Difference between estimated cost and price

Estimating cost means developing the approximate cost of completing the entire project or part of it. It is the expected quantitative result. When we estimate the cost of doing a project, we are estimating the amount of money that it will take to complete the entire project.

In addition to the project completion cost, we may frequently include the life cycle cost as well. Normally the cost of the project includes only the amount of money that will be spent by the project team up until the time the completed project is turned over to the client and the stakeholders. Life cycle cost includes the cost of the project that continues after delivery of the project throughout the useful life of the project. Although the project team will be concerned with the cost of the project up until the time of delivery, many of the decisions it makes will affect life cycle cost and should be discussed with management and the stakeholders and shown in the project justification.

The selling price minus the cost of the project is equal to the profit of the project.
Selling price is the amount of money the organization will charge to deliver the project. This may be more or less than the cost of the project. The price of a project should be equal to the perceived value to the customer. The value to the customer is generally what money the project will generate for the customer and has little to do with what it costs to produce the project.

statistical cost estimating Project Management

Note that because of statistical convergence, the more details that are included in the cost estimate, the more accurate the cost estimate becomes. This is simply because mathematically, the more detail that is present in the estimate, the more accuracy there will be. In a detailed estimate we have individual estimates for each of the details. It is reasonable and statistically accurate to say that some of the estimates will be overestimates and others will be underestimates. When these estimates are added together, the overestimates and the underestimates will tend to cancel each other out. This, in turn, makes the overall cost summary more accurate.
Suppose we have an estimate that we are doing for a new product. It is estimated that the most likely cost for the project will be $63,000. Based on this estimate, we have determined that the standard deviation of the estimate is $1,250. If we were interested in an estimate that had a range of values such that the actual cost would be more than the minimum and less than the maximum, it would be reasonable to use + or - two standard deviations from the most likely value. In this case it would be $63,000 +$2,500 and -$2,500 and the range of values would be $65,500 to $60,500. If this project were being bid competitively or if the product we were making had a very narrow price range, we would probably want to have more accurate estimates.
To do this and take advantage of the convergence of the standard deviation, we could break the product into five subassemblies. Once the subassemblies were identified, we could estimate the cost of each by estimating the optimistic, pessimistic, and most likely values. We could then calculate the expected value of each subassembly and its standard deviation. To get the overall revised estimate of the cost of the whole product, we then sum the standard deviations by first squaring them, then adding them together, and then taking the square root of the total.

Factors estimating for projects

Utilization is another adjustment factor to the cost estimate. Utilization is based on the idea that even though we pay someone for a full eight-hour day, the person seldom, if ever, actually works the full eight hours. Utilization is a way of adjusting the cost of a task to allow for the time that the person is being paid but not actually doing things that are productive.

