OBJECTIVE

Time Cost Optimisation

To determine a
reduced or optimum
length of contract and
still save money
1
 TIME COST RELATION

The use of CPM is not limited to calculation

of project duration
Reducing the duration of projects leads to
cost consideration.
Reducing the time of project may lead to
increase in cost due to use of more resources
There must be a balanced point wherein the
project finishes at minimum cost and
optimum duration.

2
 OBJECTIVE
NETWORK TECHNIQUE
Bring improvement in the following :-

Planning
Scheduling
Control of project

3
 Policy of every successful organization

To reduce the target time so that the time

saved may be utilized for additional production.
The overall project duration can be reduced by
reducing the duration of only the critical
activities in the project network

The durations of such activities may be

reduced in two ways:-
a)By deploying more resources for the
completion of such activities.
b)By relaxing the technical specifications
for such activities (depends on engineering
considerations)
4
 RELATIONSHIP BETWEEN
TIME AND COST

In this time cost model we will assume that the

project duration is reduced by deploying more
resources on critical activities.
There is a certain range of time during which the
project may be completed depending on the
resources employed on various critical activities.
a) If the duration is made larger, cost will be reduce
b) Reducing the project duration would increase the
cost.

5
 NOW LETS KNOW HOW
TIME AND COST
INTERRELATE WITH
EACH OTHER WITH AN
EXAMPLE

6
 For any project, the relationship between
total cost and overall duration can be
explained with the figure as shown below.
A. If a project goes on indefinitely, the cost will
increase.
B. Similarly, cost will increase if project is
expedited.
C. Cost is minimum at some optimum project
duration.

7
 COST
Cost is considered to be a common parameter
of the resource expenditure on project.
Cost is of two types:-
a) Direct cost
b) Indirect Cost

In CPM there are two time and two cost

estimates for each activity
a) Normal estimate – it emphasis is on cost with
time being associated with minimum cost
b) Crash estimate – involves the absolute
minimum time required for the job and the
cost necessary to achieve it.
8
 DIRECT COSTS

As the project is conceived, cost is incurred

on the purchase of
Materials
Plant
Equipment
Manpower
Relationship of direct costs with time is of
prime importance

9
10
 INDIRECT COSTS
Indirect Costs Includes :-
Overheads
Administrative expenses
Depreciation
Loss of profit
Loss of revenue
Penalty
The loss in profit, penalty comes under a
category called outage loss
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12
 TOTAL COST

Total cost = direct cost + indirect cost

13
 Cost Analyses Using
The Critical Path Method (CPM)

The critical path method (CPM) is a

deterministic approach to project planning.

Completion time depends only on the

amount of money allocated to activities.

Reducing an activity’s completion time is

called “crashing.”

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 SOME TERMS
Normal time (tn) - Standard time that an
estimator normally allow for an activity.
Crash time (tc) - Minimum possible time in which
an activity can be completed, by employing extra
resources.
Normal cost(Cn) - Direct cost required to
complete the activity in the normal time duration.
Crash cost(Cc) - Direct cost corresponding to the
completion of the activity within crash time.
Cost slope (Cs) - Slope of the line(s)used to
approximate the direct cost curve .
 CRASH TIME/CRASH COST
 There are two crucial completion times
to consider for each activity.
 Normal completion time (TN).
 Crash completion time (TC), the
minimum possible completion time.

• The cost spent on an activity varies between

– Normal cost (CN). The activity is completed in TN.
– Crash cost (CC). The activity is completed in TC.

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 Crash timeCrash cost –
The Linearity Assumption

 The maximum crashing of activity

completion time is TC – TN.
 This can be achieved when spending C N –
CC.
 Any percentage of the maximum extra
cost
(CN – CC) spent to crash an activity, yields
the same percentage reduction of the
maximum time savings (TC – TN).
17
 Normal
CN = 2000
A
Time TN = 20 days demonstration
Total Cost = 2600
Job time = 18 days
20 …and save on of the Linearity
18 completion
…and save time
more on Assumption
16 completion time Add 25% of the extra
14 Add totothe
Add more the cost...
normal
normal cost...cost...
12 … to save 25% of the
10 max. time reduction Crashing
CC = 4400
8 TC = 12 days
6
4
2

18 Cost (100)
5 10 15 20 25 30 35 40 45
 Crash time/ Crash cost -
The Linearity Assumption

Additional Cost to get Max. Time Reduction

Marginal Cost =
Maximum Time reduction
= (4400 - 2000)/(20 - 12) = 300 per day

MM == E
R

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 Crashing activities –
Meeting a Deadline at Minimum
Cost

If the deadline to complete a project cannot

be met using normal times, additional
resources must be spent on crashing
activities.
The objective is to meet the deadline at
minimal additional cost.

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 ABCD Restaurant –
Meeting a Deadline at Minimum
Cost

ABCD Restaurant is a chain of Italian-style

fast food restaurants.
It is planning to open a new restaurant in 19
weeks.
Management wants to
Study the feasibility of this plan,
Study suggestions in case the plan cannot be
finished by the deadline.

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 ABCD Restaurants –

Without spending any extra When all the activities are crashed
money, the restaurant will open to the maximum, the restaurant
in 29 weeks at a normal cost of will open in 17 weeks at crash cost
Rs 200,000. of Rs 300,000.

