram.


b. Calculate the slack for each activity. Which activities are on the critical path?
The following information is available about a project.

Activity

Activity Time
(days)

Immediate
Predecessor(s)

6. Consider the following project information.

Activity

Activity Time (wk)

lmmediate
Predecessor(s)

Draw the network diagram for this project.


Specify the critical path(s).
Calculate the total slack for activities A and D.
What happens to the slack for D if A takes five
days?
7. Recently, you were 'assigned to manage a project for
your company. You have constructed a network diagram depicting the various activities in the project
20). In addition, you have asked various man(Fig.
agers and subordinates to estimate the amount of time
that they would expect each of the activities to take.
Their responses are shown in the following table.
a.
b.
c.
d.

Time Estimates (days)


Activity

a. Draw the network diagram.


b. Find the critical path.
5. The following information has been gathered for a
project.

Activity

Activity Time (wk)

A
B
C
D
E
F! G u R

Optimistic

MostLikely

Pessimistic

8
8
6
4
7

11
11
7
6
10

4
5

2
4
2o

AON Project Diagram

lmmediate
Predecessor(s)

a. Draw the network diagram.


b. Calculate the slack for each activity and determine
the critical path. How long will the project take?

a. What is the expected completion time of the


project?

b. What is the probability of completing the project


i r 21
~ days?
c. What is the probability of completing the project
in 17 days?
8. In Solved Problem 1, estimate the probability that the
noncritical path &F-G will take more than 20 weeks.
Hint: Subtract from 1.00 the ~ r o b a b i l i tthat
~ B-F-G
will take 2 0 weeks or less.
9. Consider the following data for a project never before
attempted by your company.

Activity

Expected
Time, te (wk)

A
B

5
3

Because of the uncertainty in planning the new


course, the assistant also has supplied the following
time estimates for each activity.
Time Estimates (days)

Activity

Pessimistic

D
E

A
B

C, D

The director wants to conduct the seminar 47 working days from now. What is the probability that everything will be ready in tirne?
11. Table
6 contains information about a project.
Shorten the project by finding the minimum-cost
schedule. Assume that project indirect costs and
penalty costs are negligible. Identify activities to crash
while minimizing the additional crash costs.

TABLE

6
Normal
Time

Activity

Description

Most Likely

Immediate
Predecessor(s)

a. Draw the network diagram for this project.


b. Identify the critical path and estimate the project's
duration.
c. Calculate the slack for each activity.
10. The director of continuing education a t Bluebird University has just approved the planning for a salestraining seminar. Her administrative assistant has
identified the various activities that must be done and
their relationships to each other, as shown in Table
5.

,ctivity

Optimistic

(days)

Project Activity and Cost Data


Crash
Time
(days)

Cost to
Crash
($ per day)

Immediate
Predecessor(s)
None
None

lmmediate
Predecessor(s)

B
G
D

F
G
H
I
J

Design brochure and course


announcement.
Identify prospective teachers.
Prepare detailed outline of
course.
Send brochure and student
applications.
Send teacher applications.
Select teacher for course.
Accept students.
Select text for course.
Order and receive texts.
Prepare room for class.

A
B
C'D
D, E
F
G

I3
C, E

12. Information concerning a project is given in Table


-7. Indirect project costs amount t o $250 per day.
The company will incur a $100 per day penalty for
each day the project lasts beyond day 14.

t?

Activity

Normal Erne
(days)

Normal Cost

($1

Crash Time
(days)

Crash Cost
($)

Immediate
Predecessor(s)

None
None
A, B

C, D
E
E
G

":qI:

TABLE

g.-;*;,
u

.(:,:';

.; .. -:=TY-:;
... : . . . . ;. :
..........-.....
,
: ;&
.;

6:

i'..

:...

..

...

;.-.,

. .. . ..

. . ,.
..