Productivity and utilization factors are important in deriving the total project cost and schedule estimates. Failure to use them could result in otherwise good estimates being off by as much as 40 percent or even more. Failure to manage them properly could result in demoralizing the entire project team.
Productivity is a measure of how productive one person is when compared to a normal person. The normal person is a hypothetical person who works at a pace that is not abnormally fast or abnormally slow. This is a concept we inherit from industrial engineers whose job it is to manage factory people. Since most factory workers perform the
same task over and over again the industrial engineer is very concerned with being as close as possible to the actual cost The productivity factor is 3n adjustment to the time that it takes a person to do work when compared to a normal person. In the industrial environment it would not be fair to measure everyone's work in comparison to that of someone who is abnormally fast or slow.
Although the idea of productivity has its roots in factory operations, it is significant to project management as well. It is difficult to measure a person's productivity accurately in project work because the nature of projects is that the work is generally not very repetitious. However, it does make sense to adjust cost and schedules depending on who is actually going to do the work. Suppose we have a choice of using John or Mary on a particular task on our project. Mary is very senior and has a lot of experience doing this kind of work. John is new to the company and has never done this kind of work before. Mary receives a much higher salary than John. Mary will most likely get the work assignment completed in a minimum amount of time and make very few mistakes. John will probably take longer to complete the work and make more mistakes doing it.
As a project manager doing estimates, we will be faced with many conflicting problems in terms of the resources we can use. We would all like to have the best people on our projects for all the positions we have on the team. Unfortunately this is not always possible. The needs of other projects should also come into play and this is one of the important jobs that the functional manager in a matrix organization must face. His or her job is to see to it that the correct and appropriate resource is used in each assignment, and this is not always the one that the project manager feels is the best one for the project.
Let us say that Mary has a salary of $125,000 per year, and John has a salary of $40,000 per year. Mary estimates that the task will take her four weeks to complete if she works on it full-time. John does not have any idea how long it will take him to do the task, but with help he estimates that it will take him eight weeks. Checking the schedule we find that the task in mind has sixty-three days of total float and forty days of free float associated with it. Although John's productivity is half of Mary's, it is cost-effective to use John for this task.
When early project estimates are put together, we frequently do not know precisely who will be available to do the work when the work is actually scheduled to be done. This is where the normal person concept comes in. The amount of time that should be put into the estimate at this point should be the amount of time that a normal person will take to do the task and the cost of that time. As we become more definitive in our estimating and as the time to actually do the project work comes closer, we should make
adjustments in our cost and schedule estimates to reflect the person who will actually be doing the work At the point the person who will do the work is identified the cost of that person to the project and the estimated time that the task will take should be recognized.
Utilization becomes important to project managers as well. Remember that utilization is the adjustment factor to correct for the fact that everyone is paid to work a certain number of hours in a day. say eight hours, but that no one actually works that many hours in a day. Everyone has interruptions, visits from an immediate boss, coffee breaks, telephone calls calls of nature, meetings in the hall on the way to and from the calls of nature or the coffee machine, and many others.
Where utilization becomes a problem is in recognizing whether a person doing an estimate has or has not included a utilization factor in the estimate. If a utilization adjustment has been made to an estimate we receive and if we apply a utilization factor to it, we will be adding unnecessary cost to our estimate. On the other hand, if a utilization factor has not been applied to the estimate and if we do not add it, we will have underestimated the cost of doing the task. This utilization factor is of some importance when you consider that the amount of time that is lost in a typical eight-hour day is about 30 percent. This 30 percent is based on people who have very good timekeeping records. In most companies it is probably higher than this.
Generally you can standardize on a utilization factor for your project. This utilization factor will usually not change much from project to project and will generally be set by a company policy. The real problem comes when we are trying to determine whether or not someone on our project team has included the adjustment of utilization or not. The rule here is that when you are in doubt about an estimate, you need to make sure the person doing the estimate has thought about it and deliberately included it in the estimate or excluded it from the estimate. Most people who are not professional estimators will not include a utilization factor when they estimate the time that it will take to do a task in hours as in. "I think this task is going to take me fifteen hours to complete". This person probably means that if they can start working on this task and work without interruption, they will finish it fifteen working hours after they started. We should probably increase the estimate by 30 percent and use 19.5 hours for this task.
Another person submits an estimate of the time to do a different task as two weeks. This person probably means that if they start working on Monday, they will finish the task at close of business one week from the following Friday. In this case the person has probably included the utilization and interruptions.

Terms used in estimating are related to the use of project management software

Effort: The hours of labor to do work. Effort is usually expressed as man-hours or people-hours but could be expressed as man-days, man-months, or man-years.

Effort = Number of equivalent full-time people X Duration

If a task contains four hundred people-hours of effort and there are ten people working on it then it will take forty hours of duration to complete it. If five people are working on the same task, it will have a duration of eighty hours. If the five people working on this task are working on a part-time basis and available 50 percent of the time the duration will be 160 hours.

Duration: Number of time intervals to do work. Duration is usually expressed in working days but could be expressed in anytime interval that is convenient. Project management software has been used in a number of nontraditional schedule and resource management applications. One application used project management software to schedule jobs through the central processor of a computer, and the durations were measured in microseconds.

