Project Management

Lecture Note: 4
Probabilistic Time Estimates

MG 8203
New York University
Department of Technology Management and Innovation

Dr. Mihir Parikh

1
Course Progress

Lecture Course Material Textbook

Notes Chapter
1. Project Management Introduction Chap 1.
2. Project Activity Organization Chap 2 & 3

3. Deterministic Time Estimates Chap 5

4. Probabilistic Time Estimates Chap 5

5. Project Budgeting Chap 4
6. Allocating Resources Chap 6
7. Monitoring & Controlling Projects Chap 7
8. Project Evaluation & Termination Chap 8

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Uncertainty
Every project faces uncertainty
Projects are complex
They include interfaces, interdependencies, and assumptions,
which may turn out to be wrong
Uncertainty cannot be eliminated, but it can be
minimized by recognizing the sources and managing
them.
Types of Uncertainties
Time required to complete a project
Availability and cost of key resources
Timing of solutions to technological problems
Macroeconomic variables
The whims of clients
Actions taken by competitors

3
Managing Risk
Effective project management requires an ability to deal
with uncertainty and risks associated with uncertainties.
Risk management planning
A continuous planning process for the management of risks through
proper allocation of resources in a timely manner
Risk identification
Identify potentially uncertain events and likelihood of their occurrence,
and what are the risks when they do occur
Risk analysis Qualitative and Quantitative
Determine the impact of risks and evaluate the desirability of alternate
managerial decisions
Qualitative Scenario Analysis and FMEA Analysis
Quantitative Expected Value and Simulations
Risk response planning
Decide on which risks to prepare for and which to ignore
Create contingency plans and logic charts
Risk monitoring and control
Response to risk
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Risk Analysis

Focus on the nature and extent of the risks associated

with some variables used in a decision making process
to determine the desirability of an investment project
The general process of risk analysis
Subjectively and objectively estimate each of the uncertain
variables
Determine their probability distributions
Through simulation, find the probability distribution for the rate of
return (or net present value)
Use both the expectation and its variability in the evaluation of a
project

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PERT Probabilistic Analysis

Three time estimates with Beta probability distribution

are determined for each activity
Optimistic (a)
When everything goes right in the activity and most variable
factors do not impact the activity time
Pessimistic (b)
When many things go wrong and associated variable factors
impact the activity time
Most Likely (m)
As the most likely scenario in which some things go wrong
and some things go right

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PERT Probabilistic Analysis

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Activity Probability Analysis

Expected activity time (Assuming beta probability

distribution)
a + 4m + b
Expected Time (t) =
6
Expected time (E(t)) of each activity is used in the
network diagram as activity time or duration
Use E(t) in the forward and backward passes to find the
critical activities and critical path

Variance of activity completion time

b a
2

Variance =
6

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 General Foundry-Time Estimates
Most Probable Expected Variance
Optimistic Pessimistic
Activity a m b E(t) 2
3 1
2
A 1 2 3 2 1
=
6 9
4 2
2
1
B 2 3 4 3 =
6 9

3 1
2
C 1 2 3 2 =
1
6 9
6 2
2
D 2 4 6 4 4
=
6 9
E 1 4 7 4 7 1

2

= 1
6
9 1
2
16
F 1 2 9 3 =
6 9
11 3
2
G 3 4 11 5 =
16
6 92
3 1 1
H 1 2 3 2 =
6 9

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Project Probability Analysis
Expected project completion time.
It is the sum of the time taken by each activity on the critical path
General Foundry
Critical path = A-C-E-G-H
2 + 2 + 4 + 5 + 2 = 15
Expected Project completion time = 15 weeks
Project variance
It is the sum of the variances of the activities on the critical path
General Foundry
Critical path = A-C-E-G-H
1/9 + 1/9 + 1 + 16/9 + 1/9 = 28/9
Project variance = 3.111
Project standard deviation
It is the square root of the project variance
General Foundry
Square root of 3.111
Project standard deviation = 1.76 week

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Probability of Project Taking a Longer Time
What would be the probability of the General Foundry
project completion within 16 weeks rather than within 15
weeks?
Calculate z-value (the number of standard deviations by which the
due/target date lies from the expected project completion time)
Standard deviation, sigma - = project variance

Due date - Expected completion time 16 - 15

z= = = 0.57
1.76
Find the probability using this z-value in the Normal Probability
Distribution table, given at the end of the book.
For the z-value of 0.57 (intersection of 0.5 and 0.07) in the table,
the value is 0.7157
So, the probability of the project completing within 16 weeks is
71.57%.

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Probability of Project Taking a Longer Time

0.57 Standard Deviations

P(t 16 weeks)
= 71.57% (From the Table)

15 16 Time - weeks

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Find Probabilities

What is the probability of General Foundry project

completion within 18 weeks?

P(t 18 weeks)

18 - 15
z= = 1.14
1.76

For this z value, the

15 18 probability is 0.8729
Time - weeks

So, the probability of the project completion within 18 weeks is 87.29%

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Find Probabilities

What is the probability that the General Foundry project

takes longer than 18 weeks?

