Project Organization Types

• Functional: Project is divided and assigned to appropriate functional

entities with the coordination of the project being carried out by
functional and high-level managers

• Functional matrix: Person is designated to oversee the project

across different functional areas

• Balanced matrix: Person is assigned to oversee the project and

interacts on equal basis with functional managers

• Project matrix: A manager is assigned to oversee the project and is

responsible for the completion of the project

• Project team: A manager is put in charge of a core group of

personnel from several functional areas who are assigned to the
project on a full-time basis
Project Organization Continuum

Functional Matrix
Project Matrix

Functional Project Team

Organization Balanced Matrix Organization

Project fully managed

by functional managers Project fully managed by
project team manager
A Business School as a Matrix Organization
Dean

Associate Dean for Associate Dean for Director of

Undergraduate MBA Programs Doctoral Program
Program

Accounting
Department Chair Larry Zelda Diane

Marketing Curly Bob Barby

Department Chair

Finance Department Moe Gloria Leslie

Chair
Matrix Organizations & Project Success

• Matrix organizations emerged in 1960’s as an

alternative to traditional means of project
teams
• Became popular in 1970’s and early 1980’s
• Still in use but have evolved into many different
forms
• Basic question: Does organizational structure
impact probability of project success?
Organizational Structure & Project Success
• Studies by Larson and Gobeli (1988, 1989)
• Sent questionnaires to 855 randomly selected PMI members
• Asked about organizational structure (which one best describes the primary
structure used to complete the project)
• Perceptual measures of project success: successful, marginal, unsuccessful
with respect to :
1) Meeting schedule
2) Controlling cost
3) Technical performance
4) Overall performance
• Respondents were asked to indicate the extent to which they agreed with
each of the following statements:
1) Project objectives were clearly defined
2) Project was complex
3) Project required no new technologies
4) Project had high priority within organization
Study Data
• Classification of 547 respondents (64% response rate)
30% project managers or directors of project mgt programs
16% top management (president, vice president, etc.)
26% managers in functional areas (e.g., marketing)
18% specialists working on projects
• Industries included in studies
14% pharmaceutical products
10% aerospace
10% computer and data processing products
others: telecommunications, medical instruments, glass products,
software development, petrochemical products, houseware goods
• Organizational structures:
13% (71): Functional organizations
26% (142): Functional matrix
16.5% (90): Balanced matrix
28.5% (156): Project matrix
16% (87): Project team
ANOVA Results by Organizational Structure
Controlling Meeting Technical Overall
Cost Schedule Performance Results
Organizational Structure N Ave (SD) Ave (SD) Ave (SD) Ave (SD)
Functional
A Organization 71 1.76 (.83) 1.77 (.83) 2.30 (.77) 1.96 (.84)

B Functional Matrix 142 1.91 (.77) 2.00 (.85) 2.37 (.73) 2.21 (.75)

C Balanced Matrix 90 2.39 (.73) 2.15 (.82) 2.64 (.61) 2.52 (.61)

D Project Matrix 156 2.64 (.76) 2.30 (.79) 2.67 (.57) 2.54 (.66)

E Project Team 87 2.22 (.82) 2.32 (.80) 2.64 (.61) 2.52 (.70)

Total Sample 546 2.12 (.79) 2.14 (.83) 2.53 (.66) 2.38 (.70)
F-statistic 10.38* 6.94* 7.42* 11.45*
A,B < C,D,E
Scheffe Results E<D A,B < C < D,E A,B < C,D,E A,B < C,D,E

*Statistically significant at a p<0.01 level

Summary of Results
• Project structure significantly related to project success

• New development projects that used traditional functional organization

had lowest level of success in controlling cost, meeting schedule,
achieving technical performance, and overall results

• Projects using either a functional organization or a functional matrix had

a significantly lower success rate than the other three structures

• Projects using either a project matrix or a project team were more

successful in meeting their schedules than the balanced matrix

• Project matrix was better able to control costs than project team

• Overall, the most successful projects used a balanced matrix, project

team, or--especially--project matrix
Subcontracting = Business Alliance
n When you subcontract part (or all) of a
project, you are forming a business
alliance....

Intelligent Business Alliances: “A business relationship for

mutual benefit between two or more parties with compatible
or complementary business interests and/or goals”
Larraine Segil, Lared Presentations
Communication and Subcontractors
What types of communication mechanism(s) will be
used between company and subcontractor(s)?