Level of Effort Work: Work done directly for a project but not for a specific activity. One of the things that we want to do in managing our projects is to be able to account for all the things that cost money and take time. This creates a problem for people who work on the project but do not have specific task assignments. Probably the best example of a level of effort person is the project manager. The project manager is managing the entire project but no one task specifically. Since the project manager works on many tasks simultaneously, it is not practical for him to report time against the specific tasks. Time is just charged against the project. Others who provide project level services can also be level of effort workers. The number of people who report to the project as level of effort workers should be kept at a minimum since they may be doing work for specific tasks while not accruing actual cost against a specific task. People who are shared between two or more projects may also be level of effort workers.

Work Time: Calendar time available for work. This term is used to describe the work schedule a person is working. This factor is necessary for project management software to properly allocate and show the availability of people and equipment. Work time is expressed as 09:00 to 05:00. Monday through Friday.

Elapsed time:Time between start and finish regardless of working or not working. The elapsed time of a task in the project shows the start and finish dates of the task regardless of whether the task is being worked on. A task might start on January 1 and finish on January 10 and have a duration of only five days. The task might be scheduled to be worked on January 1. 2. 3. 9. and 10. January 4 and 5 are Saturday and Sunday, nonworking days, and January 6. 7. and 8 are days when the persons working on the task are transferred to another task. The elapsed time is still ten days.

Availability: The amount of time that a person is available to do work. This can be expressed as a percent of the person's full-time availability. A person may be available for 50 percent of his or her time.

NUCLEAR WASTE CONTAMINATION management

The age of nuclear energy, now over 50 years old, has given the world a great source of energy for both good and evil. On the one hand, it has helped to provide the electric power that does so much to make our lives more productive and enjoyable. On the other hand, it has terrorized us with the awful weapons it has created and the damages to public health and the environment.
Ranking high among its most frightening aspects are the waste materials that result from the production of nuclear energy and nuclear weaponry. Nuclear wastes loom as a danger to life and the environment because they are radioactive, emitting a radiation that can be deadly. Adding to their dangers is the fact that many require up to an astonishing 10,000 years before their radiation dwindles to the point where they are no longer able to harm.
The production of nuclear power and nuclear weaponry generates radioactive waste products, otherwise known as radwastes. If not properly stored, these wastes render our soil, air, and water supply vulnerable to radioactive contamination. The only secure means of disposal is shielding. Nuclear waste needs to be stored far beyond human reach, where it can decay for the hundreds, even thousands, of years necessary for it to become harmless.
Unfortunately, a serious problem of radioactive contamination of both the workplace and the environment emerged in the late 1980s. This was the exposure of the '"Cold War era" secret testing of human reaction to exposure to radiation and the poisoning of millions of people working in or living near nuclear weapons facilities. It began in 1947 and was kept secret for over 40 years. Meanwhile, nuclear waste disposal was taking place at 117 weapons factories, 16 principal and over 100 secondary, in 13 states. Contract management initially was the responsibility of the Atomic Energy Commission (AEC), one of the predecessors to the Department of Energy (DOE). DOE now has the responsibility for the huge task of cleaning up these sites.
The bomb factories highlight the absolute disregard for public health, worker safety, human dignity, and the environment. Indeed, they represent a total collapse of ethics and accountability in our government and the defense contractors as evidenced by their ignoring the professional engineers, scientists, and managers who were trying to "blow the whistle".9 The media first made a large-scale exposure of the nuclear weaponry research and development at the 16 major sites in late 1988. Whistleblowers were beginning to expose the innumerable health, safety, security, and other violations at all the bomb factory sites in 1986. Plant workers, their families, and their communities have been knowingly exposed to unacceptable levels of radioactive emissions and wastes since 1947. However, it took the Chernobyl nuclear plant disaster of 1986 in Russia to trigger U.S. media to listen to the whistleblowers.

