9618$$ $CH2 09-06-02 14:59:11 PS 69 Time Management Figure 2-13. Critical path method. Write Code Mon 7/31/00 Mon 7/31/00 Purchase Hardware Thu 8/31/00 Design Software Mon 7/10/00 Mon 7/10/00 Evaluate and Select Mon 7/10/00 Thu 7/13/00 Mon 8/28/00 Thu 9/14/00 Approval from Stakeholders Mon 7/3/00 Mon 7/3/00 Select Site Mon 10/9/00 Mon 7/10/00 Thu 7/13/00 Thu 10/12/00 Installation Complete—Approval Thu 10/19/00 Thu 10/19/00 Integrate Thu 10/12/00 Thu 10/12/00 Develop Project Deliverables Mon 6/12/00 Mon 6/12/00 Mon 9/11/00 Mon 9/11/00 Thu 9/14/00 Thu 9/14/00 Fri 9/8/00 Fri 9/8/00 Tue 8/29/00 Fri 7/14/00 Tue 7/18/00 Fri 7/28/00 Fri 7/28/00 Vendors Wed 8/23/00 Test Hardware Fri 9/1/00 Wed 7/19/00 Tue 8/1/00 Fri 7/7/00 Fri 7/7/00 Fri 10/13/00 Fri 10/13/00 Fri 9/15/00 Fri 9/15/00 Fri 6/30/00 Fri 6/30/00 Test 9618$$ $CH2 09-06-02 14:59:12 PS 70 Preparing for the Project Management Professional Certification Exam The normal probability distribution relates the event of something hap- pening to the probability that it will occur. It turns out that by experiment, the normal distribution describes many phenomena that actually occur. The duration as well as the estimated cost of project activities comes close to matching a normal distribution. In reality, another distribution, called the beta distribution, fits these phenomena better, but the normal curve is close enough for practical purposes. Suppose we have a scheduled activity that has an expected completion time of thirty-five days. In figure 2-14, the curve shows the probability of any other day occurring. Since thirty-five days is the expected value of the activity, it follows that it would have the highest probability of all of the other possibilities. Another way of saying this is that, if all of the possibilities are shown, then they represent 100 percent of the possibilities and 100 per- cent of the probability. If it were possible for this project to be done thousands and thousands of times, sometimes the time to do the activity would be 35 days, other times it would be 33 days, and still other times it would be 37 days. If we were to plot all of these experiments we would find that 35 days occurred most often, 34 days occurred a little less often, 30 days even less, and so on. Experimentally, we could develop a special probability distribution for this particular activity. The curve would then describe the probability that any particular duration would occur when we really decided to do the project and that task. In the experiment, if 35 days occurred 134 times and the experiment was performed 1,000 times, we could say that there is a 13.4 percent chance that the actual doing of the project would take 35 days. All 1,000 of the activity times were between 20 and 50 days. It is impractical to do this activity a thousand times just to find out how long it will take when we schedule it. If we are willing to agree that many phenomena, such as schedule durations and cost, will fit the normal probability distribution, then we can avoid doing the experiment and instead do the mathematics. To do this we need only have a simple way to approxi- mate the mean and standard deviation of the phenomena. The mean value is the middle of the curve along the x-axis. This is the average or expected value. A good approximation of this value can be ob- tained by asking the activity estimator to estimate three values instead of the usual one. Ask the estimator to estimate the optimistic, the pessimistic, and the most likely. (The estimator is probably doing this anyway.) The way people perform the estimating function is to think about what will happen if things go well, what will happen if things do not go well, and then what 9618$$ $CH2 09-06-02 14:59:12 PS Time Management 71 Table 2-2. PERT exercise. Most CP Act Description Optimistic Pessimistic Likely EV SD Variance CP EV Variance 1 Develop project deliverables 13 16 15 14.83 0.50 0.2500 14.83 0.2500 2 Approval from stakeholders 4 6 5 5.00 0.33 0.1111 5.00 0.1111 3 Site selection 4 4 4 4.00 0.00 0.0000 4 Evaluate and select vendor 4 5 4 4.17 0.17 0.0278 5 Purchase hardware 3 3 3 3.00 0.00 0.0000 6 Design software 14 17 15 15.17 0.50 0.2500 15.17 0.2500 7 Write code 24 33 30 29.50 1.50 2.2500 29.50 2.2500 8 Test software 4 4 4 4.00 0.00 0.0000 4.00 0.0000 9 Test hardware 9 11 10 10.00 0.33 0.1111 10 Integrate hardware and software 20 23 20 20.50 0.50 0.2500 20.50 0.2500 11 Install and final acceptance 5 5 5 5.00 0.00 0.0000 5.00 0.0000 Sumס 94.00 3.1111 sq. rt. var.סSD 1.763834 9618$$ $CH2 09-06-02 14:59:14 PS 72 fi 35 Days TEAMFLY Team-Fly ® Preparing for the Project Management Professional Certi cation Exam Figure 2-14. Schedule probability. is likely to really happen. This being the case, the three values we need are free for the asking. These are the optimistic, the pessimistic, and the most likely values for the activity duration. If we have these three values, it becomes simple to calculate the ex- pected value and the standard deviation. For the expected value we will take the weighted average: Expected value ס [Optimistic ם Pessimistic ם (4 ן Most likely)] / 6 Standard deviation ס (Pessimistic מ Optimistic) / 6 With these two simple calculations we can calculate the probability and a range of values that the dates for the completion of the project will have when we actually do the project. For the purpose of ease of calculation, if we were to decide that 95.5 percent probability would be sufficient for our purposes, then it turns out that this happens to be the range of values that is plus or minus 2 standard deviations from the mean value. If the expected value of the schedule is 93 days and the standard devia- tion is 3 