This Document Contains Chapters 3 to 4 Chapter 3 Project Activity and Risk Planning This chapter begins by discussing the nine key elements of the project plan. The following two sections address the planning process in greater detail with considerable emphasis placed on the project launch meeting and the hierarchical planning process by which parts of the plan are sequentially broken down into finer levels of detail. This provides a natural transition to the creation of the Work Breakdown Structure. Cases and Readings Some cases appropriate to the subject of this chapter are: Harvard: 9-692-058 Taco Bell Corp. This 31-page best-selling case describes a project to implement a new strategic plan involving major changes in layout, staffing, quality, product design, and information systems. The coordination and integration of all these project activities is what makes the plan successful, and hard for competitors to imitate. Two teaching notes are available for this case: 5-692-091 (20 pages) and 5-196-073 (12 pages). Harvard: 9-694-059 Hardcard Project: Plus Development Corp. (A1); 9-694-060 Hardcard Project: Plus Development Corp. (A2) This 10-page (12-pages for A2) case allows the students to evaluate, using Microsoft Project software, the time line, resource allocations, and other aspects of a major project concerned with developing a hard disk drive. The perspective is from that of the VP of engineering. The (A2) case updates the project and the students have to determine whether a specific market introduction date will be feasible for the project. (Note: this case duplicates some of the information in the Plus Development Corp. case suggested for Chapter 2.) Harvard: 9-193-013 American Airlines: The InterAAct Project (A) and 9-193-014 (B) This 17-page (and 11-page) set of cases describes the design and implementation of an extensive knowledge information system project. The implementation is in trouble in the (A) case and must be reassessed. The (B) case describes the outcome of the successful implementation. A 17 page teaching note (5-194-095) is available. Harvard: 9-390-010 Grosvenor Park This case describes a very successful project involving the development of a condominium. A reading appropriate to the subject of this chapter is: Hallgren, M & Wilson, T. L., The nature and management of crises in construction projects: Projects-as-practice observations (International Journal of Project Management, 830-838, 2008). Crises are inherent in projects because of the uniqueness of projects. This reading reviews the nature of crises and the associated disruptions that threaten the progress of the projects as well as the organizations themselves. The paper reviews the crises that have interfered with project progress of an international construction company and their remedies. Fifteen crises were studied and the report includes a characterization of the nature of these crises and how they were managed. Answers to Review Questions 1. What are some benefits of setting up a project plan for routine, frequent projects? Answer: One key benefit of setting up a project plan for routine, frequent projects is that the project plan can be used as a template for similar projects in the future. Having such a template can greatly simplify future projects – just filling in the blanks, while at the same time can ensure that important steps or activities are not overlooked. Furthermore, the project plan can be continuously improved and enhanced as the organization gains additional experience with these projects. 2. Discuss the reasons for inviting the functional managers to a project launch meeting rather than their subordinates who may be actually doing the work? Answer: The reason for inviting the functional managers to the project launch meeting is that it is important to get their buy-in and support for the project and understanding the load on their subordinates. The functional managers can have a significant impact on the degree to which the project succeeds or fails based on their willingness to assign key subordinates to the project for the required duration. Clearly, if they are convinced up-front of the importance of the project and perhaps even have input into the project’s scope, their cooperation is more likely in later stages of the project. Another important reason for including functional managers in the project launch meeting is to get their commitment to help develop the initial plan. 3. Discuss the pros and cons of identifying and including the project team at the project launch meeting. Answer: Some of major advantages to identifying and including project team members in the project launch meeting would be: • Getting their support early on. • Letting them hear firsthand from senior management the importance of the project to the organization, and • [Perhaps] getting their input on more technical issues as the project’s scope is initially defined. Major disadvantages include: • Not being able to identify all project team members at this early stage. • Getting too bogged down in technical details to the detriment of bigger picture issues, and • [Perhaps] less involvement from the functional managers if they feel their department is adequately represented by project team members from their respective departments. 4. Why is participatory management beneficial to project planning? How does the process of participatory management actually work in planning? Answer: Participatory management (i.e., including project team members in the planning process) is beneficial in that it helps ensure that: • Important issues are not overlooked, and • Team members are committed to the project. Furthermore: • Team members can be asked to identify the tasks required to complete the project along with their estimates of time and other resource requirements. 5. What is the difference between the Resource column on the WBS (including personnel needed by the project) and the Assigned To column? Answer: The Resources column is more general and simply lists the type of human, material, and machine resources needed. The “Assigned to” column is more specific and identifies the particular person who has responsibility for completing the activity. 6. Under what circumstances is it sensible to do without a project launch meeting? Answer: While holding a project launch meeting is always a sensible step, it may not be essential or required in cases where the project is: • Relatively straightforward and frequent. In these cases the scope is likely well understood and the functional managers have well defined responsibilities. • To be completed entirely within one functional department. In this case, the functional manager involved can ensure the appropriate resources are assigned to the project as well as clearly define and articulate the project's scope. 7. Distinguish among highly probable risks, extremely serious risks, and highly vulnerable areas in risk identification. Answer: This thinking question is not directly answered in this chapter. The only thing the textbook says about this is: Beyond this, a close analysis of the project plan, the WBS, and the RACI Matrix, as well as the PERT chart (Chapter 5) will often identify highly probable risks, extremely serious risks, or highly vulnerable areas, should anything go wrong. The answer the student gives is going to be subjective and based on their own experience but hopefully informed by the discussion on FMEA. • Highly probable risks have a high probability or likelihood of occurring but the consequences can vary from negligible (e.g., a data entry person quits) to very serious (an important R&D drug fails in the Phase I clinical trial). • Extremely serious risks are risks that have very significant consequences although their probability of occurrence may be very low to very high. • Highly vulnerable areas refer to risks that are both highly probable and extremely serious (high FMEA value). 