Risk Management Part 3 – Building Cost and Schedule Models that Incorporate Variability and Risk...

Risk Managem

ent Part 3 – Building Cost and Schedule Models

that Incorporate Variability and Risk

byDonald E. Shannon, PMP, CFCM, CPCM, DMLThe Contract Coach, Albuquerque, NM

DisclaimerInformation in this presentation makes reference to various software products. This should not be interpreted as a recommendation or endorsement by any of the sponsors of any one product. Individuals should conduct appropriate research to identify a product that best meets their specific needs. Where appropriate, credit has been given to the software OEM especially where screen shots of their products have been used. A listing of the products commonly used to accomplish the simulation and scheduling functions described herein is included at the end of this presentation

Building a Model Project

Managing in the virtual world ….

Time to Build Our Model

Our model of the effort (contract, project, etc) must include: Tasks to be performed Resources to be used in

accomplishing those tasks Labor Materials Other (Travel,

subcontracts, etc.) Cost data for the each of

the resources and tasks Schedule data Risk Data

Tools to be Used

Excel or Numbers spreadsheet

Project, Primavera, FastTrack, or other scheduling application

Simulation program such as: @Risk Risky Project Primavera Full Monty

What We Will Do

Create Work Breakdown Structure

Expand (decompose) WBS into various tasks

Identify resources for each task

Create risk register Map risks to each task Determine cost baseline

with and without risk Create probabilistic

estimates for cost at completion and completion date.

Proper Prior Planning Prevents Poor Performance When should these models be created?

Ideally during the acquisition planning / proposal phase Aid in determining project cost or verifying other

estimates Project schedule demonstrates understanding of project

scope Risk analysis identifies likely problems/issues that must be

addressed during performance phase Models are component of overall project plan and will

aid in creating winning proposal

If detailed planning is deferred until contract award, this planning must be done to support kick-off

Model Components

Work Breakdown Schedule

Resource Loaded Project Schedule

Risk Register Risks Probability, impact,

polarity Cost estimates/quotes Basis of estimate

Assumptions Factors Cost Estimating

Relationships

Project Schedule

Risk Register

Cost Estimate

WBS

Project Model

Basis of Estimate

Example - Product (End Item)

Prototype system Competitive Test Production System

contract 100 systems Spare Parts Deployment to 60 +/-

facilities Training

66M Contract value Option for additional

systems Option for facility

integration (conveyor system)

Example - WBS

WBS Children

WBS Dictionary – defines what is or is not included in a WBS code.

Program Schedule – elaborates on WBS to identify what effort must be accomplished for each WBS element, when that effort will occur, how long that effort will take, and what resources are required to accomplish the effort.

Project Budget – quantifies what the cost of each WBS element will be by assigning a cost to each resource used in the schedule. Cost estimate for proposal/negotiation purposes The Budget also is influential in setting up the account codes used to

track performance

Performance Baseline – Combines the Budget and Schedule so as to depict when the budget will be spent and the associated work that will be accomplished.

Example - Resource Loaded Project Schedule

Example - Risk Register

# Risk +/- Prob.

Impact

Score

1a Customer asserts requirement change does not constitute a “change” and will not pay for “additional work”

- 4 4 16

6 Inability to manufacture critical optical assembly chassis to specifications

- 3 5 15

1b Requirement change is covered by changes clause and results in a change order

+ 4 3 12

4 Bad weather closes office - 3 3 9

5 Flu epidemic impacts workforce availability

- 3 3 9

3 Loss of key staff during project - 2 4 8

2 Inability to obtain project financing - 1 5 5

Example - Cost Estimate

Commonly Used Tools

Project Management Microsoft Project (several

versions – PC only) Primavera (several versions)

PC Only ProjectLibre / Open Project

(Free multi-platform) FastTrack Schedule (Mac and

PC versions) Deltek Open Plan (Web Based) OmniPlan (Mac) Merlin (Mac) Open Workbench (PC) 2Plan (Mac, PC and Linux) Excel (via templates and

macros)

Project Risk Management RiskyProject (Stand-alone PC

only Includes Project software))

@Risk (Excel add-in PC Only) Oracle Crystal Ball (Excel add-

in PC Only) Oracle Risk Analysis

(Enterprise solution) Risk Engine (Excel add-in MAC) SimVoi (Excel add-in Mac and

PC) Deltek (Web based –

Enterprise level) Other Tools

WBS Chart Pro

Time to Get To Work!