Policy/procedure and motivational effects on productivity

Expectancy theory is a simple concept. It says that if you can create an expectancy in a person, the expectancy may indeed become fact. If a person is told that he or she is a poor performer and is no good at doing a job, the person will eventually become no good at doing the job and become a bad performer. If on the other hand a person is told that he or she is a high performer and does good work, the person may indeed become a good worker and a high performer.
Typical of the studies that were done at this time were studies that were conducted in elementary schools. In these studies the researchers went to a number of elementary schools. At each school they administered an intelligence-measuring test. Without looking at the results of the intelligence tests they randomly selected a small group of students in each class. The teachers and the parents were told that these students exhibited a high capability to learn and perform well in school.
After a period of time the researchers returned to the schools and administered another intelligence-measuring test. The results of this second test indicated that the students who had been randomly selected to be in the advanced capability group had improved their grades considerably. The only reason for this improvement was the expressed attitude of the teachers, parents, and peers toward the advanced students.
In practice, in project management, this concept can be applied by treating people with encouragement, giving them a sense of recognition and achievement, and giving praise publicly and criticism privately.

Making Matrix Management Work

Matrix management is not without its problems. The organization is quite complex in comparison to the functional or pure project types of organization. Since the resources are shared, people working in this type of organization also share their bosses. This increases problems in communications, and many more management skills are required to make it all work.
These problems are offset by the flexibility that is achieved. The matrix organization is able to respond quickly and correctly to the needs of the customer in a proper fashion. The project team has greater focus on the customer's needs. Good project direction and participative management lead to high motivation and a sense of achievement and recognition on the project team.
Moving from a functional organization to a matrix organization may take two to three years in some organizations. This is necessary because it takes time to move the functional managers out of their positions and into other productive areas. If movement from functional organizations to matrix organizations is too fast, the result can be chaos and the loss of important personnel. The objective must be to create the impression that people are going to be promoted to other positions and not that their position is going to be degraded. The functional managers in the existing organization are the major assets of the company and must not be lost.

Project Manager Roles and Responsibilities

It is a long-standing joke in the project management community that if anyone ever asks you who is responsible for anything in the project, the answer will always be the project manager. Truly it is easier to specify what the project manager does not do than to discuss what he or she actually does and is responsible for.
The nature and scope of the project should dictate the individual roles and responsibilities of the project team. When all of the team assignments and responsibilities have been decided, all of the functions and responsibilities of the project will have been assigned. The responsibility-accountability matrix is useful for determining and tracking the relationship between a given responsibility and who is responsible for it.
The functional manager must have a staffing plan that allows him or her to know where the people in their functional organization are committed. If these commitments are not organized the utilization of the human resources will be poor. A staffing plan for the functional manager is similar to the project schedule, except that instead of showing the schedule for each task in the project, it shows the schedule for each resource in the functional manager's responsibility.

Accelerated Depreciation

Accelerated depreciation methods are used to allow the expenses that are depreciated from the assets to be applied earlier in the useful life of the asset. The reason for this is to reduce the net profit after taxes (NOPAT). If NOPAT is reduced in a given year, the amount of tax that a company pays is less by this amount.
In accelerated depreciation methods the total amount of depreciation is the same as in straight line depreciation, but the time that it is taken is much earlier in the useful life of the asset. This means that more equipment expense is recognized and lower taxes are paid in the early part of the useful life of the asset purchased. In later years the taxes will be higher than in straight line depreciation. Because of the present value of the money, taxes that are deferred to later years allow us to use that money in the present years.
Two types of accelerated depreciation are commonly used: sum of the years' digits and double declining balances.
Sum of the Years* Digits. There is no scientific basis for the sum of the years' digits method. There is no financial reason for using this calculation except that it has become a standard accounting practice.
The calculation is made by totaling the digits representing the years of the useful life of the equipment. Thus, as can be seen in table 3-4, for a ten year useful life, the total is 55 (10 + 9 + 8 + 7 + 6 + 5 + 4 + 3 + 2 + 1 = 55)-

Straight Line Depreciation

Straight line depreciation is the depreciation method that allows an equal amount of depreciation to be taken each year. The amount of depreciation is determined by subtracting the salvage value of the asset at the end of its useful life from the purchase price of the asset. The remaining value is called the book value. The book value is divided by the number of years, and this amount is expensed from the asset each year.