. ~ ~
i:Dn.@
......,
f ~......................
~ : .......
t ] ~.+,>.?k
~ ... . ~~ ~' ~~i ~t @
- ~, j~~
. . ,b
. . ..A
d.... .I
-.~
.; .~. ._. ~ ..i.. .~
.- . . ,.
.,.
.,:,--..&

. . ..

'

:. . .

-.

>.

. . . . . .

; ,

.-

Time (wk)

Activity

Description

Interview at college for new manager.


Renovate building.
Place ad for employees and interview applicants.
Have new-manager prospects visit.
Purchase equipment for new outlet and install.
Check employee applicant references and make final selection
Check refeiences for new manager and make final selection.
Hold orientation meetings and do payroll paperwork.

B
C
'D
E
F

G
H

a. What is the project's duration if only normal times


.
are used?
9. What is the minimum-cost schedule?
c. What is the critical path for the minimum-cost
schedule!
3. Hamilton Berger, district manager for Gumfull Foods,
Inc., is in charge of opening a new fast-food outlet in
the college town of Senility. His major concern is the
hiring of a manager and a cadre of hamburger cooks,
assemblers, and dispensers. He also has to coordinate
the renovation of a building that previously was
owned by a pet supplies retailer. He has gathered the
data shown in Table .8.
Top management has told Berger that the new outlet is to be opened as soon as possible. Every week
that the project can be shortened will save the firm
$1200 in lease costs. Hamilton thought about how to
save time during the project and came up with two
possibilities. One was to employ Amazon, Inc., a local
employment agency, to locate some good prospects
for the manager's job, This approach would save three

Immediate
Predecessor(s)

weeks in activity A and cost Gumfull Foods $2500.


The other was to add a few workers to shorten the
time for activity B by two weeks at an additional cost
of $2700.
Help Ham Berger by answering the following
questions.
a. How long is the project expected to take?
b. Suppose that Berger has a
goal of completing the project in 1 4 weeks. What is the probability that this will happen?
c . What additional expenditures should be made to
reduce the project's duration! Use the expected
time for each activity as thbugh it were certain.
21 was developed for a project
14. The diagram in Fig.
that you are managing. Suppose that you are inrerested in finding ways to speed up the project at minimal
additional cost. Determine the schedule for completing the project in 25 days at minimum cost. Penalty
costs and project overhead costs are negligible. Alternative time and cost data for each activity are shown
9.
in Table

FIG uR E

A ON Network Diagram

2I

15. The construction crew of Johnson Homebuilders must


frame a new house. The following data are available
for the project.

Activity

""r-

TABLE

'-

,;pi@tt~ctivitya@&t-~aid
%?:<---

Ls.

Alternative 1
Activity

Time (days)

F IG u R E

Alternative 2

Cost ($)

22

Time (days)

Cost ($)

Project Diagram

Activity
Time
(days)

Workers
Required
(per day)

Immediate
Predecessor(s)

a. Draw the network diagram for the project.


b. Determine the project's critical path and duration.
c. What is the slack for each activity?
d. Only six construction workers are available e a c Q
day. Use Weist's procedure to find a new schedule
and draw a Gantt chart for it. What is the critical
path in this schedule? How long will the project
take now?
; 16. The network shown in Fig.
22 includes the number
of workers required per day for each activity, the
name of each activity, and the time (in days) required.
Use Weist's procedure to find a schedule that utilizes a
maximum of 10 workers each day. Draw a Gantt
chart for this schedule.
' a. How long will this project take?
b. What is the critical path?
17. A line crew for the Alphabet Telephone Company
must install some cable in a rural area. The following
data are available for the project.

:;

6,

Activity

Activ~'me
(days)

Required
(per day)

Immediate
Predecessor(s)
-

A
B
C
D

E.
F-

3
5
3
3
1

10
6

18. The following informatlo" concerns a new project


your company is undertaking.
Activity

5
5

5
7

D
B, C, E

A
B

C .
D

a. Disregarding capacity limitations, determine the


critical path and calculate the slack for each activity. How long will the project take?
b. Suppose that there are only 10 crew members. Use
Weist's procedure t o find a schedule that doesn't
exceed 10 workers per day on the project. Draw a
Gantt chart for your schedule. What is the critical
path now? What is the slack for each activity?
How long will the project now take?

