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Risk Management Part 3 – Building Cost and Schedule Models that Incorporate Variability and Risk by Donald E. Shannon, PMP, CFCM, CPCM, DML The Contract.

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Presentation on theme: "Risk Management Part 3 – Building Cost and Schedule Models that Incorporate Variability and Risk by Donald E. Shannon, PMP, CFCM, CPCM, DML The Contract."— Presentation transcript:

1 Risk Management Part 3 – Building Cost and Schedule Models that Incorporate Variability and Risk by Donald E. Shannon, PMP, CFCM, CPCM, DML The Contract Coach, Albuquerque, NM

2 Disclaimer Information 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

3 Building a Model Project Managing in the virtual world ….

4 Time to Build Our Model Our model of the effort (contract, project, etc) must include: Our model of the effort (contract, project, etc) must include: Tasks to be performed Tasks to be performed Resources to be used in accomplishing those tasks Resources to be used in accomplishing those tasks Labor Labor Materials Materials Other (Travel, subcontracts, etc.) Other (Travel, subcontracts, etc.) Cost data for the each of the resources and tasks Cost data for the each of the resources and tasks Schedule data Schedule data Risk Data Risk Data

5 Tools to be Used Excel or Numbers spreadsheet Excel or Numbers spreadsheet Project, Primavera, FastTrack, or other scheduling application Project, Primavera, FastTrack, or other scheduling application Simulation program such as: Simulation program Risky Project Risky Project Primavera Primavera Full Monty Full Monty

6 What We Will Do Create Work Breakdown Structure Create Work Breakdown Structure Expand (decompose) WBS into various tasks Expand (decompose) WBS into various tasks Identify resources for each task Identify resources for each task Create risk register Create risk register Map risks to each task Map risks to each task Determine cost baseline with and without risk Determine cost baseline with and without risk Create probabilistic estimates for cost at completion and completion date. Create probabilistic estimates for cost at completion and completion date.

7 Proper Prior Planning Prevents Poor Performance When should these models be created? When should these models be created? Ideally during the acquisition planning / proposal phase Ideally during the acquisition planning / proposal phase Aid in determining project cost or verifying other estimates Aid in determining project cost or verifying other estimates Project schedule demonstrates understanding of project scope Project schedule demonstrates understanding of project scope Risk analysis identifies likely problems/issues that must be addressed during performance phase 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 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 If detailed planning is deferred until contract award, this planning must be done to support kick-off

8 Model Components Work Breakdown Schedule Work Breakdown Schedule Resource Loaded Project Schedule Resource Loaded Project Schedule Risk Register Risk Register Risks Risks Probability, impact, polarity Probability, impact, polarity Cost estimates/quotes Cost estimates/quotes Basis of estimate Basis of estimate Assumptions Assumptions Factors Factors Cost Estimating Relationships Cost Estimating Relationships Project Schedule Risk Register Cost Estimate WBS Project Model Basis of Estimate

9 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)

10 Example - WBS

11 WBS Children WBS Dictionary – defines what is or is not included in a WBS code. 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. 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. 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 Cost estimate for proposal/negotiation purposes The Budget also is influential in setting up the account codes used to track performance 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. 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.

12 Example - Resource Loaded Project Schedule

13 Example - Risk Register #Risk+/-Prob.ImpactScore 1aCustomer asserts requirement change does not constitute a “change” and will not pay for “additional work” Inability to manufacture critical optical assembly chassis to specifications bRequirement change is covered by changes clause and results in a change order Bad weather closes office-339 5Flu epidemic impacts workforce availability-339 3Loss of key staff during project-248 2Inability to obtain project financing-155

14 Example - Cost Estimate

15 Commonly Used Tools Project Management Project Management Microsoft Project (several versions – PC only) Microsoft Project (several versions – PC only) Primavera (several versions) PC Only Primavera (several versions) PC Only ProjectLibre / Open Project (Free multi-platform) ProjectLibre / Open Project (Free multi-platform) FastTrack Schedule (Mac and PC versions) FastTrack Schedule (Mac and PC versions) Deltek Open Plan (Web Based) Deltek Open Plan (Web Based) OmniPlan (Mac) OmniPlan (Mac) Merlin (Mac) Merlin (Mac) Open Workbench (PC) Open Workbench (PC) 2Plan (Mac, PC and Linux) 2Plan (Mac, PC and Linux) Excel (via templates and macros) Excel (via templates and macros) Project Risk Management RiskyProject (Stand-alone PC only Includes Project (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