For example, a company buys a large machine for $1 million. The purchase is made with cash. In the accounts for this transaction, the cash account is reduced by $1 million, and the machine account is increased by the amount of $1 million. There is no effect on the liabilities or owner's equity side of the accounting equation and it remains balanced. The cost of this machine must eventually be recognized.

The machine has a useful life often years and is worth $100,000 at the end of its useful life in terms of scrap value or the ability to sell the machine to someone else. This means that the value of the machine that must be depreciated is $900,000. Since the life of the machine is ten years, the value depreciated each year is $90,000.

economic value added is the EVA

The economic value added is also called the EVA. In this financial measurement we are interested in finding if a projects NOPAT is sufficient to cover the cost of maintaining the assets that it uses. In other words, if a project uses a share of the company's assets, those assets have certain expenses associated with them. These expenses are the cost of interest on borrowed funds and the compensation paid to shareholders in the company. The rationale here is that the only way a company can acquire assets is by borrowing the money to purchase them, having investors purchase stock in the company, or generating profits. Organizations that lend money to companies are compensated in the form on interest payments. Stockholders are compensated in the form of dividends on their share of the company. The revenue generated by the project must be enough to meet all of the project's costs and expenses as well as offset the interest expense and dividends to the stockholders.
The first thing we will have to calculate is the cost of capital. This is the weighted average cost of the money paid to the stockholders in the form of dividends and the money paid to the lenders in the form of interest payments.
Suppose a company's assets are financed by 70 percent in stock sold to investors and 30 percent in funds borrowed from banks and other financial institutions in the form of loans. The average interest that is paid on the loans is 7 percent, and the company dividends are 17 percent. What is the cost of capital for this company?
Seventy dollars out of every $100 of the company's assets are financed by stockholders at 17 percent, or $11.90 per year. Thirty dollars of every $100 of the company's assets are financed by lenders at 7 percent, or $2.10 per year. The total cost of capital per $100 is $14, or 14 percent of the company's assets.
If we take the capital or the assets that are used for this project and multiply by the cost of capital, we will get the weighted average cost of capital (WACC).

Income statement.

Gross sales
Less cost of goods sold = Gross profit
Less operating expenses
Salaries and commissions Rent expenses Depreciation Selling expenses Other operating expenses = Net operating income Plus other income
Interest revenue Less other expenses Interest expense = Net income before taxes
Less income tax = Net income after taxes

Reporting Work Complete

There is frequently difficulty in reporting work complete on the project. Many people tend to report that the percent that is complete on an activity is the same as the percent of the time that has elapsed. Thus, if 50 percent of the time to do an activity in the project has passed but only 25 percent of the work is actually done, misleading reports could result.
There are several approaches to solving this problem. The "50-50 rule" is one such approach. In this approach to earned value data collection, 50 percent of the earned value is credited as earned value when the activity begins. The remaining 50 percent of the earned value is not credited until all of the work is completed.
The 50-50 rule encourages the project team to begin working on activities in the project, since they get 50 percent of the earned value for just starting an activity. As time goes by, the actual cost of work performed accumulates, and the project team is motivated to complete the work on the activity so that the additional 50 percent of the earned value can be credited. This creates an incentive to start work and another incentive to finish work that has been started. This solves the problem of reporting percent complete, and there should be few arguments about whether work has actually begun or has been completed on a project activity.
There are many variations of the 50-50 rule. Popular variations include the 20-80 rule and the 0-100 rule. These allow differing percentages of the earned value of the work to be claimed at the start and completion of the work.

