Lecture 4 - Understanding Uncertainty in Scheduling and Costing

Lecture 4 – Understanding Uncertainty in Scheduling and Costing
Project Risk Management
MS (PM)
Scheme
2
 Importance of Project Risk Management (PRM)

 Understanding How PRM Addresses Uncertainty in Costing
 WBS & Reporting Levels
 Project Cost Management
 Project Cost Baseline, Project Funding Requirements and Project Budget
 Budgeting Process
 Types of Estimates
 Three-point Estimates
Bilal Atiq PMP & RMP PMI

Scheme
3
 PRM and Uncertainty in Budgeting Process

 Calculating the Cost Contingencies
 CPM
 PERT
 Understanding How PRM Addresses Uncertainty in Scheduling

Importance of Project Risk Management
4
 PRM addresses the uncertainty in project estimates and assumptions.
 Example:
 Project scheduling provides dates and critical paths based on

activity durations and resource availability assumed to be known
with certainty.
 Quantitative risk analysis explores the uncertainty in the estimated

durations and may provide alternative dates and critical paths that
are more realistic.
5
 PRM adds the perspective of project risk to the outputs of other

processes and adds to their value by taking risk into account.
 Example:
 PRM provides the basis upon which to estimate the amount of cost
and schedule contingency reserves that are needed to cover the risk
response actions to a required level of confidence for meeting
project objectives.

6
Understanding How Project Risk Management

Addresses Uncertainty in Costing

7
. . . but before that let’s have a quick recap of some important

basic concepts used in costing & budgeting

WBS WBS Reporting Levels
Work Breakdown Structure (WBS)

8
 It is a hierarchical decomposition of the total scope of work to be

carried out by project team to accomplish project objectives and
create the deliverables.
 The level of decomposition is often guided by the degree of control

needed to effectively manage the project, e.g. 8-80, 3-30-300 rules.
 The planned work is contained within the lowest level of WBS

components, which are called work packages.
 In context of WBS, work refers to work products or deliverables that

are the result of activity and not to the activity itself.
Work Breakdown Structure (WBS)

9
 If an agile approach is used, epics can be decomposed into user

stories.
 The total of the work at the lowest levels should roll up to the higher
levels so that nothing is left out (what all is necessary) and no extra
work is performed (only what is necessary), A.K.A. 100% rule.
 Decomposition may not be possible for a deliverable or

subcomponent that will be accomplished far into the future and
project team usually waits until the details of the WBS can be
developed (rolling wave planning).
Sample WBS Organized by Phases (Ref: PMBoK Guide, 6th Edition)

10
Sample WBS with Major Deliverables (Ref: PMBoK Guide, 6th Edition)
11
WBS Reporting Levels – Work Package

12
 A work package is the work defined at the lowest level of the WBS for
which ,cost and duration can be estimated and managed.
 Therefore, a work package can be used to group the activities where work
is scheduled and estimated, monitored, and controlled.
 The lowest level of WBS is a work package with a unique identifier.
 These identifiers provide a structure for hierarchical summation of costs,

schedule, and resource information and form a code of accounts.
 Each work package is part of a control account.

WBS Reporting Levels – Work Package

13
 It contains a discrete segment of work below the control account level

that is defined by:
 A description or brief work statement.

 Starting and ending dates
 Completion milestone
 Work-in-process measure
 Time-phased budget
 It is important that the duration of work package be neither too short nor
too long.

WBS Reporting Levels – Control Account

14
 A control account is a management control point where scope,

budget, and schedule are integrated and compared to the earned
value for performance measurement.
 Sometimes, control account is also referred to as cost accounts.
 It has two or more work packages, though each work package is

associated with a single control account.
 It may include one or more planning packages.

WBS Reporting Levels – Control Account

15
 A Control Account Manager (CAM) is responsible for executing the

Statement of Work related to their assigned control account(s).
 A control account is used for:
 Cost summarization
 Variance analysis and reporting
 Responsibility assignment
 Scope description
 Corrective action planning
WBS Reporting Levels – Planning Package

16
 A planning package is a work breakdown structure component

below the control account and above the work package with known
work content but without detailed schedule activities.
 It reflects a future segment of work within a control account that is

not yet broken down into detailed work packages.
 A planning package has a firm budget, estimated start and end

dates, and statement of work.

