Quantitative Methods

Part I
Top Five Ideas from
Statistics that help
Project Management

John C Goodpasture
Square Peg Consulting
www.sqpegconsulting.com
www.johngoodpasture.com

Copyright Square Peg Consulting 2009, Fair Use Permitted www.sqpegconsulting.com 1

 Top five ideas from statistics that help project
management

1. The Bell Curve: In the long run,

most real activities, like cost and
schedule, have outcomes that cluster
around an average
• The cluster takes the shape of a bell

Copyright Square Peg Consulting 2009, Fair Use Permitted www.sqpegconsulting.com 2

 Top five ideas from statistics that help project
management

2. Expected Value: In the face of

uncertainty about the real world
outcomes, the best single number
to represent the average outcome
is a risk-weighted average:
Expected Value (EV)

3. Distributions: Every project

estimate—without exception—has
some uncertainty about it, a
distribution of possibilities, each Photo:Tom Gazpacho

possibility having a unique

probability.

Copyright Square Peg Consulting 2009, Fair Use Permitted www.sqpegconsulting.com 3

 Top five ideas from statistics that help project
management

4. Monte Carlo: the best and

fastest way to get a handle on
your project is to simulate the
outcomes
5. Dependency bias: When
otherwise independent actions
become dependent upon each
other, there is a bias towards
extending the schedule

Copyright Square Peg Consulting 2009, Fair Use Permitted www.sqpegconsulting.com 4

 The Bell Curve is ubiquitous—it’s everywhere!

• The bell curve—aka the Normal curve—is

ubiquitous because of the Central Limit EV
Theorem and the Law of Large Numbers

• CLT tells us that the sum of a value set—

like the sum of work-package costs—will
tend towards a bell curve
Events or
• LLN tells us that the average of the value Measure
ments
set will tend toward the expected value
and true mean

Outcome Values
Copyright Square Peg Consulting 2009, Fair Use Permitted www.sqpegconsulting.com 5
 Central limit and Law of Large Numbers work
together

• The consequence of the LLN upon the CLT is that the EV of the bell
curve is an excellent estimate of the true mean of the population

• The consequence of the CLT upon the LLN is that the bell curve
provides additional information about the quality of the value set.

Copyright Square Peg Consulting 2009, Fair Use Permitted www.sqpegconsulting.com 6

 Expected Value is the one go-to number for
everyone

• Example: 10 work-packages
• 3-point estimates with probabilities,
~ 80-20 rule
• EV = value x probability*
• Variance** =
Value probability x ( LLN EV – Value)2
• Standard deviation = √(variance)
• Expected value (budget): $549.7
• 84% confidence the budget will be
< $549.7 + $40.8 = $590.5
– EV + 1 standard deviation

* Example: WP1 10% x (60 + 45) + 80% x 50 = 50.5

** Example: WP1 80% x (55. – 50)2 +10% x (55-60)2 + 10% x (55-45)2

Copyright Square Peg Consulting 2009, Fair Use Permitted www.sqpegconsulting.com 7

 Ban single-point estimates! It’s all about
distributions

• There are no facts about the future—everything that hasn’t happened

is only an estimate!
– “If you are going to predict, predict often…” Milton Friedman, Nobel
laureate
• Every estimate should be placed within a range of possibilities
– Some possibilities are more probable than others
– Possibilities and probabilities constitute a distribution

Copyright Square Peg Consulting 2009, Fair Use Permitted www.sqpegconsulting.com 8

 3 points to every estimate

• 3-point estimates constitute a

distribution
– Points in between would be handy to
know, but not essential
• Its customary to connect the 3 points
with straight lines, thereby the Triangular
Distribution
– 3-point estimates can be used directly
in simple arithmetic approximations
that provide ‘good enough’ risk
adjustments for estimates

Copyright Square Peg Consulting 2009, Fair Use Permitted www.sqpegconsulting.com 9

 Monte Carlo is a simulation technique that gives
quick, useful answers

1. Step 1
• Make a 3-point estimate for
every outcome—work
package or activity
– Most pessimistic, most
optimistic and most likely

Photo John Goodpasture

Copyright Square Peg Consulting 2009, Fair Use Permitted www.sqpegconsulting.com 10

 Monte Carlo – Step 2

• Assume a distribution that

fits the situation;
• Most quick estimates are
made with the Triangular
distribution
– The choice of distribution
is not as important as
picking three points
– The Central Limit
Theorem will tend to
wash-out the distribution
detail

Copyright Square Peg Consulting 2009, Fair Use Permitted www.sqpegconsulting.com 11

 Monte Carlo—Step 3

• Run a simulation using a

plug-in tool on your
scheduler application*
• The outcome will tend to
be bell-curve
• The interesting results are
in the cumulative
probability distribution—
this is in effect a
confidence data for your
outcome, the so-called S-
curve

Copyright Square Peg Consulting 2009, Fair Use Permitted www.sqpegconsulting.com 12

 Everything stretches out when there are
dependencies

• When there are dependencies, the distributions of each event

interact
– At a milestone with paths joining:
Probability ( milestone ) = P (path A) x P (path B)
• 90% confidence in each path leads to 81% confidence in the milestone
• To raise the milestone confidence, each path must be allowed to stretch out to
the right—a phenomenon called ‘merge bias’

4 tasks, 2 resources

Time
Copyright Square Peg Consulting 2009, Fair Use Permitted www.sqpegconsulting.com 13
 Read more about it!

• Quantitative Methods is a book about

numbers and methods for applying them to
practical situations in projects
• There is a good tutorial on statistics,
accounting, balanced scorecard, and value
• The chapter on estimating is right out of my
own experience
• The presentation on earned value makes EV
really workable in day-to-day situations.
• If you do contracting, read the chapter on
about doing risk management with contracts
• And, best of all, you can buy it at any on-line
retailer, and read excerpts on google/books

Copyright Square Peg Consulting 2009, Fair Use Permitted www.sqpegconsulting.com 14

 I hope you liked what you saw here

• I hope you enjoyed this presentation.

• You can share it with your network
• There is a lot more information in the book, at
my company website, and at my BLOG. See
the cover page for links
• By the way, there is information on my other
books and magazine articles at
sqpegconsulting.com
• You can contact me from my company
website; the information is all there

Copyright Square Peg Consulting 2009, Fair Use Permitted www.sqpegconsulting.com 15