C A S E

The Pert Studebakev

T,

he new director of service operations for Roberts's


uto Sales and Service (RASAS) started work at the
beginning of the year. It is now mid-February. RASAS consists of three car dealerships that sell and service several
makes of American and Japanese cars, two auto parts
stores, a large body shop and car painting business, and an
salvage yard. Vikky Roberts, owner of RASAS, went
,the car business more than 20 years ago when she inherited a Studebaker dealership from her father. The
Studebaker Corporation was o n the wane when she obtained the business, but she was able to capitalize on her
knowledge and experience t o build her business into the
diversified and successful "miniempire" it is today. Her
motto, "Sell 'em today, repair 'ern tomorrow!" reflects a
strategy that she refers t o in private as "Get 'em coming
and going."
Roberts has always retained a soft spot in her heart
for Studebaker automobiles. They were manufactured in
South Bend, Indiana, from 1919 to 1966, and many are
still operable today because of a vast number of collectors
and loyal fans. Roberts has just acquired a 1963 Studebaker Avanti that needs a lot of restoration. She has also noted
the public's growing interest in the restoration of vintage
automobiles.

r-3

Activity Time
(days)

10

11
9

Immediate
Predecessor(s)

A,I3
A,B

a. Draw the network diagram for this project.


b. Determine the critical path and project completion
time.

f
Roberts is thinking of expanding into the vintage car
restoration business and needs help in assessing the feasibility of such a move. She also wants to restore her 1963
Avanti to mint condition, or as close to mint condition as
possible. If she decides to go into the car restoring business, she can use the Avanti as a n exhibit in sales and advertising and take it to auto shows t o attract business for
the new shop.
Roberts believes that many people want the thrill of
restoring an old car themselves but don't have time t o run
down all the old parts. Still others just want t o own a vintage auto because it is different, and many of them have
plenty of money to pay someone to restore an auto for
them.
Roberts wants the new business to appeal t o both
types of people. For the first group, she envisions serving
as a parts broker for NOS ("new old stock"), new pans
that were manufactured many years ago, packaged in their
original cartons. It can be a time-consuming process to
find the right part. RASAS could also machine new parts
to replicate those that are hard t o find or no longer exist.
In addition, RASAS could assemble a library of parts
and body manuals for old cars, t o serve as an information
resource for do-it-yourself restorers. The do-it-yourselfers
could come to RASAS for help i n compiling their parts
lists, and RASAS could acquire the parts for them. For
others RASAS would take charge of the entire restoration.

..

--

-.

after the englne has been reinstalled and t h e doors, hood,


and trunk are back on the frame. Time: 4 days. Cosr:
$700.
Replace windshield. Windshield must h a v e been received. Time: 1 day. Cost: $70.
Put fenders back on. The fenders must already have
been repaired and the transmission rebuilt a n d the brakes
replaced. Time: 1 day. Cost: $60Paint car. Can't do until the fenders a r e back on and
windshield replaced. Time: 4 days. Cost: $1700.
Reupholster interior of car. M u s t have first received
upholstery material. Car must a l s o have been painted.
Time: 7 days. Cost: $1200.
Put chrome parts back on. C a r has to have been
painted and chrome parts rechromed. Time: 1 day. Cost:
$50.
Pull car to Studebaker s h o w in Springfield, Missouri.
Must have completed reupholstery of interior and have
put the chrome parts back o n . Time: 2 days. Cost: $500

