Project Cost versus Project Completion Time
In any project, there are critical activities that
require or deserve maximum attention of the Project Manager. This is due to the
fact that any delay in completing these activities will lead to delay in
project completion time.
Why should the project manager aim at completing the
project at the shortest possible time? There are two reasons;
- Delay in project implementation invariably results in cost-overrun
- Delayed project implementation means delay in getting return on the investment made.
It is the cost consideration that prompts the
project manager to aim at time reduction however, the relationship between cost
and time is not that simple. Time reduction does not normally leads to cost
reduction. For example a particular activity may be completed at a certain cost
in a normal time with a cost that may be less or more and this also depends on
the nature of the activity and the resources used for completing the activity.
Usually, the cost of a project goes up when the
project time is reduced. The reason for the increase in cost is due to
additional resources required to be engaged for bringing down the project time.
Example: additional manpower may be engaged thus increase in cost in this areas
or additional materials if not available locally maybe brought in from outside
thus additional cost.
Such additional resources normally cost
proportionately higher, which leads to the overall increase in the project
cost.
Normal
Time and Crash Time
For any activity, two time estimates can be made and
these are the Normal Time and the Crash Time.
Normal
Time of an activity is that time of completion, any
increase beyond which is not likely to result in cost reduction.
Crash Time of an activity is that time of completion
which cannot be reduced further, irrespective of cost considerations, that is
even if one is prepared to spend additional cost towards speedy completion of
the activity, it is not feasible to reduce the time limit below the crash time. See example below of Cost versus Time Relationship of an Activity.
Direct Cost and Indirect Cost
The cost of a project comprises two components;
Direct Cost and Indirect Cost.
Direct Cost – Include the cost of
materials, labour, equipment etc. Direct cost of a project is the sum total of
direct costs of all the activities contained in the project. Direct cost of a
project reduces with time. Example; As work on projects reaches certain points
in its construction phase, sometimes labour forces are reduce in numbers thus
cost slowly decreases in this area.
Indirect Cost – Are the overhead costs
associated with project as a whole. Indirect cost includes administrative
costs, depreciation, insurance charges, maintenance charges etc.
See the graph below to understand the Cost vs. Time
Relationship
Total Cost – The total cost of a
project is the sum of direct and indirect cost.
·
The Direct Cost decreases
with Time
·
The Indirect Cost
increases with Time
Time-Cost Trade-off – Time and Cost are the two
most important resources that a project manager deals with. Both these
resources have constraints and the job of a project manager is to have a
judicious balance between the two.
What does judicious balance means? It is the balance
between time and cost and it is called Time-Cost Trade-off and can be achieved
by studying the availability of these two resources and the demand for these
two resources for the given project.
Remember; every project is unique and the same
time-cost trade-off rule will not be applicable to all projects uniformity.
Example any project can be affected by the environmental factors such as
social-cultural factors, political constraints, technological constraints etc.
Another factor is the cost factor which may contribute to the implementation
and completion time of the project.
In PNG, students will realize that one of the
factors that affect any project is the land issues due to the fact that land
ownership and compensation demands may contribute to the delay in
implementation of projects. To resolve such issues, social mapping and proper
records of landowners should be sorted out first before any work can start on a
project.
Crashing of Project Time – Refers to the shortening
of project time by reducing the time of one or more activities contained in the
project. Remember, the project cost increases when the project time is reduced
from its normal time. Let us look at an example.
Example: The South Pacific games facilities in Port
Moresby were given a normal time frame of 48 months to be completed. If one or
two of the facilities cannot be completed within the given time frame and the
project sponsors want the project two months early, than the project is to be
crashed by 2 months. How do we come up with crash time?
(Nagarajan, 2008) Two things need considerations;
the activities that do not lie of the critical path have floats in them
and hence reducing the time of these activities will only result in extra cost
without bringing down the overall project completion time. Hence only those
activities that lie on the critical path deserve consideration for time
reduction.
The activities that lie on the critical path also vary in nature.
The additional cost required to reduce the time say, one day may be different
for different activities on the critical path.
The objective of the project
manager is to shorten the project completion time to the required extent at
minimum extra cost. Hence, he has to be selective in choosing the activities on
which time reduction is to be aimed at.
Let us looking at few illustrations as provided by
Nagarajan (2008) Chapter 9 Project Management 3rd Edition.
