1. 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

2. 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

3. 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

4. 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

5. 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

6. 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, 8, or 11 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?

7. 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

8. 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

9. Project Management
Scheduled number of days to complete the project is 45 days
P(Days>45)=?
Red line shows
95% CI of days

10. Spreadsheet of a Project Management Analysis

11. 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

12. 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

13. 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.

14. 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

15. 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

16. Bid Analysis in Business
Category
Quantity
Cost
Researchers
3 to 6
$35,000 each
Grad Students
1 or 2
$15,000 each
Local Facilitators
2 or 3
$10,000 each
Secretarial 1
$24,000
Fringe Benefits
40% of salaries
Travel
10 to 15 trips
$2-$3,000 each
Materials
$5 to $8,000
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

17. 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, Note: This is much higher than the “Worst Case”
- Maximum $440, 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%

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

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

20. Bid Analysis in Business
Example of a bid analysis for building a house
Activity Cost of Materials
Site Preparation 5K, 10K, 20K
Concrete 50K – 60K
Steel 75K, 80K, 90K
Lumber 80K – 100K
Electrical 30K
Sheetrock 21K – 25K
Exterior Walls 41K – 45K
Paint 18K – 25K
Floor Covering 18K – 22K
Interest Rate 7% – 8.5%
Overhead 30K – 35K
Profit Residual

21. Contractor’s Bid Analysis

22. CDF of Profits for Alternative Bid Prices

23. Bid Analysis
As a manager job one 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

24. Bid Analysis as a Stochastic Problem

25. Bid Analysis as a Stochastic Problem

26. Event Planner Event planner KOVs Research application 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
Banquet planner

27. Event Planner