Examples
EV is higher than the PV. This means that the project is ahead of schedule. More activities have been completed than were planned to be completed at this time. This can be good. The AC is higher than the PV as well. It is also higher than the EV. This means that we are spending

Earned Value Reporting

The earned value reporting system is now the most commonly used method of performance measurement and project control. The reason for the popularity of this reporting system in project management is that it reports performance to cost and performance to schedule in one report. Schedule and cost are both measured in dollars. Where earned value reporting is not used, reports favor measuring performance to schedule or performance to budget.
In any reporting system the principle is to set some standard and then measure the actual performance to that standard, and report on the observed differences. In the earned value reporting system we use the planned budget and schedule and then measure the actual progress in the budget and schedule.
Frequently, the Gantt chart is used to show progress and performance to schedule, but this does not state the case clearly. If a scheduled activity is shown to be three days behind schedule, it is important to know if there is one person involved in this activity or if there are twenty.
In reporting cost, actual cost is frequently compared to budget cost to date. This does not show the full picture either. If a project is behind schedule, the actual cost could be tracking nicely to the expected budgeted expenditures, and the project could still be in a great deal of trouble.
Using the earned value reporting system the progress of the project in terms of cost is measured in dollars. The progress of the project in terms of schedule is also measured in dollars. This may sound confusing to people who are used to thinking of schedules in terms of days ahead or days behind. In fact, it is a more informational description of the condition of the project schedule. If a project activity is reported as being five days behind schedule, and there is one person working on the activity part time, it is very different than an activity that is behind five days that has twenty people working on it.
Obviously, what is needed is a reporting system that combines performance, schedule, and budget. This is the purpose of the earned value reporting system.

Cost Budgeting Project.

Cost budgeting is the process of allocating cost to the individual work items in the project. Project performance will be determined based on the budget allocated to the various parts of the project. The result of the cost budgeting process will be to produce the cost baseline of the project.
The cost baseline for the project is the expected actual cost of the project. 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 identified and may or may not come to pass. A reserve 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.

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 regarding that piece of work. That person is responsible for scheduling, cost estimating, 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.
You perhaps have noticed that I have been using the phrase "individual piece of work" to describe the bottom level of the WBS. This is because the Professional Management Institute (PMI) makes a distinction between terms. These individual pieces of work can be referred to as work packages, activities, or tasks. Most project managers would not make a distinction between these three terms, and if they did, they would probably disagree about the meanings of the terms. Most project managers will use the words activity and task interchangeably.
According to the Guide to the PMBOKdefinition of these terms, a work package is the lowest level of the WBS. This means that it is the lowest level that the project manager intends to manage. In a very large project with a hierarchical structure of project managers and subproject managers, there will be managers for the work packages, and each manager will have his or her own work breakdown structure. Eventually a point is reached where cost, resources, and duration define the individual pieces of work. These, according to the Guide to the PMBOK, are called activities. Activities may be further subdivided into tasks. Learning all this may get you a point on the PMP exam, but in this book I will use the words activity and task interchangeably.
In order to determine the project cost accurately enough to be considered the project cost baseline, a bottom up estimate must be made. This estimate must have an accuracy of —5 percent to + 10 percent. This type of estimate will be produced by estimating the cost of each item at the bottom level of the WBS and then summarizing or rolling up the data to the project level.
Bottom up estimates are inherently more accurate because they are a sum of individual elements. Each of the individual elements has a possibility of being over or under the actual cost that will occur. When they are added together, some of the overestimates will cancel out some of the underestimates.

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 documentation. 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 software after delivery of the project will be more difficult.

Output from the Monte Carlo Simulation

The most common output from a Monte Carlo simulation is a chart showing 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 probability 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.

Monte Carlo Simulation

When a schedule with acriviries 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 possibility 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 managers to afford.