WHAT a company HOW a company

communicates..... communicates.....

How is knowledge
transferred?
Personality Compatibility

Subcontractor
Corporate Personality
Personality

Project

Individual
Personality
Subcontracting Issues
n• What part of project will be subcontracted?
n• What type of bidding process will be used? What type of

contract?
n• Should you use a separate RFB (Request for Bids) for

each task or use one RFB for all tasks?

n• What is the impact on expected duration of project?

n• Use a pre-qualification list?

n• Incentives? Bonus for finishing early? Penalties for

finishing after stated due date?

• What is impact of risk on expected project cost?
 Basic Contract Types
n Fixed Price Contract
u Client pays a fixed price to the contractor irrespective of actual audited
cost of project
n Cost Plus Contract
u Client reimburses contractor for all audited costs of project (labor, plant,
& materials) plus additional fee (that may be fixed sum or percent of costs
incurred)
n Units Contract
u Client commits to a fixed price for a pre-specified unit of work; final
payment is based on number of units produced
 Incentive (Risk Sharing) Contracts
General Form:
Payment to Subcontractor = Fixed Fee + (1 - B) (Project Cost)
where B = cost sharing rate

Cost Plus Contract Fixed Price Contract

B=0 Linear & Signalling B=1

Contracts
 Why Use Incentive Contracts?
Expected Cost of Project = $100M
Two firms bid on subcontract

Firm 1 Firm 2
Fixed Fee (bid) $5 M $7 M
Project Cost $105 M $95 M
(inefficient producer)

What is result if Cost Plus Contract (B = 0) used?

 Washington State Bid Code (WAC 236-48-093)
n WAC 236-48-093: A contract shall be awarded to the lowest responsible and responsive
bidder based upon, but not limited to, the following criteria where applicable and only
that which can be reasonably determined:
n 1) The price and effect of term discounts...price may be determined by life cycle costing
if so indicated in the invitation to bid
n 2) The conformity of the goods and/or services bid with invitation for bid or request for
quotation specifications depicting the quality and the purposes for which they are
required.
n 3) The ability, capacity, and skill of the bidder to perform the contract or provide the
services required.
n 4) The character, integrity, reputation, judgement, experience, and efficiency of the
bidder.
n 5) Whether the bidder can perform the contract with the time specified.
n 6) The quality of performance on previous contracts for purchased goods or services.
n 7) The previous and existing compliance by the bidder with the laws relating to the
contract for goods and services.
n 8) Servicing resources, capability, and capacity.
 Competitive Bidding: Low-Bid System
n “In the low-bid system, the owner wants the most building
for the least money, while the contractor wants the least
building for the most money. The two sides are in basic
conflict.”

Steven Goldblatt
Department of Building
Construction
University of Washington
The Seattle Times, Nov 1,
1987
Precedence Networks
Networks represent immediate precedence relationships
among tasks (also known as work packages or activities)
and milestones identified by the WBS
Milestones (tasks that take no time and cost $0 but indicate
significant events in the life of the project)
Two types of networks: Activity-on-Node (AON)
Activity-on-Arc (AOA)
All networks: must have only one (1) starting and one (1)
ending point
Precedence Networks: Activity-on-Node (AON)

A C

Start End

B D
Precedence Diagramming
Standard precedence network (either AOA or AON) assumes that a successor
task cannot start until the predecessor(s) task(s) have been completed.
Alternative relationships can be specified in many software packages:

Finish-to-start (FS = ): Job B cannot start until  days after Job A is
finished

Start-to-start (SS = ): Job B cannot start until  days after Job A has
started

Finish-to-finish (FF = ): Job B cannot finish until  days after Job A
is finished

Start-to-finish (SF = ): Job B cannot finish until  days after Job A
has started
Critical Path Method (CPM): Basic Concepts

Task A Task B
7 months 3 months

Start
End

Task C
11 months
Critical Path Method (CPM): Basic Concepts
ESA = 0 ESB = 7
LFA = 8 LFB = 11

ESStart = 0 Task A Task B

ESEnd = 11
LFStart = 0 7 months 3 months
LFEnd = 11

Start
End

Task C
11 months
ESC = 0
LFC = 11

ESj = Earliest starting time for task (milestone) j

LFj = Latest finish time for task (milestone) j
AON Precedence Network: Microsoft Project