22
Determined by the PERT.xls template
 ABCD Restaurants –
Network presentation

E O

I K
B
A F G J M N
C
H
P
D L
23
 ABCD Restaurants –
Marginal costs

R = TN – TC = 5 – 3 = 2
E = CC – CN = 36 – 25 = 11
M = E/R = 11/2 = 5.5

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 ABCD Restaurants –
Heuristic Solution

• Small crashing problems can be solved

heuristically.

• Three observations lead to the heuristic.

– The project completion time is reduced only when
critical activity times are reduced.
– The maximum time reduction for each activity is limited.
– The amount of time a critical activity can be reduced
before another path becomes critical is limited.
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 7.11 PERT/COST
PERT/Cost helps management gauge
progress against scheduled time and cost
estimates.
PERT/Cost is based on analyzing a
segmented project. Each segment is a
collection of work packages.
PROJECT
PROJECT

Work Package 1 Work Package 3

Activity 1 Work Package 2 Activity 4
Activity 2 Activity 3 Activity 6
Activity 5
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 Work Package - Assumptions

Once started, a work package is performed

continuously until it is finished.

The costs associated with a work package are

spread
evenly throughout its duration.

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 Monitoring Project progress
For each work package determine:
Work Package Forecasted Weekly cost =
Budgeted Total Cost for Work Package
Expected Completion Time for Work Package
(weeks)

Value of Work to date = p(Budget for the work

package)
where p is the estimated percentage of the work package completed.

Expected remaining completion time =

(1 – p)(Original Expected Completion Time)

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 Monitoring Project progress
• Completion Time Analysis
Use the expected remaining completion time estimates,
to revise the project completion time.

• Cost Overrun /Underrun Analysis

For each work package (completed or in progress) calculate

Cost overrun =
[Actual Expenditures to Date] - [Value of Work to Date].

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 Monitoring Project Progress –
Corrective Actions

A project may be found to be behind schedule,

and or experiencing cost overruns.
Management seeks out causes such as:
Mistaken project completion time and cost estimates.

Mistaken work package completion times estimates

and cost estimates.

Problematic departments or contractors that cause

delays.

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 Monitoring Project Progress –
Corrective Actions

Possible Corrective actions, to be taken

whenever needed.
Focus on uncompleted activities.

Determine whether crashing activities is desirable.

In the case of cost underrun, channel more resources

to problem activities.

Reduce resource allocation to non-critical activities.

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 AB COMPANY

Perri is running for Mayor.

Twenty weeks before the election the campaign

remaining activities need to be assessed.

If the campaign is not on target or not within
budget, recommendations for corrective actions
are required.

32
 AB COMPANY–
Status Report

Work
Work Package
Package Expenditures
Expenditures ($)
($) Status
Status
AA Hire
Hirecampaign
campaignstaff
staff 2,600
2,600 Finish
Finish
BB Prepare
Prepareposition
positionpaper
paper 5,000
5,000 Finish
Finish
CC Recruit
Recruitvolunteers
volunteers 3,000
3,000 Finish
Finish
DD Raise
Raisefunds
funds 5,000
5,000 Finish
Finish
EE File
Filecandidacy
candidacypapers
papers 700
700 Finish
Finish
FF Prepare
Preparecampaign
campaignmaterial
material 5,600
5,600 40%
40% complete
complete
GG Locate/staff
Locate/staffheadquarter
headquarter 700
700 Finish
Finish
HH Run
Runpersonal
personalcampaign
campaign 2,000
2,000 25%
25% complete
complete
II Run
Runmedia
mediacampaign
campaign 00 0%
0% complete
complete

33
Work packages to focus on
 AB Company-
Completion Time Analysis

The remaining network at the end of week 20.

H
15 20+15=35

Finish
(1-p)(original expected completion time)=(1-0.25)(20)=15
27.8+9=36.8.8
I
F 9
7.8
20+7.8=27.8

The remaining activities are expected to take

34 0.8 weeks longer than the deadline of 36 weeks.
 AB Company–
Es
Project Cost Control
tim
ate
dw
or k
va
Budgeted Values
lue
Work Totalto Total Percent Co EstimatedA ctual Cost
da st
te=
Package Time ( 13 Cost Completedo ve rrValue Value Ocerrun
,00 u
A 4 2000
0)( 100% n =2,000
56 2,600 600
0.4 00
B 6 3,000 0 ) = 100% 3,000 - 5 5,000 2000
$5 2 0 3,000
C 4 4,500 , 2 0 100% 4,500 0= -1500
0
D 6 2,500 100% 2,500 40
5,000 2,500
0
E 2 500 100% 500 700 200
F 13 13,000 40% 5200 5,600 400
G 1 1,500 100% 1,500 700 -800
H 20 6,000 25% 1,500 2,000 -500
I 9 7,000 0% 0 0 0
35
Total 40,000 20,700 24,600 3,900
 AB COMPANY–
Results Summary

The project is currently .8 weeks behind

schedule
There is a cost over-run of $3900.
The remaining completion time for
uncompleted work packages is:
Work package F: 7.8 weeks,
Work package H: 15 weeks,
Work package I: 9 weeks.
Cost over-run is observed in
Work package F: $400,
Work package H: $500.
36