Step 1. Create Work Breakdown Structure It is the framework

(skeleton) upon which all else rests.

Hierarchical (tree like) structure Top-Down structure Product Oriented

Mil-STD-881C is convenient (and FREE) reference/guide

Level 1 = End Item Level 2 = Major Systems Level 3 = Subsystems

and/or major components Level n (lowest level) =

work package

What’s a Work Package

In traditional cost/schedule systems, the criteria for defining work packages is as follows: Each work package is clearly

distinguishable from all other work packages

Each work package has a scheduled start and finish date

Each work package has an assigned budget that is time-phased over the duration of the work package

Each work package either has a relatively short duration, or can be divided into a series of milestones whose status can be objectively measured, or

Each work package has a schedule that is integrated with higher-level schedules.

Work Packages are deliverable oriented

Build the Schedule

The WBS tells us WHAT will be done

The schedule tells us WHEN it will be done AND: How long it will take

(duration) Who will do the work

(resources) What must occur

before this work can be done (predecessors)

What materials or other (direct) costs will be incurred

When it will be done

Elaboration Expanding the WBS

element or WP contents into greater detail

Stop when additional detail does not contribute to the understanding

Example: Install lighting fixtures probably does not need additional detail

Can be done by a single person or group

Time to accomplish is less than a single reporting period (e.g., week or month)

Project Scheduling Project scheduling is an

iterative process Start with the goal first

Desired outcome or product Define the steps to that goal

Typically based on past experience or logical progression

Usually organized into groups by process, function or product (i.e., a Work Breakdown Structure or WBS)

“Top Down” approach Start with generalities and

then break down into smaller (more detailed) steps

PMI defines this process as decomposition

Result is a task list

Progressive Elaboration

Project Scheduling Several passes are made through the work, each providing increased detail.

Some tasks are too vaguely defined initially to break down These are entered as a

single large task to be defined when sufficient data is available

This technique is called Rolling Wave planning by PMI


Identify Resources

Resource pool for project or enterprise

Labor Resources May list by name or

specialty Total number available

= 2 ½ 2 full time people 1 half time person

Facilities Special tools or

equipment items Subcontracts

Project Scheduling Once tasks are identified they are further developed Effort: The amount of work

needed to complete the task e.g., 60 labor hours, 48 clock hours

Duration: The period of time it will take the workforce to accomplish the effort e.g., 60 labor hours ÷ 2 people = 3 days + 6 hours

Resources: Who and/or what is needed to do the work. People Equipment Supplies


Estimating Effort

Most difficult and error prone step in the entire process

Several techniques Analogy – compare new

task to something done previously

Parametric Estimate – use planning factors or rules to equate work to effort i.e., 100 sq/ft per hour per person

Expert Opinion – Obtain estimate (preferably 3 points) from subject matter expert.

Historical data i.e., flat rate

Delphi – consensus of experts

Estimating Effort

Remember that estimates are not exact

Try to model as a three-point estimate Optimistic Most likely Pessimistic

Beware of estimate bias When obtaining expert opinion

seek “most likely” value first, then identify possible +/- for the range.

Recognize frequently performed tasks tend to be underestimated while seldom performed tasks tend to be overestimated.

Assign Effort/Resources

Effort includes labor hours, skill levels, and duration

Effort = summation of labor hours x rate for each person working on the project

Effort is one half of resource assignment – the other half is materials, tools, equipment, and subcontracts.

Each task in the schedule must be assigned the appropriate resources

When complete, the cost of the task may be computed from the individual costs.