Vikky Roberts asks the new director of service operations to take a good look at her Avanti and see what needs
t o be done to restore it to the condition it was in when it
came from the factory more than 30 years ago. She wants
t o restore it in time t o exhibit it at the National Studebaker Meet beginning July 15 in Springfield, Missouri. If the
car wins first prize in its category, it will be a real public
relations coup for RASAS--especially if Roberts decides to
enter this new venture. Even if she doesn't, the car will be
a showpiece for the rest of the business.
Roberts asks the director of service operations to prepare a report about what is involved in restoring the car
and whether it can be done in time for the Springfield meet
this summer. PERTICPM is to be used to determine if the
July 15 date is feasible. The parts manager, the body shop
manager, and the chief mechanic have provided the following estimates of times and tasks that need to be done, as
well as cost estimates:
Order all needed material and parts (upholstery,
windshield, carburetor, and oil pump). lime: 2 days. Cost
(phone calls and labor): $700.
Receive upholstery material for seat covers. Can't do
until order is placed. lime: 30 days. Cost: $250.
Receive windshield. Can't do until order is placed.
Tune: 10 days. Cost: $130.
Receive carburetor and oil pump. Can't do until order
is placed. T i e : 7 days. Cost: $1 80.
Remove chrome from body. Can do immediately.
Time: 1 day. Cost: $50.
Remove body (doors, hood, trunk, and fenders) from
frame. Can't do until chrome is removed. Time: 1 day.
Cost: $150.
Have fenders repaired by body shop. Can't do until
body is removed from frame. Time: 4 days. Cost: $200.
Repair doors, trunk, and hood. Can't do until body is
removed from frame. Time: 6 days. Cost: $300.
Pull engine from chassis. Do after body is removed
from frame. Xme: 1 day. Cost: $50.
Remove rust from frame. Do after the engine has been
pulled from the chassis. Time: 3 days. Cost: $300.
Regrind engine valves. Have to pull engine from chassis first. lime: 5 days. Cost: $500. .
Replace carburetor and oil pump. Do after engine has
been pulled from chassis and after carburetor and oil
pump have been received. lime: 1 day. Cost: $50.
Rechrome the chrome parts. Chrome must have been
removed from the body first. Time: 3 days. Cost: $150.
Reinstall engine. Do after valves are reground and
carburetor and oil pump have been installed. Time: 1 day.
Cost: $150.
Put doors, hood, and trunk back on frame. The
doors, hood, and trunk must have been repaired. The
frame also has to have had ~ t rust
s removed. Time: 1 day.
Cost: $80.
Rebuild transmission and replace brakes. Do this

, ,

4.

Roberts wants to limit the expenditures o n this project to


what could be recovered by selling the restored car. She
has already spent $1500 to acquire the car.
In addition, she would like a brief report on some of
the aspects of the proposed business, such a s how it fits in
with RASAS's other businesses a n d what RASAS's operations task should be with regard t o cost, quality, customer
service, and flexibility.
According to Turning Wheels, a publication for owners and drivers of Studebakers, a n d other books on car
restoration, there are categories of restoration. A basic
restoration gets the car looking great and running, but a
mint condition restoration puts the car back in original
condition-as it was "when it rolled off the line." When
restored cars compete, a c a r in mint condition has an advantage over one that is just a basic restoration. As cars
are restored, they can also b e customized. This means t h a n
something is put on the c a r that couldn't have been o n the'.
original. Customized cars c o m p e t e in a separate class.
Roberts wants a mint condition restoration, without customization. (The ~ r o ~ o s en de w business would accept any
kind of restoration a customer wanted.)
A restored 1963 Avanti c a n probably be sold for
$15,000. Thus, the total b u d g e t cannot exceed $13,500
($15,000 minus the $1500 Roberts has already spent).
Even though much of the w o r k will be done by Roberts's
own employees, labor and materials costs must be considered. All relevant costs h a v e been included in the cost
estirna tes.

Questions
a
:3'

4. Using the information provided, prepare the report


Roberts requested, a s s u m i n g that the project will begin
in late February of the current year. This leaves 1 0 0
working days to complete the project, including

transporting the car to Springfield before the meet


begins. Your report should briefly discuss the aspects
of the proposed new business, such as the competitive
t h a t Roberts asked about.
priorities,)-(
. Compose a table containing the project activities, with
a letter assigned to each activity, the time estimates,
and the precedence relationships from which you will
assemble the network diagram.