8. What limitation associated with traditional project management techniques like Gantt charts and precedence diagrams does the Design Structure Matrix overcome? Answer: Traditional project management planning tools such as Gantt charts and precedence diagrams were developed primarily to coordinate the execution of tasks. DSM is designed to overcome this. 9. Contrast the traditional waterfall approach to project management with Agile Project Management. Answer: 10. Contrast the project plan and the work breakdown structure. Suggested Answers to Discussion Questions 1. Give several examples of a type of project that would benefit from a template project plan being developed. Answer: Projects that are completed routinely would benefit from a template project action plan. In addition to routine system maintenance projects, examples of such projects include: a. Constructing a house. b. Taking a drug through clinical trials, and c. Installing the same computer system in all of an organization’s manufacturing plants. 2. Why is the hierarchical planning process useful for project planning? How might it influence the plan if the hierarchical planning process was not used? Answer: The hierarchical planning process is useful for project planning for a number of reasons: a. By starting very broadly and gradually adding more detail it is a logical and systematic process, and b. It fits well with typical organizational hierarchies in the sense that senior and middle-level managers can focus on the top level items and then delegate the specification of these details to the people that will be responsible for completing these tasks. A key problem with not using hierarchical planning is that important tasks may be overlooked which may ultimately delay the project and/or result in cost overruns. 3. Develop a WBS with at least two levels for a project you are personally familiar with (e.g., moving away to college, registering for class, cleaning out a garage). (Hint: the plan will be more useful as a learning exercise if you have a subordinate or two – real or imaginary). Be sure to include precedence’s, task durations, resource requirements, and milestones. Answer: The following example describes a project involving the development of a history term paper. It involves three students (Alex, Gary and Neil) and their instructor, Professor Daniels. History Term Paper WBS Task Name Predecessor Estimated Duration Resource Name 1 Select Topic 1 Week Alex, Gary, Neil 2* Get Topic Approved 1 1 Week Professor Daniels 3 Outline Paper 2 3 Days Alex 4* Conduct Research 3 Weeks Gary, Neil, Alex 4.1 Library Research 3 3 Weeks Gary and Neil 4.2 Research Web 3 2 Weeks Alex 5* Write-Up Report 4 Weeks Alex, Gary, Neil 5.1 First Draft 4.1, 4.2 2 Weeks Gary 5.2 Proof First Draft 5.1 1 Week Alex, Gary, Neil 5.3 Edit First Draft 5.2 1 Week Neil *Milestones 4. Discuss the drawbacks of implementing a project plan without a RACI matrix. Answer: A key drawback of not using a RACI matrix is that required communications or tasks may fall through the cracks as no one took responsibility for completing them, assuming they were someone else’s responsibility. 5. Assume that your class instructor appointed you project manager to lead a dozen of your classmates in writing up the end-of-chapter pedagogy materials (i.e., Review Questions, Discussion Question, Problems, Incidents for Discussion, and Cases) as an Instructor’s Guide for this book. You plan to form subteams to work on each of these elements, each headed by a subteam leader. Of course, all the subteam materials will need to be integrated into the final Instructor’s Guide at the end. Construct a WBS and RACI matrix for this project. Answer: The WBS for this project might be as follows. The RACI matrix could divide the classmates either among the chapters (e.g., 1-2 per chapter doing all the 5 elements) or among the elements (e.g., 2-3 per element with 1 person being sub team leader) and then a couple of people to integrate all the materials into the final Instructor’s Guide. 6. You and your family and friends are planning to host a graduation party at the end of the school year. Construct a WBS for this party. Answer: Task Duration Predecessor Assigned To 1. Invitations 1.1 Make up list 1 hour -- Alec, Bob, Tia 1.2 Buy invitations 5 days 1.1 Tia 1.3 Mail invitations 1 day 1.2 Bob, Tia 1.4 Update RSVPs 2 weeks 1.3 Bob 2. Food 2.1 Buy cake 3 days -- Tia 2.3 Buy drinks 2 hours 1.4 Bob 2.4 Buy appetizers 2 hours 1.4 Alec 2.5 Plates, forks, cups 1 hour 1.4 Alec 3. Decorate 3.1 Purchase banner 1 hour -- Alec, Bob 3.2 Buy balloons 2 days -- Tia 3.3 Napkins 1 hour 1.4 Bob 3.4 Decorate house 1 day 3.1, 3.2 Alec, Bob, Tia 7. Construct a WBS for the project in Question 3.5. Answer: Task Duration Predecessor Assigned To 1. Organization You 1.1 Establish sub teams 2 hours -- You 1.2 Select sub team leaders 2 hours 1.1 Sub team members 1.3 Assign chapters. 2 hours 1.2 Sub team leaders 2. Conduct project 2.1 Prepare drafts 4 weeks 1.3 Chapter leaders 2.2 Review drafts 2 weeks 2.1 Sub team members 2.3 Revise drafts 2 weeks 2.2 Chapter leaders 2.4 Review final drafts 1 day 2.3 Sub team leaders 3 Finalize project 3.1 Combine chapter materials 2 days 2.4 Sub team leaders 3.2 Make final revisions 1 day 3.1 Sub team members 4 Submit materials 1 hour 3.1 You 4.1 Meet with class instructor 2 hours 3.2 Project members 8. Consider one or more projects (from this course or elsewhere) that you understand reasonably well. Identify situations where information learned from a later task of the project becomes important to an earlier task. Answer: As an example, one can consider the construction of a new house. Initially the homeowners work with an architect to develop the plans for the house and, as part of the plans, the dimensions for the kitchen are specified. Later in the process the homeowners go out and actually select the cabinets and appliances for the kitchen. At this stage, it may be discovered that the original dimensions are not optimal given the cabinets and appliances the homeowners actually select. 9. Consider the differences between Agile Project Management and the traditional waterfall approach summarized in Table 3-4. Which practices associated with the APM approach do you see as having the greatest potential to compliment the traditional waterfall approach? Answer: As is noted in the chapter, many of the tenants of APM can easily be incorporated in more traditional approaches to project management. For example, there is nothing that prevents increasing customer involvement in the traditional waterfall approach. Likewise, there is nothing inherent to traditional project management that prohibits greater experimentation. This suggests that nothing precludes a PM from adopting a subset of APM best practices. Exercises 1. Find the best alternative given the cost outcomes below. The probability of rain is 0.3, clouds is 0.2, and sun is 0.5. Answer: Alternative State Rainy Cloudy Sunny Expected Value A 6 3 4 4.4 B 2 4 5 3.9 C 5 4 3 3.8 D 5 4 3 3.8 Probability 0.3 0.2 0.5 Options c and d have the lowest expected cost. 2. In Exericse 1, base your decision instead on the worst possible outcome for each alternative. Now consider a decision based on the best possible outcome. When might both of these give you the same decision? Answer: These are costs so a higher number is worst. The worst for each alternative are a(6), b(5), c(5), and d(5). Given this, the answer is a three-way tie: b, c, and d. The best for each alternative are a(3), b(2), c (3), and d(3). Given this, the answer is b has the best possible (lowest-cost) option. When a particular option had both the highest and lowest cost, that option would be selected using both rules. 