WBS Reporting Levels – Planning Package

17
 As work becomes more clearly defined, planning packages are

converted into work packages with he following constraints:
 All planning packages are converted into work packages as

requirements are defined.
 Conversion of planning packages to work packages is reviewed by
the Project Manager and Sponsor.
 Any conversion involving a change to the schedule or budget of
the control account must be accomplished by approval from
senior management.

Project Cost ManagementCost Baseline Funding Requirements Project Budget
Project Cost Management

18
Includes the processes involved in

planning, estimating, budgeting,
financing, funding, managing, and
controlling costs so that the project can
be completed within the approved
budget.

Project Cost Management Cost Baseline Funding Requirements Project Budget
Cost Baseline
19
Management Reserve
 The Cost baseline is the approved version of the time-phased project budget,
excluding any management reserves, which can only be changed through BAC
formal
change control procedures.
 It is typically displayed in the form of an S-curve.

Cumulative Values
Cost Baseline
Bilal Atiq PMP & RMP PMI Time

Cost Baseline
20
 It is developed as a summation of the approved budgets for the different

schedule activities.
 Cost estimates for the various project activities, along with any contingency
reserves for these activities, are aggregated into associated work package costs.
 The work package cost estimates, along with any contingency reserves
estimated for the work packages, are aggregated into control accounts.
 The summation of the control accounts make up the cost baseline.

Project Funding Requirements

21
Management Reserve
 Total funding requirements and periodic funding BAC
requirements (e.g., quarterly, annually) are
derived from the cost baseline.
Funding often Funding

occurs Requirements
Cumulative Values
 in incremental amounts,
and may not be evenly distributed, which appear
as steps.
Cost Baseline
 The total funds required are those included in the
cost baseline plus management reserves.

Project Budget Project Budget
22
Management Reserve
 Budget is the approved estimate for the
BAC
project or any work breakdown structure
component or any schedule activity.
Project BudgetFunding
is the Requirements
Cumulative Values
 sum of cost baseline

and the management reserves.
 As changes warranting the use Cost Baseline

of
management reserves arise, the change
control process is used to obtain approval to
move the applicable management reserve
funds into the cost baseline.
Budgeting Process Types of Estimates Three-point Estimates
Budgeting Process
23

24
25

26
Types of Estimates
27
1. Expert Judgment from technical Subject Matter Experts

Estimating Description Type WBS General Time to
Method Relationship Accuracy Prepare
Uses actual historical
2. Analogous data from previous ROM Top Down -25 to +75% Days
similar projects
Uses an algorithm to
3.Parametric calculate cost or duration
based on historical data Budget Top Down -10 to + 25% Weeks
Estimating and project parameters
(e.g. per square foot cost)
Aggregates the estimates +/- 10%
4.Engineering of the lower level Definitive Bottom Up Or Months
components of the WBS -5 to +10%

Three-Point Estimates
28
 Instead of providing activity estimates as a

discrete number, such as four weeks, it is often
helpful to create a three-point estimate.
 It is an estimate that includes an optimistic, most-

likely and pessimistic estimate, such as three
weeks for the optimistic (best case scenario), four
weeks for the most likely, and five weeks for the
pessimistic (worst case scenario) estimate.
 Three-point estimates are needed for PERT and

Monte Carlo simulations.

Three-Point Estimates
29
 Optimistic Time (to) – It is the shortest time taken to

complete the activity. It means that if everything goes
well then there is more chance of completing the
activity within this time.
 Most Likely Time (tm) – It is the normal time taken to

complete an activity, if the activity were frequently
repeated under the same conditions.
 Pessimistic Time (tp) – It is the longest time that an

activity would take to complete. It is the worst time
estimate that an activity would take if unexpected
problems are faced.
PRM and Budgeting Process
30
WBS Element Best Case Most Likely Worst Case
Design $ 4M $ 6M $ 10M
Build $ 16 $ 20M $ 35M
Test $ 11 $ 15M $ 23M
Total Project $ 31 M $ 41M $ 68M
Interviewing relevant stakeholders helps determine the three-point
estimates for each WBS element.