16 Time to Get To Work! Step 1. Create Work Breakdown Structure Step 1. Create Work Breakdown Structure It is the framework (skeleton) upon which all else rests. It is the framework (skeleton) upon which all else rests. Hierarchical (tree like) structure Hierarchical (tree like) structure Top-Down structure Top-Down structure Product Oriented Product Oriented Mil-STD-881C is convenient (and FREE) reference/guide Mil-STD-881C is convenient (and FREE) reference/guide Level 1 = End Item Level 1 = End Item Level 2 = Major Systems Level 2 = Major Systems Level 3 = Subsystems and/or major components Level 3 = Subsystems and/or major components Level n (lowest level) = work package Level n (lowest level) = work package

17 What’s a Work Package In traditional cost/schedule systems, the criteria for defining work packages is as follows: 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 is clearly distinguishable from all other work packages Each work package has a scheduled start and finish date 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 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 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. Each work package has a schedule that is integrated with higher-level schedules. Work Packages are deliverable oriented Work Packages are deliverable oriented

18 Build the Schedule The WBS tells us WHAT will be done The WBS tells us WHAT will be done The schedule tells us WHEN it will be done AND: The schedule tells us WHEN it will be done AND: How long it will take (duration) How long it will take (duration) Who will do the work (resources) Who will do the work (resources) What must occur before this work can be done (predecessors) What must occur before this work can be done (predecessors) What materials or other (direct) costs will be incurred What materials or other (direct) costs will be incurred When it will be done When it will be done

19 Elaboration Expanding the WBS element or WP contents into greater detail Expanding the WBS element or WP contents into greater detail Stop when additional detail does not contribute to the understanding Stop when additional detail does not contribute to the understanding Example: Install lighting fixtures probably does not need additional detail Example: Install lighting fixtures probably does not need additional detail Can be done by a single person or group Can be done by a single person or group Time to accomplish is less than a single reporting period (e.g., week or month) Time to accomplish is less than a single reporting period (e.g., week or month) Broadly Defined Scope Additional Detail More Detail Yet Detailed Scope

20 Project Scheduling Project scheduling is an iterative process Project scheduling is an iterative process Start with the goal first Start with the goal first Desired outcome or product Desired outcome or product Define the steps to that goal Define the steps to that goal Typically based on past experience or logical progression 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) Usually organized into groups by process, function or product (i.e., a Work Breakdown Structure or WBS) “Top Down” approach “Top Down” approach Start with generalities and then break down into smaller (more detailed) steps Start with generalities and then break down into smaller (more detailed) steps PMI defines this process as decomposition PMI defines this process as decomposition Result is a task list Result is a task list Progressive Elaboration

21 Project Scheduling Several passes are made through the work, each providing increased detail. Several passes are made through the work, each providing increased detail. Some tasks are too vaguely defined initially to break down 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 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 This technique is called Rolling Wave planning by PMI Progressive Elaboration

22 Identify Resources Resource pool for project or enterprise Resource pool for project or enterprise Labor Resources Labor Resources May list by name or specialty May list by name or specialty Total number available = 2 ½ Total number available = 2 ½ 2 full time people 2 full time people 1 half time person 1 half time person Facilities Facilities Special tools or equipment items Special tools or equipment items Subcontracts Subcontracts

23 Project Scheduling Once tasks are identified they are further developed 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 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 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. Resources: Who and/or what is needed to do the work. People People Equipment Equipment Supplies Supplies Progressive Elaboration

24 Estimating Effort Most difficult and error prone step in the entire process Most difficult and error prone step in the entire process Several techniques Several techniques Analogy – compare new task to something done previously 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 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. Expert Opinion – Obtain estimate (preferably 3 points) from subject matter expert. Historical data i.e., flat rate Historical data i.e., flat rate Delphi – consensus of experts Delphi – consensus of experts

25 Estimating Effort Remember that estimates are not exact Remember that estimates are not exact Try to model as a three-point estimate Try to model as a three-point estimate Optimistic Optimistic Most likely Most likely Pessimistic Pessimistic Beware of estimate bias Beware of estimate bias When obtaining expert opinion seek “most likely” value first, then identify possible +/- for the range. 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. Recognize frequently performed tasks tend to be underestimated while seldom performed tasks tend to be overestimated.

26 Assign Effort/Resources Effort includes labor hours, skill levels, and duration Effort includes labor hours, skill levels, and duration Effort = summation of labor hours x rate for each person working on the project 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. 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 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. When complete, the cost of the task may be computed from the individual costs.