3. Laptops-R-Me keeps detailed data on their laptop sales. In the last 300 days the number of laptops sold was as shown in the table … Answer: a. The frequency distribution of sales is: Number Sold Frequency 0 5% 1 10% 2 29% 3 47% 4 9% b. The average number of laptops sold daily is: 0(.05) + 1(.1) + 2(.29) + 3(.47) + 4(.09) = 2.45 laptops c. The yearly profit is: 2.45 laptops sold per day × 50 weeks/yr × 5 days/week × $65 profit/laptop = $39,812.50 4. You are offered the chance to play a dice game at $10 per toss of 2 die. If the sum of the two dice tossed is 4, you will receive $100. Should you play or not? Answer: Dice 1 Dice 2 1 2 3 4 5 6 1 2 3 4 5 6 7 2 3 4 5 6 7 8 3 4 5 6 7 8 9 4 5 6 7 8 9 10 5 6 7 8 9 10 11 6 7 8 9 10 11 12 As shown in the table above, a sum of for the two die occurs 3 times out of 36 times or 8.33% of the time (3/36). Therefore the expected value of the game is $100 × 0.0833 = $8.33. Since the expected value of $8.33 is less than the $10 it costs to play, you should not play. 5. A marketing firm is trying to win a major contract from a large retail company and is concerned with four major threats. (1) Competition: the probability of very competitive bids is high at 0.6, and the potential impact would be substantial at a value of 5 on a scale of 1–7 (where a 7 is a major negative impact and a 1 is slight). (2) Economy: probability of a recession is 0.4 and its impact would be 7 since the company would probably decide not to advertise. (3) Chance of a loss: a small probability of only 0.3 with a negative impact of 4. (4) Personnel loss (head of marketing is being courted by a competitor): probability of loss is 0.5 but negative impact is only 3. Use the FMEA technique to prioritize the risks. Answer: A few points about this problem. First, all the examples in the textbook use a 10 point scale. That is not a requirement so having impact measured on a 1-7 point scale and probability on a 0-1 scale is not a problem. Second, need to be sure that a higher number corresponds to a worse outcome. Here, competition, recession, loss, and personnel loss are all negative outcomes so a higher impact and probability is worse. Third, the textbook shows FMEA as severity x likelihood x detectability. All three are not required and some situations may have more than three. The point is to include all the factors that matter for a particular situation. Impact Probability FMEA Competition 5 0.6 3.0 Economy 7 0.4 2.8 Chance of a loss 4 0.3 1.2 Personnel loss 3 0.5 1.5 Based on the above, competition is likely to have the largest impact and the economy the second highest and both far exceed the other two so both should be monitored closely. 6. A marketing analyst has investigated each of the four threats in Exercise 3.5 in terms of NOT being able to ameliorate them and has come up with the following values (again, on a 7 point scale) for each of the threats: #1: 1, #2: 6, #3: 3, #4: 4. Recalculate the RPN and determine which risks are now critical and which can be ignored. How has this changed from before? Does this new ranking seem more realistic? Answer: S L D RPN Competition 5 6 1 30 Economy 7 4 6 168 Chance of a loss 4 3 3 36 Personnel loss 3 5 4 60 The new data greatly changes the ranking and makes the economy the riskiest. This seems much more realistic. 7. Prepare a WBS using MSP with the steps that must be completed before Vern Toomey can contact outsourcing vendors. If Vern starts on August 1, 2016, how long will it take to get ready to contact outsourcing vendors? Answer: Based on the information in the Gantt chart it would be Friday, August 16, 2013 before Vern would be able to contact vendors for the outsourcing proposals. 8. Develop a mind map for a nonprofit organization’s annual casino night charity event. Answer: 9. In addition to your regular responsibilities, your supervisor has just assigned you to be in charge of your organization’s annual golf tournament. It is expected that 100 to 150 employees will enter the tournament. In addition to organizing the event, you are also responsible for promoting it. Your budget for the event is $25,000. Develop a mind map for the golf tournament project. Answer: 10. Enter the tasks and task durations into the Gantt Chart View in Microsoft Project. Answer: Incidents for Discussion Plymouth Zoo’s Re-engineering Project Question: what should Avery Mitchell do next? Answer: Avery Mitchell should make no decision until he gets more information. What information should he ask the consultants for before accepting their proposal? Answer: He should ask for references, examples of other work redesign jobs the consultants have done, and he should ask about the relationship they had with the former CEO of the zoo. What project management tools would you suggest Avery ask the consultants to use to outline the project more specifically and address his concerns? Answer: He should also ask for: • A specific project charter with deliverables, objectives, schedules, resource needs, etc. • A RACI matrix so that Zoo officers can identify what the consultants are responsible for and what the Zoo is accountable to do to meet the targets. These pieces of information would help Avery determine if and how the work re-design project would impact ongoing work or other projects going on. Also, this information would enable him to see how the consultants propose to carry out the project. He can then determine the impact of the project on the Zoo’s everyday operations. This would also enable him to see where and how the cost savings were determined and whether they would be sufficient to meet the Zoo’s profit projections. Time is Fleeting Question: if you were the President, how would you handle this problem? Answer: The president could ask the IT and HR department heads each to outline a project plan for the approach they favored. It might be better, however, if he asked them to work together to prepare action plans for each of their recommended solutions to the current problem with the time clocks. The two department heads could then be asked to plan cost benefit studies of both plans. They should carefully delineate the objective of each project. Acting together, they could choose the best alternative, based on the cost/benefit studies. Then they could jointly outline the implementation project plan for the solution that they choose. Suggested Case Analyses and Solutions Friendly Assisted Living Facility -- 3 Question #1: Define the project deliverables. Answer: Deliverables of the project are: • Construction of a 100 unit facility • Provide a positive return on investment and contribute to overall business Project outcomes that will be measured to determine project effectiveness are: • Increase utilization of existing hospital outpatient services • Develop more services focused on wellness and preventative medicine • Increase census of inpatient units Question #2: Define project constraints and assumptions. Answer: Project assumptions are: • For-profit subsidiary of St. Dismas • Free standing apartment construction design • Facility will be constructed to provide easy access to St. Dismas’ services such as kitchen area, outpatient therapy areas, etc. • 100 units, some designed for heavy-assisted, and most light-assisted. Project constraints are: • Construction cannot begin until after November 1999 • Open facility in July 2000 Question #3: Develop a level 1 WBS. Answer: Outline the broad steps in the project, for example; Number Step 1 Start ALF project 2 Building design 3 Construction 4 Define food service needs 5 Define housekeeping needs 6 Define staffing needs 7 Develop policies and procedures 8 Create budget for facility 9 Create financial systems (payroll, accounting, etc) 10 Identify telecommunications & information systems needs 11 Develop marketing plan (including ground breaking event) 12 Develop communications plan 13 Define clinical services