Program Evaluation and Review Technique (PERT)

The PERT system was developed for the Polaris Missile Program in the 1950s. At that time there was a lot of pressure on the United States Navy to complete the Polaris Missile Program. The Cold War was raging, and the United States needed a deterrent that would discourage the threat of nuclear war with Russia. A mobile missile that could be carried aboard a submarine and launched from beneath the surface of the sea would be a formidable weapon.
The problem for the U.S. Navy was that there were two separate projects to be done. One was to develop a submarine that could launch these missiles. The second project was to develop a missile that could be launched from a submarine. The durations of the project plan activities had a great deal of uncertainty in them. The navy needed a method to predict the project schedule with better reliability than was possible in the past. PERT was developed to assist in analyzing projects where there was uncertainty in the duration of the tasks. The normal probability distribution relates the event of something happening 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. 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 approximate the mean and standard deviation of the phenomena.

Critical Path Method (CPM)

The critical path is a method of managing a project effectively. We have seen how the critical path is determined and how the float or slack is determined. Using the notion of float, the project manager can direct his or her efforts where they will do the most good. Activities that are found to have float, particularly those that have large amounts of float, can be managed less intensely than other activities in the project plan. This is because activities with float can be delayed without affecting the project completion date. Conversely, the activities that have zero float cannot be delayed without affecting the project completion date. These activities should be managed carefully by the project manager and the project team. In the critical path method of managing projects, another term for float is ‘‘free float.’’ This is somewhat different than the float we have discussed up until now. One of the problems with managing by float is that if an activity is delayed within its float, it may be necessary to reschedule many other activities as a result. Free float is the amount of time an activity can be delayed without affecting the project completion date or requiring any other activity to be rescheduled. This is important because rescheduling the remaining activities in the project can cause great confusion for the project team, and the project manager can quickly lose credibility. The use of free float prevents much of this problem.

Start-Finish Relationship (SF)

The start-finish relationship is very seldom used and has even been dropped from some of the project management scheduling software packages. This relationship is stated in the same sentence as the finish-start relationship except that the words start and finish are substituted for finish and start. The relationship is stated like this: The independent activity in the relationship must start before the dependent activity can finish. This says that where there are two activities connected by an arrow, the one that is connected to the tail of the arrow must start before the activity connected to the head of the arrow is allowed to finish. It does not say that the dependent activity must finish then. The dependent activity could finish later than that time, but it is not allowed to finish any sooner than the start of the independent activity. For an example, let’s use the wedding cake and the supervisor again. The project is still to construct a wedding cake. The task in this example is to apply the frosting to the cake. We do not want to finish applying the frosting to the cake until the master chef is on the scene. The two tasks then are:

(1) apply frosting to cake and (2) master chef supervises cake construction.
The start-start relationship says that I cannot start putting the frosting on the cake until I have the master chef present. The start-finish relationship says that I can start putting on the frosting of the cake before the master chef is present, but I am not allowed to finish putting on the frosting until the master chef has started supervising. Notice that I could, logically, start putting the frosting on any time before the master chef begins to supervise. The relationship constricts the finish of the activity of frosting the cake to be no sooner than the beginning of the master chef supervising the cake construction. These relationships must be available to project managers and schedulers in order to be able to schedule all of the real relationships that are necessary to properly schedule a project. They are seldom used until attempts are made to reduce total schedule time. In the examples involving frosting the cake, I related the frosting of the cake to the presence of the master chef to supervise the operations.
At first the relationship was a start-start relationship, in which the frosting operation had to wait until the master chef began supervising. If we were trying to shorten the schedule, one of the things that might help would be to change the relationship between these to activities to a start-finish relationship. This would allow the frosting of the cake to begin much sooner but still require that the master chef supervise the completion of the task.