Sequencing

WBS elements and work packages (WP) must be sequenced What are the entry

conditions to begin work on the WP

When must the WP be completed to meet delivery schedule

What is the duration? Backwards Planning

If we want to be done by date x when must we begin?

Project Scheduling Sequence tasks based

on dependencies among the various tasks Finish to Start (Task 2

cannot start until Task 1 finishes)

Finish to Finish (Task 2 cannot end until Task 1 finishes)

Start to Finish (Task 2 cannot end until Task 1 starts)

Start to Start (Task 2 cannot start until task 1 starts)

Lead or lag is also considered Task 2 cannot begin until

2 days after Task 1 completes

Task 1 must start 2 weeks before Task 2

Project Scheduling

The product of the preceding is a network of tasks which is displayed in one of several formats: Network Node Gantt PERT

Network Diagrams

Network Node Diagram

Gantt Chart

Critical Path

Network Paths Typically networks have

more than one path The longest path

through the network is defined as the Critical Path

Tasks on the Critical Path (critical tasks) have no slack time

Tasks not on the critical path have slack time

Start A C F Finish = 7 WeeksStart A D Finish = 5 WeeksStart B E Finish = 6 weeks

Determine Program Cost

Individual work package totals Labor hours x rate = Direct

Labor Cost1

Material costs Sub contract costs Special tooling, fixtures, etc.

Work packages ‘roll-up’ into WBS element cost

WBS totals “up the tree” to provide subtotals at each level

Top level WBS (by definition) contains 100% of the program cost

1. Assumes use of fully burdened labor rates

Be Careful How Costs are “Rolled Up”

Bottom-up (aka “grass roots”) estimates are potentially the best.

Must be aware of possibility of double counting work

Must be aware of correlation between / among WBS elements when summing Adding “most likely” values

will underestimate true cost Sum of the means is more

accurate approach Better yet do a Monte Carlo

simulation Best approach is to do

bottom-up and then compare with top down estimate.

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Allocate Costs Over Time

“Spread” the costs over the period of performance

Creates time phased budget Cost per period of

time When combined with

schedule allows creation of Budgeted Cost of Work Scheduled (BCWS)

The combined schedule/budget product is termed the “Performance Baseline”

Identify and Categorize Risks

As per the first session Brainstorm to identify as

many risks as possible Assign probability

(likelihood of occurrence)

Identify potential outcome(s) Probability Impact

Determine appropriate strategy and develop plans

Determine residual risk

Add Risk to Cost/Schedule

Global Risks Impact the

entire project Individual

Risks Impact a task May be

applied to more than one task


Adding Risks to Model

Define risk chance, outcome and result. Risks can have mutually exclusive outcomes, different

outcomes of the same risk

Risks can be global (for all

tasks or resources) or local (for

specific tasks or resources)


Time to “Turn the Crank”

Once the model has been built we can run a simulation and determine: Probabilistic

completion date Probabilistic total cost Critical path Risk adjusted schedule

And More…….

When your project schedule and risk breakdown structure is ready, click here to perform Monte Carlo simulations


Combining Probability Distributions

Risk Adjusted Schedule

White bars represent original project

schedule (no risks)

Blue bars represent project schedule with

risks

Compare original project schedule and result of analysis


Risk Analysis Results


Project Summary: project duration, cost, and finish time with

and without risks

Results of analysis for project cost, finish time, and

duration

Cost vs Schedule


Update Schedule to Track Progress


This task is 100% completed (green

bar)

This task is partially

completed (yellow bar)

Risky project automatically adjusts the

probability of risks for partially completed tasks

Summary

A mathematical model combining schedule, cost, and risk is an essential project control tool

The quality of the model depends on the quality of the data i.e., “garbage in garbage out”

The models results help guide critical management decisions and provide insight into the “why” as well as the “what”

Produced by: The Contract Coach

The Contract Coach5338 La Colonia Dr NWAlbuquerque, NM 87120(505) 259-8485http://www.contract-coach.com

Risk Management Part 3 – Building Cost and Schedule Models that Incorporate Variability and Risk...

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