3. Draw a n AON network diagram of the project similar


4. Determine the activities on the critical
to Fig.
path and the estimated slack for each activity.
4. Prepare a project budget showing the cost of each
activity and the total for the project.
Source: This case was prepared by and is used courtesy o f
I'rofessor Sue Perrott Siferd, Arizona State University.

Normal Distribution

Answers to Selected P r o b l m s

1. b. 27 days
c. G = 9, H = 0, I = 1
2. a. The critical path is A-C-D-E-F, with a
completion time of 15 days
4. a. The critical path is A-E-G-I, with a completion
time of 18 days
6. b. The critical path is B-E-G-H,
weeks

which takes 29

c. Total slack activity A = 6 wk

Total slack activity D = 6 wk


d. D will have 5 weeks' slack
7. a. 19 days
b. 90%
c. 10%
8. 31-21%
9. b. Critical path is B-D-F; expected project duration
is 15 weeks
12. a. Critical path is B-D-E-G-H;
project duration is
21 days
b. Recommended completion date is day 17, crashing
activity E by 2 days and activity H by 2 days
13. a. Critical path is C-F-H; project is expected to take
b. 0.1151
16weeks
c. No additional expenditures are recommended
15. b. The critical path is A-C-E; project duration is 10
days
c. Activity
Activity Slack
A
0
B
4
C
0
D
4
E
0
d. Critical path is A-B-C-E; activity D has one day's
slack; project wiU now take 11 days
16. a. 18 days; when we impose a ten-worker limit,
project will take 20 days
b. Critical path is A-B-D-E-F-H,
recognizing the
ten-worker limitation

ADDENDUM
PERT / COST

PERT / COST
,PLANNING AND SCHEDULING PROJECT COSTS

PERTICOST is a method for planning and scheduling project costs overtime


when budjet considerations are important.
The project management procedures we have discussed emphasized the time
aspect of a project and provided information that can be used to schedule and
control individual activities so that the entire project is completed on time.
While project time and the meeting of a scheduled completion date are primary
considerations for almost every project, there are many situations in which the
cost associated with the project is just as important as time. In this section, we
show how the technique referred to as PERTICost can be used to help plan,
schedule, and control project costs. The ultimate objective of a PERT/Cost system is to provide information that can be used to maintain project costs within a
specified budget.
The budgeting process for a project usually involves identifying all costs associated with the project and then developing a schedule or forecast of when the
costs are e~pectedto occur. Then at various stages of prolect completion, the
actual project costs incurred can be compared to the scheduled or budget
costs. If actual costs are exceeding budgeted costs, corrective action may be
taken to keep costs within the budget.
The first step in a PERTlCost control system is to break the entire project into
components that are convenient -intgrms of measuring and controlling costs.
While a P~%RF/GP&I .nefw6rks
mayalready
show detailed activities-for the pro*.<:$ .
, ,
ject, we may iind that t@g$e
- ..I,- a ~ t i->.~ -~ ~ tob
~ ~ detailed
r a ' r e for conveniently controlling project co-sts. In su$h d2se.s r@ed activities under the control of one department or subcontradior-hie ohefi kjrouped together to form what are referred
to as work packages. By identifying costs of each work package, a project manager can use a PERT/COS~
syst&hSto help plan, schedule, and control project
costs.
1- ?*-

--

Since the projects we discuss in this training course have a relatively small
number of activities, we find it convenient to define work packages as having
only one activity. Thus in our discussion of the PERTICost technique we treat
each activity as a separate work package. Realize, however, that in large and
complex projects we would almost a!ways group related activities so that a
cost-control system could be developed for a more reasonable number of work
packages.