31

32
 The cumulative distribution, assuming the given data ranges and triangular
distribution, shows that project is only 12% likely to meet the $41M estimate.
 If a conservative organization wants a 75% likelihood of success, a budget of

$50M is required.
 That means a contingency of nearly 22% ($50M-$41M)/$41M is required.

33
Understanding How Project Risk Management

Addresses Uncertainty in Scheduling

34
. . . but before that let’s have a quick recap of CPM and PERT
CPM PERT PRM and Scheduling
Critical Path Method (CPM)

35
 In 1957, the Critical Path Method (CPM) was developed as a network

model for project management.
 CPM is a deterministic method, which uses a fixed time estimate for

each activity.
 While CPM is easy to use, it does not consider the time variations
that can have a great impact on the completion time of a real life
project.


36
 It is a network diagramming technique used to predict total project

duration by finding the critical path.
 A critical path for a project is the series of activities that determines

the earliest time by which the project can be completed.
 The critical path is the longest path through the network diagram
and has the least amount of slack or float.
 Slack or float is the amount of time and activity can be delayed

without delaying a successor activity or the project finish date.

37
EARLY START: When can the activity start at the earliest?

ES ACTIVITY IDENTIFIER EF
S EARLY FINISH: When can the activity finish at the earliest?
L ACTIVITY LATE START: When can the activity start at the latest?
A DESCRIPTION
C LATE FINISH: When can the activity finish at the latest?
K
SLACK: Time for which an activity can be delayed without
LS ACTIVITY DURATION LF delaying the successor activity or project finish date.
CPM Node

Activity Description Preceding Activity

Activity Duration
A Approval of application None 5
B Consultation plans A 15
C Traffic study A 10
D Service availability check A 5
E Staff report B, C 15
F Commission approval B, C, D 10
G Wait for consultation F 170
H Occupancy E, G 35
Preceding Activity
Activity
ES ACTIVITY EF Forward Pass Activity Duration
S IDENTIFIER ES + Duration = EF A None 5

B A 15
L ACTIVITY
C A 10
A DESCRIPTION
5 B 20 20 E 35 D A 5
C39
E B, C 15
K
LS ACTIVITY LF Construction Plan Staff F B, C, D 10
20
DURATION Report G F 170
H E, G 35
15 15 15
35
5 20
0 A 5 5 C 15 20 F 30 200 H 235
Traffic Commission
Approval of 5 Study
15
Approval
Occupancy
Application
5 10 10 35
10 30
5
200
5 D 10 30 G 200
Service Wait for
Availability Construction
Check
5 170
Backward Pass
LS + Duration = LF
40 5 B 20 20 E 35
Construction Plan 185 Staff

Report
5 15 20 185 15 200
185
5 20 200
0 A 5 5 C 15 20 F 30 200 H 235
Approval of 10 Traffic 20 Commission Occupancy

Application Study Approval
0 5 5 10 10 20 20 10 30 200 35 235
20 30
15
200
5 D 10 30 G 200
Service Wait for

Availability Check Construction
15 5 20 30 170 200
Slack = LS – ES = LF – EF
41 5 B 20 20 E 35

Report
5 15 20 185 15 200
185
5 20 200
0 A 5 5 C 15 20 F 30 200 H 235

Application Study Approval
0 5 5 10 10 20 20 10 30 200 35 235
20 30
15
200
5 D 10 30 G 200
Service Wait for

Availability Check Construction
15 5 20 30 170 200
Slack = LS – ES = LF – EF
42 5 B 20 20 E 35

0 165 Report
5 15 20 185 15 200
185
5 20 200
0 A 5 5 C 15 20 F 30 200 H 235

0 5 Study 0 Approval 0
Application
0 5 5 10 10 20 20 10 30 200 35 235
20 30
15
200
5 D 10 30 G 200
Service Wait for

