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
Progressive Elaboration
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
Progressive Elaboration
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
Document Risks
Content © 2014 Intavar Institute
Add Risk to Cost/Schedule
Global Risks Impact the
entire project Individual
Risks Impact a task May be
applied to more than one task
Content © 2014 Intavar Institute
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)
Content © 2014 Intavar Institute
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
Content © 2014 Intavar Institute
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
Content © 2014 Intavar Institute
Risk Analysis Results
Content © 2014 Intavar Institute
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
Content © 2014 Intavar Institute
Update Schedule to Track Progress
Content © 2014 Intavar Institute
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
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