27 Sequencing WBS elements and work packages (WP) must be sequenced WBS elements and work packages (WP) must be sequenced What are the entry conditions to begin work on the WP What are the entry conditions to begin work on the WP When must the WP be completed to meet delivery schedule When must the WP be completed to meet delivery schedule What is the duration? What is the duration? Backwards Planning Backwards Planning If we want to be done by date x when must we begin? If we want to be done by date x when must we begin?

28 Project Scheduling Sequence tasks based on dependencies among the various tasks Sequence tasks based on dependencies among the various tasks Finish to Start (Task 2 cannot start until Task 1 finishes) Finish to Start (Task 2 cannot start until Task 1 finishes) Finish to Finish (Task 2 cannot end 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 Finish (Task 2 cannot end until Task 1 starts) Start to Start (Task 2 cannot start until task 1 starts) Start to Start (Task 2 cannot start until task 1 starts) Lead or lag is also considered Lead or lag is also considered Task 2 cannot begin until 2 days after Task 1 completes Task 2 cannot begin until 2 days after Task 1 completes Task 1 must start 2 weeks before Task 2 Task 1 must start 2 weeks before Task 2

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

30 Network Node Diagram

31 Gantt Chart

32 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 Weeks Start  A  D  Finish = 5 Weeks Start  B  E  Finish = 6 weeks

33 Determine Program Cost Individual work package totals Individual work package totals Labor hours x rate = Direct Labor Cost 1 Labor hours x rate = Direct Labor Cost 1 Material costs Material costs Sub contract costs Sub contract costs Special tooling, fixtures, etc. Special tooling, fixtures, etc. Work packages ‘roll-up’ into WBS element cost Work packages ‘roll-up’ into WBS element cost WBS totals “up the tree” to provide subtotals at each level WBS totals “up the tree” to provide subtotals at each level Top level WBS (by definition) contains 100% of the program cost Top level WBS (by definition) contains 100% of the program cost 1. Assumes use of fully burdened labor rates

34 Be Careful How Costs are “Rolled Up” Bottom-up (aka “grass roots”) estimates are potentially the best. Bottom-up (aka “grass roots”) estimates are potentially the best. Must be aware of possibility of double counting work Must be aware of possibility of double counting work Must be aware of correlation between / among WBS elements when summing Must be aware of correlation between / among WBS elements when summing Adding “most likely” values will underestimate true cost Adding “most likely” values will underestimate true cost Sum of the means is more accurate approach Sum of the means is more accurate approach Better yet do a Monte Carlo simulation Better yet do a Monte Carlo simulation Best approach is to do bottom- up and then compare with top down estimate. Best approach is to do bottom- up and then compare with top down estimate.

35 Allocate Costs Over Time “Spread” the costs over the period of performance “Spread” the costs over the period of performance Creates time phased budget Creates time phased budget Cost per period of time Cost per period of time When combined with schedule allows creation of Budgeted Cost of Work Scheduled (BCWS) When combined with schedule allows creation of Budgeted Cost of Work Scheduled (BCWS) The combined schedule/budget product is termed the “Performance Baseline” The combined schedule/budget product is termed the “Performance Baseline”

36 Identify and Categorize Risks As per the first session As per the first session Brainstorm to identify as many risks as possible Brainstorm to identify as many risks as possible Assign probability (likelihood of occurrence) Assign probability (likelihood of occurrence) Identify potential outcome(s) Identify potential outcome(s) Probability Probability Impact Impact Determine appropriate strategy and develop plans Determine appropriate strategy and develop plans Determine residual risk Determine residual risk

37 Document Risks Content © 2014 Intavar Institute

38 Add Risk to Cost/Schedule Global Risks Global Risks Impact the entire project Impact the entire project Individual Risks Individual Risks Impact a task Impact a task May be applied to more than one task May be applied to more than one task Content © 2014 Intavar Institute

39 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

40 Time to “Turn the Crank” Once the model has been built we can run a simulation and determine: Once the model has been built we can run a simulation and determine: Probabilistic completion date Probabilistic completion date Probabilistic total cost Probabilistic total cost Critical path Critical path Risk adjusted schedule Risk adjusted schedule And More……. And More…….

41 When your project schedule and risk breakdown structure is ready, click here to perform Monte Carlo simulations Content © 2014 Intavar Institute

42 Combining Probability Distributions

43 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

44 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

45 Cost vs Schedule Content © 2014 Intavar Institute

46 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

47 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”

48 Produced by: The Contract Coach The Contract Coach 5338 La Colonia Dr NW Albuquerque, NM (505)


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