needed 14 Develop management structure 15 Identify all regulatory requirements 16 Complete Project Question #4: Develop the RACI matrix for this project based on the Level 1 WBS. Answer: Question #5: Would a Project Charter have been useful here? Answer: Consider the list of items to include in a charter shown in Section 3.1. Out of this list, it would have been useful to: • Clarify the assumptions underlying the project concerning future health levels, state of the economy, patient preferences, etc. • Constraints facing the Center on this project (staff, money, etc.) • High-level risks • Milestones for control phase gates to review and reconsider project progress • Identify key stakeholders such as the local community, regulatory agencies, etc • Boundaries as to what is out of scope on the project. John Wiley & Sons Teaching Purpose: This case requires students to use their creativity and develop a WBS for a website development project. Question #1: Develop a mind map for this project. Answer: Question #2: Convert your mind map into a WBS. Answer: Question #3: Discuss how your mind map might be used to facilitate other project planning activities such as resource allocation, schedule development, and risk analysis. Answer: The mind map can be utilized to develop what additional resources (human) can be allocated, and for what portion of the project. It would also facilitate the development of a schedule for each component of the website and determine where risks might be encountered within the project, where the pitfalls might be encountered as you develop the website. Samson University Teaching Purpose: This case reinforces issues related to effective launch meetings, the development of mind maps and WBS, and risk assessment.. Question #1: Critique the launch meeting. Are there aspects you think are worth emulating? Are there aspects you would do differently? Answer: Opinions will naturally vary on this question. Positive aspects might include: • Project was introduced by Dean Ryan, the project sponsor within Samson University. • Dean Ryan thanked the team members for participating and explained the strategic importance of the project. • Professor Scott, the project manager, took over after Dean Ryan’s introduction. • All of the team members seemed to participate in the meeting and were mostly positive about the project. Negatives might include: • As Professor Lee points out, the goals of the project were not well founded at the launch meeting. • Other than Professor Scott coming up with a draft schedule and sending out a poll, no one else left the meeting with any responsibilities. • A number of ideas were thrown out at the meeting (benchmarking, faculty related issues, online survey, resources in career center, and curriculum) but there was no plan from the meeting to follow up on any of these. Question #2: Develop a mind map for this project using the ideas shared in the meeting and other ideas that occur to you. Answer: It is important to emphasize that the purpose of the mind map is to identify the work that needs to be done to complete the project. It is not the purpose to identify or address the goals of the project. Question #3: Convert your mind map into a WBS. Answer: The figure below illustrates the process of converting the mind map to a WBS down to level 2. The process is continued for the level 3 and 4 tasks. Question #4: Review your mind map and identify risky potential failure points. Which are the most serious? Which are the most likely? Determine the most critical failure points by calculating all their RPNs. For each of the most critical failure points you identify, develop a contingency plan. Answer: FMEA begins by identifying ways the project might fail. Next, each potential failure is evaluated in terms of the severity of the failure, the likelihood of the failure, and the detectability of the failure. Finally, the RPN is calculated as the product of these three parameters. The Figure below illustrates failure points students might identify for this project. According to this analysis, the task with the greatest risk is Determine the Goal of the Program and suggests the need for a solid contingency plan for this task. Chapter 4 Budgeting the Project This chapter continues the topic of project planning and focuses specifically on project budgeting and its risks. With the technical aspects of project planning discussed in the previous chapter, this chapter addresses the need to develop a budget in order to obtain the resources needed to accomplish the project’s objectives. The chapter begins with an overview of budgeting methods and discusses both the top-down and bottom-up approaches. In comparing these approaches, it is noted that top-down budgeting is usually accurate overall but may include significant errors for low-level tasks. Bottom-up budgeting, on the other hand, is usually accurate for low-level tasks but risks overlooking tasks. Following this overview of budgeting methods, the chapter next addresses the issues of cost estimation and improving cost estimates. The need for PMs to thoroughly understand the organization’s accounting system is emphasized. Also the issue of budget cuts is addressed. In terms of improving cost estimates, techniques such as the use of learning curves and tracking signals are presented. Finally, the chapter concludes with a discussion of budget uncertainty and risk management via the use of simulation. Cases and Readings Some cases appropriate to the subject of this chapter are: Harvard: 9-193-071 Porsche AG This 20-page case illustrates how traditional cost measurement systems operate in an R&D department but offers little information for managing projects. Harvard: 9-690-051 Campbell Soup Co. This 23-page case describes the cost-justification of a new engineering project to develop a microwavable package and product for the growing convenience foods market segment. A 28 page teaching note (5-690-094) is available for this case. A reading appropriate to the subject of this chapter is: P. Armour. Ten UnMyths of Project Estimation (Communications of the ACM, 45(11), 2002). This reading discusses some commonly accepted “unmyths” about estimating project costs. An “unmyth”, according to the author, is something that appears to be true but when looked at closely, is not true. The author draws attention to some accepted practices associated with estimating project costs, duration, productivity, resource needs and so on and suggests ways of treating these estimates. Answers to Review Questions 1. Contrast the disadvantages of top-down budgeting and bottom-up budgeting. Answer: The main disadvantages of top-down budgeting are that: • Significant errors may be made for low-level tasks, • A lower level of budget acceptance is likely due to limited participation, and • It provides little training opportunities in budgeting for junior managers. The main disadvantage of bottom-up budgeting is the risk of overlooking some important, and possibly expensive, tasks. 2. What is the logic in charging administrative costs based on total time to project completion? Answer: Charging administrative costs based on total project completion time is based on the assumption that administrative costs increase in proportion to the length of the project. In other words, longer projects are expected to require more administrative resources than shorter projects, which may or may not be true for individual projects. 3. Would you expect a task in a manufacturing plant that uses lots of complex equipment to have a learning curve closer to 70 percent or 95 percent? Answer: The learning rate corresponds to the new amount of time or cost when the output doubles, relative to the previous amount of time or cost. Therefore, a lower learning rate actually translates into a faster rate of learning. Generally speaking, people have the ability to learn while machines do not. Thus, if we assume by complex we mean automated, then the plant would have a slower learning rate of perhaps 95 percent. On the other hand, if by complex it is assumed that workers need a great deal of skill to operate the equipment, then a faster learning rate of 70 percent would be expected. 