Task A Task B

2 7d 3 3d
Wed 12/20/00 Thu 12/28/00 Fri 12/29/00 Tue 1/2/01

Start

1 0d End
Wed 12/20/00 Wed 12/20/00
5 0d
Wed 1/3/01 Wed 1/3/01

Task C

4 11d
Wed 12/20/00 Wed 1/3/01
Critical Path Method (CPM): Example 2
ES A =
LFA =
ES F =
LFF =
Task A
14 wks ES D =
LFD = Task F
ES START = 0 9 wks ES END =
LF START = 0 LFEND=
ES B = Task D
LFB = 12 wks
START END
Task B ES E =
9 wks LFE =

Task E
ES C = 6 wks
LFC =

Task C
20 wks
Example 2: Network Paths

Expected
Path Tasks Duration (wks)
1 START-A-D-F-END 35
2 START-A-D-E-END 32
3 START-B-D-F-END 30
4 START-B-D-E-END 27
5 START-C-E-END 26
Example 2: CPM Calculations

EARLI E ST LA T E S T

Task or Duration Start Time Finish Time

Milestone ( ti ) (ESi) Finish Time Start Time (LFi)
START 0 0 0 0 0
A 14 0 14 0 14
B 9 0 9 5 14
C 20 0 20 9 29
D 12 14 26 14 26
E 6 26 32 29 35
F 9 26 35 26 35
END 0 35 35 35 35
Example 2: Calculating Total Slack (TSi)

Total Slack for task i = TSi = LFi - ESi - ti

Earliest Lastest
Task or Duration Start Time Finish Time Total Slack Critical
Milestone ( ti ) (ESi) (LFi) (TSi) Task?
START 0 0 0 0 Yes
A 14 0 14 0 Yes
B 9 0 14 5 No
C 20 0 29 9 No
D 12 14 26 0 Yes
E 6 26 35 3 No
F 9 26 35 0 Yes
END 0 35 35 0 Yes
Slack (Float) Definitions (for task i)
Total Slack (TSi) = LFi - ESi - ti

Free Slack (FSi) = ESi,min - ESi - ti

where ESi,min = minimum early start time of all tasks that

immediately follow task i
= min (ESj for all task j  Si)

Safety Slack (SSi) = LFi - LFi,max - ti

where LFi,max = maximum late finish time of all tasks that

immediately precede task i
= min (LFj for all task j  Pi)

Independent Slack (ISi) = max (0, ESi,min - LFi,max - ti)

Example #2: LP Model
Decision variables: STARTj = start time for task j

END = ending time of project (END milestone)

Minimize END
subject to
STARTj ≥ FINISHi for all tasks i that immediately precede task j

STARTj ≥ 0 for all tasks j in project

where FINISHi = STARTi + ti = STARTi + duration of task i

Example #2: Excel Solver Model
Gantt Chart
February March April May
ID Task Name 21 24 27 1 4 7 10 13 16 19 22 25 28 31 3 6 9 12 15 18 21 24 27 30 3 6 9 12 15 18
1 Start 3/1

2 Task A Workers[5]

3 Task B Workers[7]

4 Task C Workers[3]

5 Task D Workers[12]

6 Task E Workers[2]

7 Task F Workers

8 Task G Workers[2]

9 Task H Workers[5]

10 Task J Workers[6]

11 End 5/10

Microsoft Project 4.0

Project Budgeting
• The budget is the link between the functional units and the project
• Should be presented in terms of measurable outputs
• Budgeted tasks should relate to work packages in WBS and
organizational units responsible for their execution
• Should clearly indicate project milestones
• Establishes goals, schedules, and assigns resources (workers,
organizational units, etc.)
• Should be viewed as a communication device
• Serves as a baseline for progress monitoring & control
• Update on rolling horizon basis
• May be prepared for different levels of aggregation
(strategic, tactical, short-range)
Project Budgeting (cont’d)

• Top-down Budgeting: Aggregate measures (cost,

time) given by top management based on
strategic goals and constraints

• Bottom-up Budgeting: Specific measures aggregated

up from WBS tasks/costs and subcontractors
Issues in Project Budgets
• How to include risk and uncertainty factors?

• How to measure the quality of a project budget?

• How often to update budget?