days, we could make the statement: This project has a probability of 95 percent that it will be finished in 87 to 99 days. For example, suppose we use the same example we used earlier. This time we have probabilistic dates instead of the specific ones that we had before. We have collected estimates on the duration of each of the activities and show the optimistic, pessimistic, and most likely values in the table. The expected value is from the formula: 9618$$ $CH2 09-06-02 14:59:14 PS 73 Time Management EV ס [Optimistic ם Pessimistic ם (4 ן Most likely)] / 6 The standard deviations can be calculated using the formula: Standard deviation ס (Pessimistic מ Optimistic) / 6 One thing must be pointed out here. Unlike cost estimating, where the cost of every activity in the project must be added up to get the total cost, the sum of the time it will take to do the project is the sum of the expected value of the items that are on the critical path only. Other activities in the project do not contribute to the length of the project, because they are done in parallel with the critical path. The sum of the durations for the critical path items is 18.3 days. The standard deviation is 2.3 days. We can say that there is a 95 percent probabil- ity that the project will be finished in 13.7 days to 22.9 days. Monte Carlo Simulation When a schedule with activities that have uncertainty associated with their durations is encountered, the PERT method can be used to help predict the probability and range of values that will encompass the actual duration of the project. While the PERT technique uses the normal and beta distributions to determine this probability and range of values, there is a serious flaw in the results. The assumption made in the PERT analysis is that the critical path of the project remains the same under any of the possible conditions. This is, of course, a dangerous assumption. In any given set of possibilities it is quite possible that the critical path may shift from one set of activities to another, thus changing the predicted completion date of the project. In order to predict the project completion date when there is a possibil- ity that the critical path will be different for a given set of project conditions, the Monte Carlo simulation must be used. The Monte Carlo simulation is not a deterministic method like many of the tools that we normally use. By that I mean that there is no exact solution that will come from the Monte Carlo analysis. What we will get instead is a probability distribution of the possible days for the completion of the project. Monte Carlo simulations have been around for some time. It is only recently that the use of personal computers and third party software for project management has become inexpensive enough for many project man- agers to afford. 9618$$ $CH2 09-06-02 14:59:15 PS 74 Preparing for the Project Management Professional Certification Exam The Simulation In our project schedule, the predecessors and successors form a critical path. As I explained earlier, the critical path is the list of activities in the project schedule that cannot be delayed without affecting the completion date of the project. These are the activities that have zero float. Float is the number of days an activity can be delayed without affecting the completion date of the project. When we have uncertainty in the duration times for the activities in the schedule, it means that there is at least a possibility that the activity will take more time or less time than our most likely estimate. If we used PERT to make these calculations, we already have calculated the mean value and the standard deviation for the project and all of the activities that have uncer- tainty. The Monte Carlo simulator randomly selects values that are the possi- ble durations for each of the activities having possible different durations. The selection of a duration for each activity is made, and the calculation of the project completion date is made for that specific set of data. The critical path is calculated, as well as the overall duration and completion date for the project. The simulator usually allows for the selection of several probability distributions. This can be done for one activity, a group of activities, or the entire project. Depending on the software package being used, a selection of probability distributions is offered, such as: uniform, binomial, triangular, Poisson, beta, normal, and others. The Monte Carlo simulation works in a step-by-step way: 1. A range of values is determined for the duration of each activity in the schedule that has uncertainty in its duration. 2. A probability distribution is selected for each activity or group of activities. 3. If necessary, the mean and standard deviation are calculated for each activity. 4. The network relationships between the activities are entered. 5. The computer simulation is begun. 6. A duration time is selected for each activity in the schedule, whether it is on the critical path or not. 7. The critical path, duration of the project, float, and other schedule data are calculated. 8. This process is repeated many times until the repetitions reach a 9618$$ $CH2 09-06-02 14:59:15 PS 75 Time Management certain predefined number of cycles or until the results reach a cer- tain accuracy. 