10 Availability Check 0 Construction
15 5 20 30 170 200
CP: ABFGH
Program Evaluation and Review Technique (PERT)

43
 In critical path method, the time estimates are assumed to be

known with certainty.
 Sometimes, project like R & D projects and new product

development projects, it is difficult to estimate the duration of
various activities with certainty.
 PERT is a network analysis technique used to estimate project

duration in such projects, i.e. projects with a high degree of
uncertainty about the individual activity duration.
Program Evaluation and Review Technique (PERT)

44
 PERT was developed in the late 1950s for the US Navy’s Polaris
project (SLBM) having thousands of contractors.
 PERT uses probabilistic time estimates, i.e. duration estimates based

on optimistic, most likely and pessimistic estimates of activity
durations, or a three-point estimate.
 It has the potential to reduce both time and cost required to

complete a project.
PERT Formulae
45
 PERT uses following formulae to calculate mean/average and variance:
(Sigma Square)

PERT Formulae
46
 Using PERT formula, we can calculate an average expected duration, standard

deviation from the expected duration and the overall range of duration.
 For Example:
 Average expected duration = 240 days

 Standard deviation from the expected duration = +/- 10 days
 Range of expected duration = 230 – 250 days
PRM and Scheduling

47
Activity Description Preceding Activity Duration

Activity (Three-point estimate)
A Approval of application None 5, 8, 4

B Consultation plans A 12, 15, 17
C Traffic study A 6, 10, 11
D Service availability check A 3, 5, 6
E Staff report B, C 9, 15, 21
F Commission approval B, C, D 9, 10, 14
G Wait for consultation F 140, 170, 191
H Occupancy E, G 29, 35, 42
PRM and Scheduling

48
Activity Description Preceding Activity PERT Average

Activity Duration (Ta)
A Approval of application None 5, 8, 4 5.33
B Consultation plans A 12, 15, 17 14.83
C Traffic study A 6, 10, 13 9.83
D Service availability check A 3, 5, 8 5.17
E Staff report B, C 9, 15, 21 15.00
F Commission approval B, C, D 9, 10, 14 10.50
G Wait for consultation F 140, 170, 191 168.5
H Occupancy E, G 29, 35, 42 35.17
PRM and Scheduling

49
Activity Preceding Activity Activity Duration PERT Average (Ta)

A None 5, 8, 4 5.33
B A 12, 15, 17 14.83
C A 6, 10, 13 9.83
D A 3, 5, 8 5.17
E B, C 9, 15, 21 15.00
F B, C, D 9, 10, 14 10.50
G F 140, 170, 191 168.5
H E, G 29, 35, 42 35.17
Critical path = tA + tB + tF + tG + tH = 5.33 + 14.83 + 10.5 + 168.5 + 35.17 = 234.33

PRM and Scheduling

50
Activity Preceding Activity Activity Duration PERT Average (Ta) Variance

A None 5, 8, 4 5.33
B A 12, 15, 17 14.83
C A 6, 10, 13 9.83
D A 3, 5, 8 5.17
E B, C 9, 15, 21 15.00
F B, C, D 9, 10, 14 10.50
G F 140, 170, 191 168.5
H E, G 29, 35, 42 35.17

PRM and Scheduling

51

A None 5, 8, 4 5.33 0.45
B A 12, 15, 17 14.83 0.69
C A 6, 10, 13 9.83
D A 3, 5, 8 5.17
E B, C 9, 15, 21 15.00
F B, C, D 9, 10, 14 10.50 0.69
G F 140, 170, 191 168.5 72.25
H E, G 29, 35, 42 35.17 4.71

PRM and Scheduling

52

A None 5, 8, 4 5.33 0.45
B A 12, 15, 17 14.83 0.69
C A 6, 10, 13 9.83
D A 3, 5, 8 5.17
E B, C 9, 15, 21 15.00
F B, C, D 9, 10, 14 10.50 0.69
G F 140, 170, 191 168.5 72.25
H E, G 29, 35, 42 35.17 4.71
Total Variance 78.79
PRM and Scheduling

53
Critical path = 234.33

Variance = 78.89
Standard deviation = √variance = √ 78.89 = +/- 8.88
Expected Project Duration = 234.33 +/- 8.88 days
Range = 225.45 – 243.21 days