P(t 18 weeks)

18 - 15
z= = 1.14
1.76

For this z value, the probability

15 18
is 0.8729. Since we are
Time - weeks interested in longer than 18 weeks,
it would be 1 - 0.8729 = 0.1271

So, the probability of the project completion taking longer than 18 weeks
is 12.71%

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Find Probabilities

What is the probability of General Foundry project

completion within 14 weeks?

P(t 14 weeks)

14 - 15
z= = - 0.57
1.76

14 15 For this z value, the probability

is 0.7157. But since it is negative,
Time - weeks it would be 1 - 0.7157 = 0.2843

So, the probability of the project completing within 14 weeks is 28.43%

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Find Probabilities

What is the probability of General Foundry project

completion in sometime between 15 and 18 weeks?

P(15 t 18 weeks)

18 - 15
z= = 1.14
1.76
For this z value, the probability
15 18 is 0.8729. But since we are
interested between 15 and 18
Time - weeks weeks, it would be
0.8729 0.5 = 0.3729

So, the probability of the project completing sometime between 15 and

18 weeks is 37.29%

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Find Completion Date
For 95% certainty that a project would complete within a
certain time, what would be that completion time?

Find the closest possible z-value associated with the

probability from the Normal Probability Distribution table
given at the end of the book
For the probability of 0.95, the closest z-value is
between 1.64 and 1.65, approximately equal to 1.645.

Find the Due Date using the following formula

Due date = z * + Expected completion time
= 1.645 * 1.76 + 15
= 17.8952 weeks

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Find Completion Date
For 99% certainty that the project would complete within
a certain time, what would be that completion time?

Z-value for 99% is approximately 2.33

Applying that in the formula 2.33*1.76 +15
The completion time would be 19.1 weeks

For 90% certainty that the project would complete within

a certain time, what would be that completion time?

Z-value for 90% is approximately 1.28

Applying that in the formula 1.28*1.76 +15
The completion time would be 17.25 weeks

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Find Completion Date
For 80% certainty that the project would complete within
a certain time, what would be that completion time?

Z-value for 80% is approximately 0.84

Applying that in the formula 0.84*1.76 +15
The completion time would be 16.48 weeks

For 50% certainty that the project would complete within

a certain time, what would be that completion time?

Z-value for 50% is 0.00

Applying that in the formula 0.00*1.76 +15
The completion time would be 15 weeks

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Is it Really the Critical path

Given uncertainty, one cannot be sure that any

specific path is the critical path
Critical path may take less than expected while
another path takes longer
We know which path was actually critical only after
the project is complete
Managerial implication is the project manager
must carefully manage all paths that have a
reasonable probability of becoming critical
Simulation
Simulation is another approach to understand and
manage risk
It builds on the probabilistic functions already discussed
earlier to understand the consequences of uncertainty
Simulated risk analysis can be done for both project time
and project costs
It provides an insight into the range and distribution of
project completion times and project costs, not just time
and cost of individual activities
For simulation, Oracle Crystal Ball is a widely-used
software.
http://www.oracle.com/us/products/applications/crystalball/overview/index.html
Simulated Risk Analysis for
Project Completion Time
Monte Carlo simulation is used to evaluate different
possibilities of project completion time
Enter project activity and path information in Crystal Ball
software
Enter three time estimates for each activity and select
beta probability distribution
Run a simulation on the model for 1000 times
The simulation will create 1000 different instances of the model
with each activity time having a random value based on the beta
probability distribution.
Analyze descriptive statistics and frequency chart from
the simulation to find the certainty about project
completing in a specific range of time or the probability of
the project taking longer than a specific time period.
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Crystal Ball Chart for
Project Completion Time
Simulated Risk Analysis for
Project Costs (NPV Calculations)
Like variations in activity times, activity costs and benefits may also
vary.
To find variation in NPV, first find probability distributions for:
Outflow
Inflow
Discount rate (including the inflation rate)
Integrate spreadsheet information about the probable values and
their probability distribution information into Crystal Ball software
Run a simulation on the model for 1000 times
The simulation will create 1000 different instances of the model with
each cost and hurdle rate having a random value based on their
probability distributions.
Analyze descriptive statistics and frequency chart from the
simulation to check the probability of NPV exceeding a specific
threshold.

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Traditional Statistics vs. Simulation
Both approaches assume that activity times or costs are
statistically independent
Sometimes, they may be interrelated.
For example, what affected one activity and caused delays in it,
may also affect another activity in the same manner and cause
delays in it.
Both approaches assume the paths are independent
A simulation can circumvent the assumption of statistical
independence by including the activity or path dependencies as
part of the model
Simulation requires less computational effort and much
faster than statistical tools
Project Management
Lecture Note: 4 Probabilistic Time Estimate

Summary
Every project faces uncertainty, which cannot be eliminated.
Risk related to uncertainty can be managed by proper risk management.
Quantifying and factoring in the probability and impact related to risk is
essential.
In probabilistic time estimate analysis, we use three types of time
estimates: Optimistic, pessimistic and most likely
Using beta probability distribution, we can calculate expected time and
variance for each activity and the whole project. We can also apply the
same concept for project costs.
Using statistical tools and simulation, we can find the probability for
different times for the completion of a project as well as the probability
for various overall project costs.

Dr. Mihir Parikh

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