4. Are there other kinds of changes in a project in addition to the three basic types described in Section 4.4? Might a change be the result of two types at the same time? Answer: The three basic causes of changes listed in Section 4.4 are: • Errors made by the cost estimator with regard to how to achieve the tasks identified in the project plan. • Increased knowledge by either the team or the client as to the nature of the performance goals. • The passage of a new law, standard, or policy. These three causes would appear to capture the vast majority of change in projects. As the question hints, however, two or more of these causes may occur at the same time. For example, new knowledge of a competitor’s new product may change the performance goal of a project and also require a change in how the tasks are achieved. Suggested Answers to Discussion Questions 1. Given the tendency of accountants to allocate a project’s estimated costs evenly over the duration of the task, what danger might this pose for a project manager who faces the following situation? The major task for a $5 million project is budgeted at $3 million, mostly for highly complex and expensive equipment. The task has a six month duration, and requires the purchase of the equipment at the beginning of the task to enable the project team to conduct the activities required to complete the task. The task begins December 1. Answer: The accountant would likely assume that the $3,000,000 is to be allocated evenly over the six month duration of the task or $500,000 per month. However, most of the $3,000,000 will likely be incurred at the beginning of the task when the equipment must be acquired and paid for. The problem for the PM is that the accountant will expect a $500,000 charge in the first month of this task but will see an expenditure of close to $3,000,000! Based on this the accountant and top management may become alarmed in terms of the project being completed on budget. 2. The chapter describes the problems of budgeting projects with S-shaped and J-shaped life cycle curves. What might be the budget problems if the life cycle of a project was just a straight diagonal line from 0 at project start to 100 percent at project completion? Answer: A straight-line project life cycle means that the impact of a budget cut would be constant throughout the project’s life. A slope greater than 45 degrees means a change in the budget would have a proportionally larger impact on the project’s completion. Conversely, a slope less than 45 degrees means a change in the budget would have a proportionately lesser impact on the project’s completion. Of course it is unlikely in reality to observe a straight-line life cycle. 3. If a firm uses program budgeting for its projects, is an activity budget not needed? If it is, then of what value is the program budget? Answer: Activity budgets segregate costs by types of expenditures - phone, labor, etc. - whereas program budgets group costs according to the task or job that uses resources of all types to accomplish that task. Program budgets, therefore, relate expenditures directly to the project plan and simplify the project manager problem of managing the budget and making trade-offs. 4. As a senior manager, you oversee a project with a total estimated cost of 245 engineer-months of effort. Three months ago, however, the project had fallen behind by about 25 engineer-months so you authorized the hiring of three additional engineers, which you felt should more than make up for the delay in the remaining year of the project (3 x 12 months = 36 engineer-months). You have just received the latest quarterly project status report and are surprised to learn that the project is now 40 engineer-months behind schedule! Your first reaction is to calculate how many more engineers need to be hired to make up for the increased delay. Using Brooks’s concept of the “mythical man month,” explain what might be happening here. Answer: According to the “mythical man month” effect, the three new engineers hired would be unlikely to hit the ground running. They would almost certainly require training. This training would likely take time away from other members of the project team. Thus, the extra capacity created by adding these three engineers was likely more than used up by the other engineers who spent some of their time now training the new team members. Depending on the amount of training needed, the next quarter may show some catching up or falling even further behind, but if more engineers are hired again, the project will undoubtedly fall further behind. 5. So what went wrong with the assistant purchasing manager’s solution (outlined in Section 4.3) to the problem of having an inadequate supply of hard-to-obtain parts? Answer: The assistant purchasing managers’ solution (i.e., including a 10 percent allowance for additional, hard to obtain parts in every cost proposal) only addressed the symptom of the problem. It did not focus on the cause (i.e., why the company was short in the first place). Furthermore, the solution created another problem, namely, that the organization was no longer cost competitive. 6. Contrast simulation to other risk analysis tools discussed in Chapter 3 such as decision tables, FMEA, logic charts, and contingency planning. What are its advantages and disadvantages? If you were to do an important risk analysis, which tool would you prefer? Answer: A simulation involves the use of a model of a system to analyze the expected behavior or performance of the system. Most simulations are based on some form of Monte Carlo analysis which simulates a model’s outcomes many times to provide a statistical distribution of the calculated results. The advantages of this methodology are that it gives a graphic picture of the results and their probabilities, and can be used to determine the impact of whatever assumptions one wishes to make. On the negative side, the outcomes are determined by the parameters used in the model. Decision tables employ the probabilities of various events happening and the outcomes of different decisions/policy choices when each of those events occur, so in some ways it is like a simplified simulation of each decision/policy, but the result is usually expressed as a single number, the expected value. Although the extreme values can be seen in the various outcomes with their probabilities, these aren’t usually checked. FMEA is a structured approach similar to the scoring methods discussed in Chapter 1 to help identify, prioritize, and better manage risk. A risk priority number is calculated as severity times likelihood times undetectability. The advantages of this methodology are its ability to rank risks and it includes the probability of occurrence. Its disadvantage is that very large scores on any one scale can overwhelm modest scores on the other scales. Logic charts show the flow of activities once a backup plan is initiated. They force managers to think through the critical steps that will need to be accomplished in a crisis, and provide an overview of the response events and recovery operations. The advantage is that once an event occurs, everyone knows what to do. The disadvantage is it does not give any indication of the probability of the event or its impact if it happens. A contingency plan is a backup for some emergency or unplanned event, often referred to colloquially as “plan B.” The contingency plan includes who is in charge, what resources are available to the person, where backup facilities may be located, who will be supporting the person in charge and in what manner, and so on. Its advantages and disadvantages are identical to logic charts. Simulations provide the most detail but are the most difficult to prepare. FMEA provides many of the advantages of a simulation but is much easier to prepare. Generally, logic charts or a contingency plan would be used to plan for important risks identified by either simulation or FMEA. Solutions to Exercises Note to instructor: All Crystal Ball solutions are simulations. As such, every answer will be different, although the results will be similar to those shown. Note too that each time a student runs the simulation, they will get a slightly different answer. 