Using the Cost Accounts Entry/Edit Tool

Once the labor-hour estimates have been made for a work package, the cost for the work package can be estimated. Often, there is not just a single type of work conducted on a work package. For instance, there may be "direct labor" and "indirect labor" or possibly ''subcontract labor."
Each of these types of labor is usually billed at a different rate. Also, there may be large differences in compensation among workers on a given work package. Often, there may be a supervisory-level person conducting the work, with a number of less senior persons working for the supervisor. These different types of workers account for different labor rates. Also, there are costs for a work package other than just labor costs. There may be materials costs, equipment costs, supply costs, maintenance costs, and so on. To make matters a little more complicated, the cost information for a project is often put to a different use than the labor-hour data. The project manager uses the labor-hour budgets to manage the work of the project, but the cost information is used to communicate with the client, for general accounting purposes, for tax determination, and for a host of other uses. For whatever uses are made of this information, it is customary to classify cost data by cost accounts. Often a company has multiple sets of cost accounts. One of these is the General Ledger (GL) chart of accounts.
There may be a different chart of accounts for cost accounting, sometimes refered to as the cost codes. In the Modern Project toolset supplied with this book, there is only one database for cost accounts, and it is assumed to be the GL chart of accounts for the example project. There is nothing to prevent you from using this capability for some other set of cost codes, since you will be the one defining the account identifiers, and you can assign GL account numbers to them or some other cost code account identifiers. There are actually two different entry/edit tools needed for entering cost information. One is used infrequently. It is the Cost Code Entry/Edit Tool .

Using Modern Project to Create a WBS

A desktop toolset called Modern Project is included with this blog. In order to run the tools provided in this toolset, it is necessary for you to have Microsoft Access 97, or a later version, such as Access 2000, installed on your computer. Modern Project is a learning aid intended to demonstrate how a set of desktop tools can support the projectmanagement techniques covered in this book. Modern Project has been tested on the example project described in the book but has not been subjected to exhaustive testing. Neither the author nor the publisher takes any responsibility for the correct operation of this toolset. It is intended to be useful on projects on which it is used, but the reader must understand that it is to be used at his or her own risk.
There is a file on the electronic media provided with the book that you need to copy to one of your disk drives. If you are using Access 97, then the file is the one named example97.mde. If you are using Access 2000, then the file is the one named example2K.mde. For simplicity, we will just use the filename example.mde in what follows instead of repeatedly distinguishing between the two.
Example.mde is a database that will eventually contain the example project data that will be used throughout the book to illustrate project management concepts and the use of Modern Project.

Quantification of the Work

The next step after subdividing the work is quantification of the work. Quantification of the work consists of assigning an appropriate unit of measure to each control package and then assigning a quantity to the work content of the package that quantifies the amount of work in the package in terms of its unit of measure. The way this is done requires some explanation. We first discuss how it
is done for work packages. The work content of a work package is further subdivided into tasks or activities. The terms task and activity are interchangeable in this book. These individual tasks are the things that are eventually scheduled, usually with an automated scheduling software package. This produces a start date and an end date for each task. But this is not our concern at the moment. The important thing to understand just now is that each task needs to be assigned a unit of measure.
It is the responsibility of the work package manager to subdivide the work packages for which he or she is responsible into appropriate tasks. It is also this manager's responsibility to quantify and estimate these tasks. Suppose the work package manager for the ''Siteprep" work package, after careful consideration and perhaps consultation with those who will actually perform the work,
decides to subdivide the work package into four tasks, say:

Task 1: Clear and Grub the Site
Task 2: Remove Excess Earth
Task 3: Grade the Site
Task 4: Excavate for a Foundation

Work Breakdown Structure ( WBS)

In other words, we believe that these latest packages are small enough to be work packages. We could have had additional levels of control packages between the top-level control package and the work packages, but, for the sake of simplicity, the example project stops here. In what follows we will refer to any of these packages as control packages but to only the lowest-level packages as work packages. This structure of control packages we have just described for
the example project is referred to as the Work Breakdown Structure or simply the WBS, for the project.
There are other meaningful subdivisions of the work besides the work breakdown structure. Subdividing the work by discipline (craft) may be useful for supporting monthly labor reporting; for example, electrical or carpentry or masonry activities could be grouped together.

Field Survey in project

• Physical layout
• Screen and report requirements
• Man machine interface
• Sequence of operation
• Current process overview