OBJECTIVE

Time Cost Optimisation

To determine a reduced or
optimum length of contract
and still save money

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 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.

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 OBJECTIVE
NETWORK TECHNIQUE
Bring improvement in the following :-

 Planning
 Scheduling
 Control of project

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 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)
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 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.

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

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  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.

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 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.
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 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

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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

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 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 CN – 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).

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 Normal
CN = 2000
Time
TN = 20 days A demonstration
Total Cost = 2600
Job time = 18 days
20 …and save on of the Linearity
completion
18 …and time on
save more Assumption
16 completion time Add 25% of the extra
14 Add to
Add more tothe
the cost...
12 normalnormal
cost...cost...
… to save 25% of the Crashing
10 max. time reduction 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

E
M=
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.

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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
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 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

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.

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 AB COMPANY–
Status Report

Work Package Expenditures ($) Status

A Hire campaign staff 2,600 Finish
B Prepare position paper 5,000 Finish
C Recruit volunteers 3,000 Finish
D Raise funds 5,000 Finish
E File candidacy papers 700 Finish
F Prepare campaign material 5,600 40% complete
G Locate/staff headquarter 700 Finish
H Run personal campaign 2,000 25% complete
I Run media campaign 0 0% complete

Work packages to focus on

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 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–
Project Cost Control

Budgeted Values
Work Total Total Percent Estimated
Actual Cost
Package Time Cost Completed Value Value Ocerrun
A 4 2000 100% 2,000 2,600 600
B 6 3,000 100% 3,000 5,000 2000
C 4 4,500 100% 4,500 3,000 -1500
D 6 2,500 100% 2,500 5,000 2,500
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
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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.

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