In order to illustrate the PERT/Gost technique for project cost control, let us
consider the research and development project network for the Preston and
Granger Company shown in Figure 1 The specific project involves an effort to
develop a suds-producing additive for a dishwashing detergent We are assuming that each activity in the network is an acceptable work package and that a
detailed cost analysis has beene
d
ain
on an activity basis. The activity cost estimates, along with the expected activity times, are shown in Table l r In using
the PERTfCost technique we assume activities (work packages) are defined
such that costs occur at-a constant rate over the duration of the activity.

FIGURE

Network for the ..

Research and Development Project

Activity

e%?S?&Fa
~~~)

w or

-fed
c0pt.w

Morith

For example, activity B, which shows an estimated cost of $30,000 and an expected 3-month duration,
assumed to have a cost rate of $30.000/3 =
$10,000 per month. The cost rates for all activities are provided
Note that the total estimated, or budgeted, cost for the project is 87,000,

is

Using the expected activiiy times, we can compute the critical path for the project. A summary of the critical path calculations and the resulting activity schedule is shown in Table 8. Activities B, D, and F determine the critical path and
provide an expected projed compl6fion time of 8 months.

We are now ready to develop a budget for the project that will show when costs
should occur during the 8-month project duration. First let us assume that all activities begin at their earliest possible starfing date. Using the monthiy activity
cost rates shown in Table 2 and the earliest start times, we can prepare the
month-by-month cost forecast as shown in Table 3 For example, using the earliest start date for activity A as 0,we expect activity A, which has a 2-month duration, to show a cost of $5000 in each of the first 2 months of the project. By
similarly using the earliest starting date and monthly cost rate for each activity,
we are able to complete Table 3 as shown. Note that by summing the costs in
each column, we obtain the total cost anticipated for each month of the project.

TABLE 2
AcdvitySchcddc

~a~est
Acfivify

w
-3

0
0
2

0
E

3
3

Frdsh

Latest
FhWl

Sledc

2
3

5
3

3
6
5
8
6

6
7
8
8

Earfies(

s@

Stllri

.O

5
6

--

TMLE' 3

Budgeted Costs for


X!+&at
Starting Date Schedule ~ o u s ~ *f@@&s
d s
j
Month

Activity

Monthly cost
Total project cost

15 15
15 30

13

12
55

12
67

43

10
5
77 82 87

cdfd
Pam

2
0

Finally, bp awirrnulating the monthly coSfs, we can show the budgeted total
cost schedule provided all activities are started at the earliest starting times. In
a similar manner, we can develop the budgeted total cost schedule when all activities are started at the latest starting times. (Table 4 shows these results.)
Provided the project progresses on its PERTICPM time schedule, each activity
will be started somewhere between its earfiest and iatest starting times. This irnplies that the total project costs should occur at levels between the earliest start
and latest start cost schedules. For example, usingLthedatajn Tables 3 and
10 , we see that by month 3, total project costs should be between $30,000 (latest starting date schedule) and $43,000 (earliest starting date schedule), Thus,
at month 3 a total project cost between $30,000 and $43,000 would be expected.
In Figure 2 , we show the forecasted total project costs for both the earliest and
latest starting time schedules. The shaded region between the two cost curves
shows the ~ s s i b l ebudgets for the project. Ifthe project manager is willing to
commit activities to specific starting times, a specific project cost forecast or
budget can be prepared- However, based on the above analysis, we know that
such a budget will have to be in the region of feasible budgets shown in Figure
2

Budgeted Costs .fora Latest


Starting Date Schedule (T&ousa& of Dollars)
TABLE

Activity

Monthly cost
Total project cost

10
10

10

20

10
7
30 37

7
44

15 15 13
59 74 87

HGURE 2 - Feasible Budgets for Total


Project Costs

-fn
o
U

$100.000

Earliest starting time

80,000

- total cost schedule

60.000

m
.-

Region of feasible budgets