54
 PRM addresses the uncertainty in project estimates and assumptions.
 Example:
 Project scheduling provides dates and critical paths based on

activity durations and resource availability assumed to be known
with certainty.
 Quantitative risk analysis explores the uncertainty in the estimated

durations and may provide alternative dates and critical paths that
are more realistic.
55
 PRM adds the perspective of project risk to the outputs of other

processes and adds to their value by taking risk into account.
 Example:
 PRM provides the basis upon which to estimate the amount of cost
and schedule contingency reserves that are needed to cover the risk
response actions to a required level of confidence for meeting
project objectives.

56
Thank You

Assignment #1
57
Activity Description Preceding Activity Activity

Activity Duration Duration
A Land Acquisition None 7 5, 8, 4
B Site Clearance A 12 12, 15, 17
C Foundation B 11 6, 10, 13
D Walls Construction C 25 13, 25, 18
E Roof Work C, D 10 9, 15, 19
F Plastering D,E 7 9, 10, 14
G Woodwork E,F 35 40, 30, 45
H Final Paint Work G 30 29, 35, 42
Required Deliverables
58
Critical Path Duration (deterministic) = ?

Variance = ?
Standard deviation = ?
Expected Project Duration = ? days
Range = ? days

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Lecture 4 – Understanding Uncertainty in Scheduling and Costing

Project Risk Management

 Importance of Project Risk Management (PRM)

Bilal Atiq PMP & RMP PMI

 PRM and Uncertainty in Budgeting Process

Bilal Atiq PMP & RMP PMI

 PRM addresses the uncertainty in project estimates and assumptions.

 Project scheduling provides dates and critical paths based on

 Quantitative risk analysis explores the uncertainty in the estimated

 PRM adds the perspective of project risk to the outputs of other

Bilal Atiq PMP & RMP PMI

Understanding How Project Risk Management

Bilal Atiq PMP & RMP PMI

. . . but before that let’s have a quick recap of some important

Bilal Atiq PMP & RMP PMI

Work Breakdown Structure (WBS)

 It is a hierarchical decomposition of the total scope of work to be

 The level of decomposition is often guided by the degree of control

 The planned work is contained within the lowest level of WBS

 In context of WBS, work refers to work products or deliverables that

Work Breakdown Structure (WBS)

 If an agile approach is used, epics can be decomposed into user

 Decomposition may not be possible for a deliverable or

Sample WBS Organized by Phases (Ref: PMBoK Guide, 6th Edition)

WBS Reporting Levels – Work Package

 The lowest level of WBS is a work package with a unique identifier.

 These identifiers provide a structure for hierarchical summation of costs,

 Each work package is part of a control account.

WBS Reporting Levels – Work Package

 It contains a discrete segment of work below the control account level

 A description or brief work statement.

Bilal Atiq PMP & RMP PMI

WBS Reporting Levels – Control Account

 A control account is a management control point where scope,

 Sometimes, control account is also referred to as cost accounts.

 It has two or more work packages, though each work package is

 It may include one or more planning packages.

WBS Reporting Levels – Control Account

 A Control Account Manager (CAM) is responsible for executing the

 A control account is used for:

WBS Reporting Levels – Planning Package

 A planning package is a work breakdown structure component

 It reflects a future segment of work within a control account that is

 A planning package has a firm budget, estimated start and end

Bilal Atiq PMP & RMP PMI

WBS Reporting Levels – Planning Package

 As work becomes more clearly defined, planning packages are

 All planning packages are converted into work packages as

Bilal Atiq PMP & RMP PMI

Project Cost Management

Includes the processes involved in

Bilal Atiq PMP & RMP PMI

 It is typically displayed in the form of an S-curve.

Bilal Atiq PMP & RMP PMI Time

 It is developed as a summation of the approved budgets for the different

 The summation of the control accounts make up the cost baseline.

Bilal Atiq PMP & RMP PMI

Project Funding Requirements

Funding often Funding

Bilal Atiq PMP & RMP PMI Time

Project Budget Project Budget

 sum of cost baseline