9. Output reports are generated. Output from the Monte Carlo Simulation The most common output from a Monte Carlo simulation is a chart show- ing the probability of each possible completion date. This is usually shown as a frequency histogram. Generally, a cumulative plot is made as well. In this way you may see graphically the probability of each of the possible dates. This clearly shows the most likely dates for project completion. Because of the shifting of the critical path, it is quite possible for early dates and late dates to be the most likely, with unlikely dates in between them. A cumulative curve is also generated showing the cumulative probabil- ity of completing the activity before a given date. The criticality index can also be calculated. This is the percentage of the time that a particular activity is on the critical path. In other words, if a simulation were run 1,000 times and a particular activity was on the critical path 212 times, its criticality index would be 21.2 percent. Summary Time management of a project produces the schedule baseline. The activities of the project must be defined before they can be scheduled. The work breakdown structure provides the individual activities to be scheduled. There is a one-to-one relationship between the activities described at the bottom of the work breakdown structure and the activities that are scheduled in the project schedule. Activity durations for the schedule are determined in the estimating process. The activities are sequenced in the logical order in which they are done. This logical ordering is represented in a network diagram. The network diagramming method in use today is the precedence diagram. With the use of the correct logical relationship and the leads and lags, every logical rela- tionship in the schedule can be diagrammed. Fast tracking and crashing are two techniques for reducing schedules that must have a promise date sooner than predicted by the schedule. Buffer- ing is a technique for increasing schedules that can have a promise date later than the date predicted by the schedule. The critical path method is a method of managing a project by applying 9618$$ $CH2 09-06-02 14:59:16 PS 76 Preparing for the Project Management Professional Certification Exam the management effort of the project manager and the efforts of the project team in the most effective way. Activities with little or no float are given more attention than activities with float or great amounts of float. PERT is a technique that is used to predict project completions when there is a great deal of uncertainty in the estimated durations. PERT makes a statistical approximation of the project completion by using the estimate for the optimistic, pessimistic, and most likely duration for each task. The Monte Carlo simulation is used to eliminate a problem associated with PERT. The problem is that the critical path may move from activity to activity under different conditions. Monte Carlo is a simulation technique that runs many schedules with selected durations, statistically calculates the effect of variable durations, and reports (statistically) the results. CHAPTER 3 Cost Management C ost management is the completion of the project management triple constraint of cost, schedule, and scope. Each of these must be com- pleted in order to complete the project on time and on budget and to meet all of the customer’s expectations. In order to meet the cost goals of the project, the project must be completed within the approved budget. Why We Need Cost Management The project manager is primarily concerned with the direct cost of the proj- ect, but the trend in project management is that the role of the project manager in cost control will increase to include more of the nontraditional areas of cost control. In the future it will be expected that more project managers will have a great deal of input into the indirect costs and expenses of the project. Regardless of what the project manager is or is not responsible for, it is critical that the project be measured against what the project manager is responsible for and nothing else. If the project manager does not have re- sponsibility for the material cost of the project, then it makes no sense for the project manager to be measured against this metric. Timing of the collection of cost information is also important to the cost measurement system. The project budgets must be synchronized with the collection of the project’s actual cost. For example, if a project team is responsible for material cost, should the budget show the expenditure when 77 9618$$ $CH3 09-06-02 14:58:58 PS 78 Preparing for the Project Management Professional Certification Exam the commitment by the project team to buy the product is made, when the item is delivered, when it is accepted, or when it is paid for? Timing issues like these can make project cost control a nightmare. If the project team does not properly control cost, the project will invariably go out of control, and more money will be spent than anticipated. It is the purpose of cost management to prevent this. Project Life Cycle and Project Cost Lately, it has become important to consider the cost of the project for the full useful life of the product or service that is created. This means that the cost of the project does not end when final acceptance of the project has been completed. Guarantees, warranties, and ongoing services that must be performed during the life of the project must be considered. With regard to project life cycle, cost decisions are made with a clearer picture of the future commitments that the project will require. If life cycle cost is considered, better decisions will be made. An example of this would be the project of creating a software program for a customer. The project team can create a working software program without organization or docu- mentation. This is usually called ‘‘spaghetti code.’’ Considering the cost of the project as delivered, the ‘‘spaghetti coded’’ project will be less costly. Considering the life cycle cost of the project, however, this approach will be more costly. This is because the cost of debugging and modifying the soft- ware after delivery of the project will be more difficult. Using the Work Breakdown Structure The work breakdown structure is the key to successful projects. The work breakdown structure produced a list of the individual pieces of work that must be done to complete a project. These are the building blocks of the project. Each of these represents a portion of the work of the project. Each must be the responsibility of one and only one person on the project team. The person responsible for an individual piece of work is similar to the project manager and is responsible for all that happens in the project regard- ing that piece of work. That person is responsible for scheduling, cost esti- mating, time estimating, and of course seeing that the work gets done. Like the project manager, the person responsible may not be required to do all the work. He or she is, however, responsible for seeing that it gets done. [...]... must be budgeted for risks that are not identified On most projects, the expected value for risks is budgeted This is reasonable since it reflects the average risk exposure for the project Using the worst case or the best case situation for the project would be overly pessimistic or optimistic 84 Table 3-1 Preparing for the Project Management Professional Certification Exam Estimate of the cost of a printed... project This is the BAC adjusted for current performance to date, costwise It says that if the project continues along at its present level of performance to cost, the EAC will be the final project cost This is a pessimistic value since it says that the mistakes that have been made in the project are expected to continue for the remainder of the project This is often used for calculating the EAC There are... of the items in the fundamental accounting equation The assets must bal­ ance the liabilities and owner’s equity Project managers have an influence on the numbers on the company’s financial reports But the company’s reports are just the summation of the different projects and other activities of the company It is therefore sensible to consider these financial measures as they apply to the individual projects... previously completed projects to predict the cost of the Cost Management 81 project that is being estimated Thus, there is an analogy between one project and another If the project being used in the analogy and the project being estimated are very similar, the estimates could be quite accurate If the proj­ ects are not very similar, then the estimates might not be very accurate at all For example, a new... development project is to be done The modules to be designed are very similar to modules that were used on an­ other project, but they require more lines of code The difficulty of the project is quite similar to the previous project If the new project is 30 percent larger than the previous project, the analogy might predict a project cost of 30 percent greater than that of the previous project Parametric... interest to the project manager, since the project manager’s decisions directly influence these reports The current trend in project management is to make project managers responsible for the revenue cost and expenses of the proj­ ect These are the basic reports of accounting for any business In these statements, the words profit and income are frequently interchanged The reason that project managers... the cost baseline of the project The cost baseline for the project is the expected actual cost of the proj­ ect The budget for a project should contain the estimated cost of doing all of the work that is planned to be done for the project to be completed In addition, cost must be budgeted for work that will be done to avoid, transfer, and mitigate risks Contingency must be budgeted for risks that are... cost of the resources that will be required to complete all of the work of the project Cost estimating is done throughout the project In the beginning of the project proof of concept estimates must be done to allow the project to go on An ‘‘order of magnitude’’ estimate is performed at this stage of the proj­ 80 Preparing for the Project Management Professional Certification Exam ect Order of magnitude... estimates are of the bottom up variety This is the type of estimate that is used to establish a project baseline or any other important estimate In a project, the WBS can be used as the level of detail for the estimate The accuracy of this estimate can be made to be quite high, but 82 Preparing for the Project Management Professional Certification Exam TE AM FL Y the cost of developing the estimate can... cost of a person in the group is used for estimating purposes When the project is actually done, the average cost of a person in the group is still used It may seem that this is the right thing to do, but look at the effect on the project manager The project manager is going to be charged the same amount per hour regardless of which person in the group is used to do the work The project manager will . will be to produce the cost baseline of the project. The cost baseline for the project is the expected actual cost of the proj- ect. The budget for a project should contain the estimated cost. an- other project, but they require more lines of code. The difficulty of the project is quite similar to the previous project. If the new project is 30 percent larger than the previous project, . the critical path only. Other activities in the project do not contribute to the length of the project, because they are done in parallel with the critical path. The sum of the durations for