• Other issues?
Critical Path Method (CPM): Example 2
ES A = 0
LFA = 14
ES F = 26
LFF = 35
Task A
14 wks ES D = 14
LFD = 26 Task F
ES START = 0 9 wks ES END = 35
LF START = 0 LFEND= 35
ES B = 0 Task D
LFB = 14 12 wks
START END
Task B ES E = 26
9 wks LFE = 35

Task E
ES C = 0 6 wks
LFC = 29

Task C
20 wks
 Project Budget Example
No. of No. of
Task or Duration Early Start Latest Start Resource A Resource B Material Direct Labor Labor +
Milestone (tj) Time (ESj) Time (LSj) workers workers Costs Cost/wk Materials
START 0 0 0 - - - - -
A 14 0 0 2 0 $ 340 $ 800 $ 1,140
B 9 0 5 4 12 $ 125 $ 8,800 $ 8,925
C 20 0 9 3 14 $ - $ 9,600 $ 9,600
D 12 14 14 0 8 $ 200 $ 4,800 $ 5,000
E 6 26 29 1 0 $ 560 $ 400 $ 960
F 9 26 26 4 10 $ 90 $ 7,600 $ 7,690
END 0 35 35 - - - - -

Cost for Resource A worker = $400/week

Cost for Resource B worker = $600/week
 Project Budget Example (cont’d)
Early Start Times Week
Task 1 2 3 4 5 6 7 8 9 10 11 12
A 1140 800 800 800 800 800 800 800 800 800 800 800
B 8925 8800 8800 8800 8800 8800 8800 8800 8800
C 9600 9600 9600 9600 9600 9600 9600 9600 9600 9600 9600 9600
D
E
F
Weekly Subtotals 19665 19200 19200 19200 19200 19200 19200 19200 19200 10400 10400 10400
Cumulative 19665 38865 58065 77265 96465 115665 134865 154065 173265 183665 194065 204465

Late Start Times Week

Task 1 2 3 4 5 6 7 8 9 10 11 12
A 1140 800 800 800 800 800 800 800 800 800 800 800
B 8925 8800 8800 8800 8800 8800 8800 8800
C 9600 9600 9600 9600
D
E
F
Weekly Subtotals 1140 800 800 800 9725 9600 9600 9600 19200 19200 19200 19200
Cumulative 1140 1940 2740 3540 13265 22865 32465 42065 61265 80465 99665 118865
Cumulative Costs
450000

400000

350000

300000 Range of
Cumulative Cost

250000 feasible budgets

200000

150000

100000

50000

0
1

11

13

15

17

19

21

23

25

27

29

31

33
Week

Early Start Schedule Late Start Schedule

Weekly Costs (Cash Flows)
25000

20000

15000
Weekly Costs

10000

5000

0
1

11

13

15

17

19

21

23

25

27

29

31

33
Week

Early Start Schedule Late Start Schedule

Managing Cash Flows
• Want to manage payments and receipts
• Must deal with budget constraints on
project and organization requirements (e.g.,
payback period)
• Organization profitability
Cash Flow Example
Make payment
of $5000

M1

Task A
2 mos
Receive payment
Task D of $3000
8 mos

START Task C
4 mos
END
Task B
8 mos Task E
3 mos

M2

Receive payment
of $3000
Cash Flow Example: Solver Model
Material Management Issues

When to order materials? How much to order?

Example:
• Single material needed for Task B (2 units) and Task E (30 units)
• Fixed cost to place order = S
• Cost of holding raw materials proportional to number of unit-weeks in
stock
• Cost of holding finished product greater than the cost of holding raw
materials
• Project can be delayed (beyond 17 weeks) at cost of $P per week
Material Management Example
LSA = 0 LSB = 4 LSC = 12

Task A Task B Task C

4 wks 8 wks 5 wks

Start 2 units
End
LSD = 6 LSE = 12 LSF = 14

Task D Task E Task F

6 wks 2 wks 3 wks

30 units
Lot-Sizing Decisions in Projects
• To minimize holding costs, only place orders at Late Starting Times
• Can never reduce holding costs by delaying project

Time
1 2 3 4 5 6 7 8 9 10 11 12

Demand: 2 30

Order option #1: 32

Order option #2: 2 30

Choose the option that minimizes inventory cost = order cost + holding
cost of raw materials