Activity
|
Normal Time (Weeks)
|
Crash Time (weeks)
|
Cost of Crashing (PNGK per
week)
|
1 – 2
2 – 3
2 – 4
3 - 4
|
9
5
7
4
|
4
2
3
2
|
K300.00
K400.00
K200.00
K200.00
|
Time related overhead expenses for the project
K250.00 per week
SOLUTION:
Stage 1 - First, find out the critical path
Forward Pass
Computation
|
Backward Pass
Computation
|
||
Event
|
TE
|
Event
|
TL
|
1
|
0
|
4
|
18
|
2
|
0 + 9 = 9
|
3
|
18 – 4 = 14
|
3
|
9 + 5 = 14
|
2
|
Maximum of (a) 18 – 7 = 11
(b) 14 – 5 = 9
i.e. = 9
|
4
|
Maximum of (a) 9 + 7 = 16
(b) 14 + 4 = 18
i.e. = 18
|
1
|
9 – 9 = 0
|
Hence;
Total Cost* = Cost of Crashing + Cost of overheads
(for 18 weeks)
= 0 + (18 x 250)
= 0 + 4500
= K4,500
Note: Critical path is the path having the longest
duration. Crashing of activities is done starting with the critical path. No
activity on the critical path is crashed and hence, the cost of crashing along
the critical path is ‘nil’. Overhead cost is calculated at the rate of K250.00
per week for a period of 18 weeks (9 + 5 + 4)
Activity
|
Normal Time
(Week)
|
Crash Time
(Weeks)
|
Maximum Time that can
be crashed
|
Cost of Crashing
(Kina per week)
|
1 – 2
2 – 3
3 - 4
|
9
5
4
|
4
2
2
|
5
3
2
|
300
400
200
|
*Cost slope
Result:
Project Time: 18 weeks
Total Cost; K4,500.00
|
Time along the critical path: = 18
weeks
Time along the sub-critical path: = 16
weeks
Differences = 2 Weeks
Hence, the time along the critical path is to be
reduced by 2 weeks, so that the time of both the paths becomes equal.
For crashing the critical path by 2 weeks, the
activities to be crashed shall be so chosen that the cost of crashing is
minimum.
All the three activities that lie on the critical
path can be crashed by the required 2 weeks since the difference between their
respective normal time and crash time is equal to or more than 2 weeks.
From the given illustrations, the activity having
the least cost slope is to be chosen for crashing.
Students are encouraged to read
chapter 9 to better understand this path of the course.
Resource Allocation
With the help of the network technique that we have
gone through in the earlier chapters, students will better understand and
identify the critical activities along the critical path and for better
allocate resources accordingly. There are many problems that project managers
may encounter when it comes to resource allocation due to certain constraints
such as; delays in delivery of raw materials, labour shortage etc. The job of
the project manager is to plan and allocate the resources for the different activities,
so that the resource utilization is optimized. With regard to resource
constraints, a project manager may face one of the following two situations;
Resource Levelling – There are situations
demanding that a particular project should be completed by a specified due date
and this is decided by the project management for various reasons. For example:
A school building have to be completed in time before the new school year start
or the completion of the bridge before the rainy season starts. Under such
situation, project completion time is the constraint which means the project
has to be completed at any cost by the due date.
A project manager often comes across mismatch
between the availability of resources and the requirement of resources. This
means that there may be surplus resources available on some days and there may
be shortage of resources on some other days. When project managers are faced
with such situations, he has to level as far as possible the demand for the
resources throughout the project execution time, keeping in view the constraint
that the specified project completion time should not be exceeded.
Resource Smoothing (Also called ‘Fixed Resource Limit scheduling’) – Under resource smoothing there is no constraints
on project completion time. The constraint is only with regard to the
availability of other resources. Though there is no time constraint, it does not
mean that the project duration can be stretched too far. Increase in project
completion time will lead to increased overhead expenses. If there is a need
for extension in the project duration time than it has to be done to minimum
possible extension to satisfy the resource constraints.
Nagarajan (2008) came up with few solutions and this
are as follows;
(1) The resources are to be allocated serially in time
that is resource allocation should start on the first day; all possible jobs
are to be scheduled for the first day before moving into the second day and so
on.
(2) When more jobs compete for the same resources,
preference is to be given to the job/jobs with least float.
(3) Jobs once started should continue till they are
finished, that is breaking of jobs is not allowed.
(4) Whenever possible, non-critical jobs are to be
postponed so that critical jobs can be scheduled without increasing the project
completion time.
(5) It must be ensured that the resource constraints in
not violated at any stage while performing the above exercise.
Remember this Chinese proverb; ‘I Hear, I forget;
I See, I remember; I do, I Understand.’ You can come up with your own rule
and when you solve any problem, it helps you understand and improve your job as
a project manager better.
Forecasting Funds Requirement (PERT – Cost System)
We have gone through the resource levelling, when a
project is required to be completed within a given or specific due date
(resource levelling) or faced with resource constraints (resource smoothing).
Forecasting funds requirements looks at resources
made available without delays. When the duration in which the project is to be
completed has been decided based on the field conditions and constraints,
project may commence and be implemented as per the planned schedule and the
resources made available without any interruption. This is possible only if the
funds required for mobilising the required resources are made available without
delays.
In practice, the funds required are mobilized during
the course of project implementation. If the funds requirement during the
course of project implementation is forecasted beforehand, mobilization of the
required funds can be planned accordingly. Hence, forecasting the funds
requirement during the course of project implementation is an important step in
project planning.
Students
are encouraged to read Chapter 9 of Project Management 3rd Edition
Nagarajan, (2008) New Age.
Please note all the illustrations and
examples are taken from Project Management 3rd Edition, Nagarajan
(2008) Chapter 8. Students are encouraged to read through this chapter 9.
Source: Project Management 3rd
Edition, Nagarajan (2008) (New Age)
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