for total project costs

Q)

Latest starting time


total cost schedule
0

Months
.-

--

-- --

\$

Controlling Project Costs


The information that we have developed thus far is helpful in terms of planning
and scheduling total project costs. However, if we are going to have an effective
cost-control system, we need to identify costs on a much more detailed basis.
For example, information that the project's actual total cost is exceeding the
budgeted total cost will be of little value unless we can identify the activity or
group of activities that are causing the cost ovemns.
The PERT/ Cost system provides the desired cost control by budgeting and
then recording actual costs on an activity (that is, work package) basis. Periodically throughout the project's duration, actual costs for all completed and inprocess activities are compared to the appropriate budgeted costs. The project
manager is then provided with up-to-date information on the cost status of each
activity. If at any point in time, actual costs exceed budgeted costs, a cost overrun has o m f l e d . On the other hand, ifactual costs are less than the budgeted
costs, we have a condition referred to as a cost undermn. By identifying the
sources of cost ovemns and cost undermns, the manager can take corrective
adion where necessary.
Now at any point during the project's duration, the manager can use a PERT1
Cost proce-durt?to obtain an activity cost status reporl by collecting the following
information for each activity:
i

1.
2.

Aaual cbsl to dage


Pekent complefion to date

While a PERT4Cpst system will require a periodic- ~ . r t t a p .biweekly


s
or monthly--collection-of,the above information, let us suepose we are at the end of the
fourth r n d h :of.ahe prdject and h'&ve the actual'ctisst an'd-Wcent completion
data for each activity, as shown in Table 5 . This current status information
shows that advities A and 6 have been completed, activfiies C, D, and E are in
process, and activities F and G have not yet been started.

TABLE 5
Activity Cost and Pescqt
Completion Data at the End of ~ o n i 4h
Activity

Actual Cost

% Completion

f 12.000

B
C

30.000

100
100

0
E
F
G

1.OoO

1O.W

50
33
25

0
0

0
0

2.000

Total actual cost = L655.000

In order to prepare a cost status report we will need to compute the value for ali
work completed to date.
Let

Vi = value of work completed for activity i


pi = percent completion for activity i
Bi = budgeted for activity i
The following relationship is used to find the value of work completed for each
activity.
.

" Note :It is assumed that activity cost occur at a constant rate over the
duration of the activity

For example, the values of work completed for activities A and C are as follows.

Cost overruns and cost underruns can now be found by comparing the actual
cost of each activity with its appropriate budgeted value.
Letting
ACi = actual cost to date for activity i
and
Di = difference in actual and budgeted value for
acttviG i
we have
Di =- ACi - Vi

A positive D, indicates the activity has a cost overrun, while a negative Di indicates a cost underrun. A value of o indicates that actual costs are in agreement
with the budgeted costs.
For example,

shows that activity A, which has aiready -been completed, has a $2000 mst
overrun. However, activrty C with Oc = $1000 $1500 =-$SO0 is currently
showing a cost underrun, or savings, of $500. A complete cost-status report
such as the one shown in Table 6 can now be prepared for the project manag-

er.
TABLE 6
Month 4

Project Cost-Status Report at

Actual
Cost
Activity

Budgeted
Cost
Differences

(AC)

A
3

C
0

F
G
Totals
'Total project cost overrun to date
--.

This cost repod shows the project manager that the costs to date are $0
or budgeted, costs. On a percentage basis, we woulg say
over the e@!in@@gf,
the prGj~H-~g:gxpIps-iendng a ($6500@48,500) x 100 = 13.4% @$t ov&rmn,
which f@r-i$hSt-jjr@e&s
-.- , -s.asq2+~ -.-- ...- is a serious situation. By checking each acj*ity, we . y e
that a $ ~ I J g l ' $ $ %re
. ~ ~ causing
~
the c q ~ovenqn:
t
SiMe a&Ri%$%i~as't&en
.
.
cornpfgtg#~$r!9$;-~$~@yer~n
cannot be corrected; h o ~ e v e r , ~ ~ ~ y i i y4s. .A
:n9-0cess a$@$ri~y:Zgp/o complete. Thus activity E should be-reyie$@ imrneaateiy.
