Project Management Lecture 22 Readings Chapter 14 Lecture 22 Short Project Management.XLSX Lecture 22 Project Management.XLSX Lecture 22 Event Management.XLSX Lecture 22 Stochastic Bid Analysis.XLSX

Project Management Project management involves estimating the length of time to complete a project Once a project has been undertaken then a project manager is responsible for carrying out the project on the assigned time table How do the managers establish a time schedule –Generally based on average length of time for each component –Average length of time based on past experience Length of time to complete each step is a random variable

Project Management Who does project management? –Engineers, managers, accountants –They estimate number of days to completion Generally do not incorporate risk Benefits of incorporating risk into project management analysis –Assign a probability to number of days until project is completed –Assign a probability to getting a project done in a fixed timeframe; potential bonus

Project Management KOV for a project management problem is: How many days will it take? There is no final answer until project is completed Answer is an unknown PDF of days, weeks, or months to completion Simulation provides a methodology for estimating unknown PDFs Formulate the problem as a Monte Carlo simulation problem

Project Management Model formulation –KOV is “Number of Days” to completion –Identify each task (step) for project –Specify order of each task for the project Identify bottlenecks where tasks will wait on precious stages –Determine the PDFs for number of days (or weeks, months, etc.) to complete each task Rely on experience from past jobs Depend on experts or subcontractors for the time to complete each task PDF may be dependent on resources available

Project Management Critical to identify the order of the tasks and their linkages (dependencies), for example: –Task 10 starts after Tasks 5 and 8 are completed –Task 11 starts after Task 10 is completed Thus, Task 5 or 8 could hold up the whole project –If analysis shows 5 is the bottleneck is it worth investing more resources in Task 5 to get the project completed earlier?

Project Management Create a simple Project Network Diagram to summarize the order of tasks Drawn it in Excel with simple arrows and boxes Network diagram shows potential bottlenecks

Project Management Tasks 1-6, 2 and 3 wait on 1, 4 waits on 2, 5 waits on 3 and 4, last task (6) waits on 5 Assumes next task starts day after its predecessor ends Days in column C are GRKS() stochastic

Project Management Scheduled number of days to complete the project is 45 days P(Days>45)=?

Spreadsheet of a Project Management Analysis

Project Management Expanded I like to add a second KOV – Cost We know cost of a project is stochastic So project management model can simulate PDFs for days and cost In the example $/day costs for each task are multiplied by stochastic days

Bid Analysis in Business Businesses are often asked to prepare bids for uncertain projects, such as: –Build a house –Build a road or bridge –Build an airplane Past experiences help in bid preparation –The cost categories are commonly known –But what of the risks? –Risks are taken into consideration based on perceived risks or past experience

Bid Analysis in Business How fixed price bids work –Contractors provide a fixed price bid –Must deliver finished product at a fixed price –If costs exceed expectations, they must absorb cost excesses in terms of reduced profits which could turn into losses –Risks are: price of inputs (materials), cost & performance of sub-contractors, performance of materials, performance of finished product, liability for environmental quality during project, interest rate, weather, etc.

Bid Analysis in Business Bids for new projects can be couched in terms of a stochastic simulation problem The KOV is the simulated cost vs. bid Objective of management: submit a bid price that is low enough to get accepted, but high enough to insure a profit –Sounds like game theory? –We can set it up as a simulation model with the objective that the bid insures an x% chance of a profit

Bid Analysis in Business Model formulation –KOV is the bid and probability of a profit –Bid = Sum of costs + Desired Profit –Stochastic variables are any factor which affects the cost and are uncertain Break each cost category into its basic component Labor costs = f( hourly, contract labor, professional labor, management time, etc.) Get estimates of the PDF for each labor cost item from an expert in that field Materials costs are risky, get estimates of PDFs from experts for each material

Bid Analysis in Business Example model to bid on a research project Example is for an international research project Start with a simplified budget for the project Notice all of the uncertainties CategoryQuantityCost Researchers3 to 6$35,000 each Grad Students 1 or 2$15,000 each Local Facilitators 2 or 3$10,000 each Secretarial1$24,000 Fringe Benefits 40% of salaries Travel10 to 15 trips $2-$3,000 each Materials$5 to $8,000

Stochastic Bid Analysis -Deterministic Best Case/Worst Case - Lowest Cost is $244,100 or the “Best Case” scenario - Average Cost is $350,850 or the “No Risk” scenario - Highest Cost is $462,600 or the “Worst Case” scenario -Stochastic Results of Budget Simulation 1000 iterations - Mean$351,379 - Minimum$266,419 Note: This is much higher than the “Worst Case” - Maximum$440,159 Note: This is less than the “Best Case” Probability of under bidding project for alternative bids: - P(costs > 375,000)=33.89% - P(costs > 400,000)=16.67% - P(costs > 425,000)=2.4% - P(costs > 350,000)=50.5%

Bid Analysis in Business The bid if you ignore the risk –Average Cost is $350,850 Stochastic Analysis yields the following

Bid Analysis in Business Because we are uncertain about the cost of facilitators and researchers we can run a scenario analysis on these costs

Bid Analysis in Business Example of a bid analysis for building a house ActivityCost of Materials –Site Preparation5K, 10K, 20K –Concrete50K – 60K –Steel75K, 80K, 90K –Lumber80K – 100K –Electrical30K –Sheetrock21K – 25K –Exterior Walls41K – 45K –Paint18K – 25K –Floor Covering18K – 22K –Interest Rate7% – 8.5% –Overhead 30K – 35K –Profit Residual

Contractor’s Bid Analysis

CDF of Profits for Alternative Bid Prices

Bid Analysis As a manager one job is to estimate how much to bid a contract We can use the project management, cost analysis to estimate the best bid for a contract The costs are at risk and if we bid to low our profits are reduced or an actual loss is incurred Bid to high and your company does not get the job

Bid Analysis as a Stochastic Problem

Event Planner Event planner KOVs –Number of days ahead to start planning an event –Cost of the event Research application KOVs –Time to complete a research project –Cost of a project Wedding planner –Probability of being ready on time –Cost of the event Banquet planner

Event Planner