1. Your firm designs PowerPoint slides for computer training classes, and you have just received a request to bid on a contract to produce the slides for an 8-session class. From previous experience, you know that your firm follows an 85 percent learning rate. For this contract it appears the effort will be substantial, running 50 hours for the first session. Your firm bills at the rate of $100/hour and the overhead is expected to run a fixed $600 per session. The customer will pay you a flat fixed rate per session. If your nominal profit margin is 20 percent, what will be the total bid price, the per session price, and at what session will you break even? Answer: As can be seen from the following Table, the number of hours needed to prepare the slides (given an 85% learning rate) would be 50 hours in session 1, 42.5 hours in session 2, 36.1 hours in session 4, and 30.7 in session 8. This enables the total cost per session to be calculated … and thus the total for the eight sessions. The total cost for the eight sessions is $34,479 to which your firm adds a 20 percent profit margin to give a bid price of $41,375. The per-session price, therefore, is $5,172. Comparing the cumulative revenue with the cumulative cost, your firm will break even in the third session. 2. If unit 1 requires 200 hours to produce and the labor records for an Air Force project of 50 units indicates an average labor content of 63.1 hours per unit, what was the learning rate? Answer: Calculation of learning rate: First begin be calculating the total labor hours required to complete the contract of 50 units as follows: 50 units × 63.1 average hours = 3,155 hours. Next, set up a spreadsheet like the one shown in the Media One Consultants example in the chapter as shown below. Finally, using a trial and error approach, plug in alternative values of the Learning Rate to get a cumulate time for the first 50 units as close as possible to 3,155 hours. A 75% learning rate yields a cumulative time of 3155.2 hours. What total additional number of labor-hours would be required for a follow-on Air Force Contract of 50 units? What would be the average labor content of this second contract? Of both contracts combined? Answer: Using the spreadsheet, the total time for the first 100 units would be 4,836 hours. Subtracting out the 3,155 hours for the first contract of 50 yields 1,681 hours for the second 50. The average labor content of the second contract is thus 33.62 hours (1,681/50). The average labor content of both contracts combined is 48.36 hours (4,836/100). If labor costs the vendor $10/hour on this second contract and the price to the Air Force is fixed at $550 each, what can you say about the profitability of the first and second contracts, and hence the bidding process in general? Answer: At a labor rate of $10/hour, the first 50 cost $631 each so they lose money. The second contract of 50 cost $336.20 each and thus make money. Between both contracts, they cost $483.60 each, on average, so the net result is a profit of $550 – 484 = $66 each or a total profit of $6,600. One implication is to bid under cost to get a contract and then make a profit on follow-on contracts. Indeed, if this strategy is not pursued, the organization may never get the first contract and not have the opportunity to move down the learning curve. 3. The IT unit of a company has been asked to prepare a budget for a special software package project. The group has considerable experience with similar tasks and submits the costs in the following table. The group also thinks that the distribution of the hours worked for each phase is normal. The wage rate for the software engineers employed on each phase is $60 per hour. Using simulation, find the distribution of total engineering costs for all the phases. What is the average engineering cost? Also, find the probability that the total engineering cost will be less than $85,000. Answer: The Crystal Ball simulation for completion time is shown below. The mean is 1,313 hours, the standard deviation is 126.7, and the distribution is close to normal. The Crystal Ball simulation for cost is shown below. The mean is $79,398 and the standard deviation is $7,544. As part of the simulation, a count of the number of times that the cost was below $85,000 was made. Out of 1,000 simulations, the cost was below $85,000 770 times, giving it a 77 percent chance of being below $85,000. That Crystal Ball simulation is shown below. 4. Reconsider the following exercise from Chapter 1: A four-year financial project is forecast to have net cash inflows of $20,000; $25,000; $30,000; and $50,000 in the next 4 years. It will cost $75,000 to implement the project, payable at the beginning of the project. If the required rate of return is 0.2, conduct a discounted cash flow calculation to determine the NPV. Now, however, assume that the net cash inflows are probabilistic variables. Further assume that each forecast net cash inflow is normally distributed with standard deviations of $1,000, $1,500, $2,000, and $3,500, respectively. Given a required rate of return of 0.2, find the mean forecast NPV using Crystal Ball®. What is the probability that the actual NPV will be positive? Answer: The NPV is calculated using Excel as follows: Note that the NPV is calculated two different ways. The first is cell B9 which uses the Excel NPV formula and is “=B4+NPV(B1,B5:B8)”. The second approach calculates the discounted value of each individual cash flow and then sums those individual discounted values to obtain the NPV. The formula in cell C4 is “=B4/(1+$B$1)^A4” and that value is copied down through C8. The formula in cell C9 is “=SUM(C4:C8)”. To handle variation, the spreadsheet was modified in two ways: • Cells B5 through B8 were defined as assumption cells. Cell B5 was defined as an Assumption Cell with a normal distribution with a mean of 20,000 and standard deviation of 1,000, and so on for the other cells. • Cell B9 was defined as a Forecast Cell. The results of simulating this situation 1,000 times in Crystal Ball are shown below. According to the results, the expected NPV is $589 while there is a 59.6% probability that the NPV will be positive. Of even greater importance, the distribution of potential NPVs is generated with the simulation approach providing the decision maker with insight into the uncertainty and risk associated with the situation. In this case, we see the NPV ranges from a low of -$6,742 to a high of $8,935. 5. What would happen to the NPV of the above project if the inflation rate was expected to be 4 percent in each of the next 4 years? You may use either Excel® or CB to determine your answer. Answer: Using Excel, and ignoring variability, the inflation changes the calculation to the following: Here, we simply used the spreadsheet developed before and increased the discount rate from 20 percent to 24 percent. When risk is included, as shown in the spreadsheet below, the probability that the NPV is positive declines from 59.6% to 0.5%. 