CorreGtivg+xGiOn for adivity E can help to bdng actual cohfs:doser to Me
b~dgetedmssg~
-The manager may also want to consider cost reductjon possibilities for adivlities,~.D,F, and G in order to keep the total projed-cost fiin
the budget.
%

A.LL-,<

,
=
.
A

While the PERT/Gost procedure just described can be an effective cost-control


system, it is n6t without possible drawbacks and implementafio'n problkfns.
first, the activity-by-activity cost-recording system can require significant den'cal effort, especially for firms with large andlor numerous projects. Thus the personnel and other costs associated with maintaining a PERT/Cost system may
offset some of the advantages. Second, questions can arise as to tiow costs
should be allocated to activities to work packages. Overhead, ingirett, and 'even
material costs can -cause cost allocation and measurement problems. Third,
and perhaps most critical, is the fact that PERT/Cost requires a system of cost
recording and control that is significantly different from-most cost-accounting
systems. firms using departments or other organized units as cost centers will
need a substantially revised accounting system to handle the PERT/Cost adivity-oriented system. Problems of modifying accounting procedures andfor a n y k g dual accbunting systems are not trivial matters.

PROJECT MANAGEMENT IN PRACTICE


The X Y Z company, has manufactured home workshop tools for a number of
years. Recently, a member of the company's new-product research team submitted a report suggesting the company consider manufacturing a heavyduty
cordless electric drill that could be powered by a special rechargeable battery,
Because no other manufacturer currently had such a product, management
hoped that the new produd could be manufactured at a reasonable cost and
that its portability would make it extremely attractive.

X Y Z top management would iike to initiate a project to study the feasibility of


this idea. The end result of the feasibility project will be a report recommending
the action to be taken for this new product- The project manager has identified
a Gst of activities and a range of times necessary to complete each activity. This
information is given in Table 7 .
1.

Develop a complete PERT/CPM anafysis for this project. Include in


your report the project network, calculation of expected times and
variances, critical activities, and minimum project-completiondate- In
addition, construct an eady start Gantt chart and compute probabihties for completing the project by weeks 18,20,22, and 24- Discuss
how this information can be used by the project manager at theXYZ
company.
The costs for each activity are given in Table 8 . Develop a total
cost budget based on both an earliest start and a latest start schedule. Shoiv the grkph of feasible budgets for the total project costAlso, prepare a PERTjCost analysis for each of the three points in
time in parts a, b,and c. For each case, show the percent overrun or
underrun for the project to date and indicate any mi~ective
action
that should @ undertaken. Why is this information.importantto the
project rnanager?'(pJote: If an activity is not fisted below, assume
-.
that it has not been started)
N

--

TMLE 7 Activities and Times for the R A . Hamilton Project


Times-(Weeks)

immediate

Activity
A

8
C
0
E
F
G

ti
I

Predecessocs

Description

R & 0 product design


PIan market research
Manu!acttlring process study
Buiid Prototype model
Prepare market questionnaire
Develop cost estimates
Prelimitnary product testing
~ a j k e survey
t
.
Pricing and forecast report
Fml report

2.5

A
A
A

14

3
3

C
0

2
6
2
2.5

25

3.5
5.5

8.E

4.5

9-5
3

5.5
-2

F. G . 4

11

--

TBLE

8 Activity Costs for &c R.A.


Hamilton Projcct
W e d cast
Adivity

Cihousands of DollarsJ

90

0
C
D
E
F
G

16

3
100
6
2

60
20

a. Ar the end of the

fifth week

Actual Cast

mAcllvity

lTharsands of $1

Percent
Completion

62
6

50

80

b. Ac the end of the tenth week


Actual Cost

Activity

0
C
D
E
H

(Thousands of $1

Percent
Completion

85
16
1
100
4
10

c. At thc cnd of the Gfreenth w n k

Actual Cost
Ah-ty

(Thousands of $)

85

0
C
0
E

16

F
G
H
I

3
105
4

55
25
4

Percent
Compktion

I
I

100

,- - - - - - - -- - ..,