6. Information about the cash flows for a four-year financial project are listed in the following table. The cash flows are assumed to follow a triangular distribution. The cost of implementing the project is expected to be between $60,000 and $70,000, with all values in this range being equally likely. Analysis of changes in the Consumer Price Index suggests that the annual rate of inflation can be approximated with a normal distribution with a mean of 4 percent and standard deviation of 1.5 percent. The organization’s required rate of return is 20 percent. Develop a model in CB to analyze this situation and answer the following questions. Answer: To analyze this problem the Crystal Ball model shown in the Figure below was created. The results are replicating the CB model 10,000 times are shown below: a. According the results shown above, the expected NPV of the project is $5,892. b. Based on the results shown above, the range of NPV for the project was $-13,374 to $24,960. c. Using CB, it can be determined that there is approximately a 12.5% of the NPV being negative. This suggests a moderate amount of risk. d. Based on an expected NPV of $5,892 with an after inflation 20% discount rate and only a 12.5% of losing money, this project appears to be investing in. Of course the risk profile of the decision maker must also be considered. 7. Server Farm Inc. (SFI) needs to upgrade its server computers. Company management has identified the following two options: (1) shift to a Windows-based platform from its current Unix-based platform, or (2) stick with a Unix-based platform. It is standard practice at SFI to use a triangular distribution to model uncertain costs. Answer: The basic worksheet is shown below. Cell B18 calculates the total Windows cost for the simulation while cell C18 does the same for the Unix cost. For Windows, the results are shown below: For Unix, the results are shown below: (a) What is the expected cost of each project? Answer: The expected cost for Windows is $511,063 and the expected value for Unix is $498,915. (b) What is the probability that each project’s cost will exceed $575,000? Answer: There is a 14.96 percent chance that Windows will exceed $575,000 and a 15.30 percent for Unix. (c) Which project would you consider to be the most risky? Answer: The probability of exceeding $575,000 is slightly higher for Unix and the standard deviation is slightly higher for Unix as well (66,477 for Unix versus 54,287 for Windows) so the Unix project is slightly riskier. (d) Which project would you recommend SFI undertake? Why? Answer: While the Unix project is slightly riskier, it has a lower expected value and the company has experience with Unix so I would recommend the Unix project (although, students could make a strong case for the Windows project based on risk). 8. A light manufacturing firm has set up a project for developing a new machine for one of its production lines. The most likely estimated cost of the project itself is $1,000,000, but the most optimistic estimate is $900,000 while the pessimists predict a project cost of $1,200,000. The real problem is that even if the project costs are within those limits, if the project itself plus its implementation costs exceed $1,425,000, the project will not meet the firm’s NPV hurdle. There are four cost categories involved in adding the prospective new machine to the production line: (1) engineering labor cost, (2) nanoengineering labor cost, (3) assorted material cost, and (4) production line down-time cost. Answer: The spreadsheet used for this simulation is shown below: All five variables were defined using a triangular distribution using the data shown. The simulated values were stored in cells B9:B13. Costs were used directly in cells B16:B20 while hours were multiplied times the appropriate hourly rate. The project total was calculated in cell B21. The results of this simulation are shown below: The expected value is $1,324,003 and there is a 92.83 percent chance that this project will come in under $1,425,000. Incidents for Discussion Suggested Answers A Budgeting Novice Question: What do you think Alex should show to his boss, so that the boss would feel more comfortable letting Alex determine and monitor the project’s budget? Answer: Since the precedent has been set that a top-down approach to budgeting is used at this company, Alex should do the same. In the past, Alex has had autonomy to manage both performance and schedule, but has not been permitted to develop the budget. Thus, it might be helpful for Alex to share documents with his boss that demonstrate his competency in handling both schedule and performance (assuming his boss is not familiar with these). In addition to documenting his previous experience, it would be useful for Alex to share with the boss his WBS and demonstrate how this drove his cost estimates. Finally, Alex might find it useful to share with his boss how having responsibility for only schedule and performance and not budget, limits his effectiveness as a project manager. Another advantage for Alex’s boss is that more of his or her time would be freed up if Alex were permitted to work on budget issues with clients. Question: What should Alex say to persuade his boss? Answer: Alex could approach his boss with sound estimates and assure the boss that he has involved all the experts in preparing the budget. Most likely, the boss will still re-work the numbers, but he should be more comfortable that Alex did his homework in preparing it. Alex must make timely communications to the boss on the project status, including thorough budget reports. Stealth Electronics Question: What should the CFOP do? Answer: This is a difficult situation due to the lack of experience with building the systems. The only information the CFO has available is the costs of building the prototype. The CFO needs to: ○ Put more certainty into the estimate of costs and the schedule of the project this will decrease the risk of cost overruns. ○ Make sure that the learning curve is taken into account for each of the steps involved in the project. The time taken for each should be reduced by a learning rate. ○ Work with the project manager to conduct three-time estimates for the durations and costs of each task in the project. ○ Be sure that uncertainty was accounted for in the project … and, based on that information, conduct a risk analysis. ○ Examine various outcomes and determine the probability of what will happen. Crystal Ball would be a good tool for the CFO to use to conduct a thorough risk analysis. General Sensor Company Question: Under these circumstances, would Justin be wise to pursue a top-down or a bottom-up budgeting approach? Answer: Justin should combine the top-down approach with selected bottom-up inputs and checks on the 50% of cost stage. He is experienced and comfortable with a top-down approach and this makes sense for the majority of the project. Selective inputs from lower level workers involved in the tasks would confirm his estimates, or indicate where more information is needed. Why? What factors are most relevant? Answer: The most relevant factors are the seriousness of the error, Justin’s experience, and the fact that only one stage is affected, but it represents 50% of the cost. Suggested Case Analyses and Solutions Friendly Assisted Living Facility Project Budget Development -- 4 Teaching Purpose: This instalment of the St. Dismas case requires students to address issues related to identifying and dealing with cost uncertainty Question 1: The cost per square foot for the units is given in the text together with its standard deviation. What other areas of cost or revenue are likely to have cost uncertainty? Answer: Other areas of cost and revenue that are likely to be uncertain are the: • Contingency allowances. • Marketing costs. • Personnel replacement costs. • Resource costs. • General services and administration (GS&A) costs. • Overhead allocation to budget. • Influences such as weather on the construction. • Cost increases for equipment or furniture, and • Labor cost increases. Question: How should these uncertainties be handled? Answer: To handle the uncertainty, the estimators need to gain more knowledge of the areas of uncertainty and clearly define all the assumptions that were used to determine the budget. Furthermore, they need to review the project plans thoroughly to identify areas of risk. Finally, they should ensure that they have an effective change order process in place in case there are the [inevitable] changes during the project. Assuming cost or revenues are normally distributed, statistical and probability theory could be used to gain additional insights. Of course, it is important that the project manager, working with the accounting department, closely monitors all of the project costs. Question 2: How would you suggest the team handle the issue of Dr. Link’s supposedly inflated medical equipment costs? Answer: Since these are expensive items, the CFO should recommend using a bottom-up approach to budgeting. The CFO should set up a team consisting of both experts and the differing doctors to determine the actual equipment needs and costs. This would (a) enable buy-in from both parties and (b) ensure a more accurate estimate of needs. If there is sufficient data, the CFO can also include a tracking signal to identify if bias is in the estimates. Question 3: Once the overall budget is agreed upon, what will need to be changed in it for the project to commence? Answer: The budget will have to be broken down by project time period and task in the project plan. Later on, we will use this project budget to monitor and control the project. Photstat Inc. Teaching Purpose: This case provides students with an opportunity to analyze the risk of a project with several uncertain parameters. Students are asked to simulate the completion of this project 1000 times and create a risk profile for the project. Based on this, students are asked to comment on the implications of using an average value versus the risk profile. Case should be analyzed using Crystal Ball. Question 1: What is the expected value of the project? Answer: The spreadsheet below was created to calculate the expected value for this project. It is worth noting that one simplification was made. Namely, only the cash flows for the first six years as opposed to the first six-and-a-half years were discounted in calculating the NPV of the project. According to the spreadsheet, the expected value of this project is $1,221,361 (see cell P5). The expected value would be perhaps $100,000 to $200,000 higher had the cash flows for the first half of the seventh year also been included. Expected Value Calculation Question 2: Simulate this project 1000 times and compute the average profit over the 1000 replications. Plot a histogram of the outcomes of the 100 replications. Answer: The use of Crystal Ball can greatly speed up the development and analysis of the simulation model for this case. To illustrate this, the spreadsheet shown above was created. With Crystal Ball, values for the random parameters are generated by defining cells as Assumption Cells rather than using Excel’s Random Number Generation tool. In this particular case, cells B5 to I5 were defined as assumption cells. For example, cell B5 corresponds to the market size in the first year of the product’s introduction. From the case, it is estimated that the market size follows a normal distribution with a mean of 100,000 units and standard deviation of 10,000 units. To define cell B5 as an Assumption Cell, first the cursor was placed in this cell. Next, the Define Assumption button was selected. Then the Normal distribution was selected from the Distribution Gallery that appeared. In the next window, 100,000 was entered in the Mean field and 10,000 was entered in the Std Dev field and the OK button selected. Cells C5 to H5 were specified in a similar fashion. Cell I5 was a little different in that the useful life of the equipment does not follow a continuous distribution. In this case, the Custom distribution was selected from the Distribution Gallery. Next 3 was entered in the Value field and .1 entered in the Prob. field and the Enter button clicked. In a similar fashion, 6 was then entered in the Value field, .8 in the Prob. field and the Enter button clicked. This was repeated for the probabilities of 8 year and 10 year useful lives, respectively. After all this information was entered, OK was clicked. Finally, cell P5 was defined as the Forecast Cell. NPV was entered as a descriptive name in the Forecast Name field and Dollars in the Units field. The formulas in cells J5:O5 are the same as was previously discussed. To run the simulation, the Start Simulation button was selected. The Frequency Chart and Statistics views are shown below. Crystal Ball’s Frequency Chart View Crystal Ball’s Statistics View Question: How does the average of the simulation compare to the expected value you calculated? What are the managerial implications of this difference? Answer: The average of the simulation was $1,231,918 which is relatively close to the expected value. However, the range of values observed in the simulation experiment varied from $241,763 to over $2.4 million. Thus, the simulation experiment demonstrates the uncertainty of the actual outcome of this project. Building the Geddy’s Dream House – Solution To analyze the Crystal Ball model shown below was created. In the model cells E2:E25 are assumption cells based on the Triangular distribution and the parameters in columns B:D. Cell E26 was defined as a forecast cell. 1. The sum of the most likely cost estimates is $350,000 and exactly matches what the couple would like to spend. 2. Given the randomness inherent in simulation analysis, student results will vary. One replication of the Crystal Ball model where the project was simulated 10,000 times yielded an average cost of $370,716. The result obtained from the simulation analysis is higher than what was obtained from the more static analysis of simply summing up the most likely cost estimates. The reason for the difference is that in this case the costs are not symmetrical around the mean and typically the distance between the most likely and pessimistic cost is greater than the distance between the optimistic and most likely cost estimates. Because the simulation analysis incorporates more information, students should have more confidence in it. 3. In the Crystal Ball Model that simulated the project 10,000 times the minimum cost was $332,868 and the maximum cost was $412,773. Again, student answers will vary. 4. Based on the results obtained from the Crystal Ball model, there is a 96.94% chance the cost of the house will exceed $350,000 and a 64.95% chance the cost of the house will be less than or equal to $375,000. There is a 61.89% chance the cost of the house will be between $350,000 and $375,000. It is almost certain the cost of the house will exceed the couple’s desired cost but almost a 65% chance the house will cost less than the couple’s upper limit. Nevertheless, with a 35% chance of the house exceeding the couple’s upper limit, they should be quite concerned. 5. Adding the services of an interior designer increases the expected cost of the house to $373,983 (or an increase of $3,267). Note that the expected increase in the house is larger than the most likely value for the interior designer. Also note that this analysis assumes that utilizing the services of an interior designer does not impact the cost estimates in the other areas which in some cases may not be valid. Solution Manual for Project Management in Practice Jack R. Meredith , Scott M. Shafer , Samuel J. Mantel 9781119385622
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