Additional Time Required

FIGURE 16-5. Trade-offs with fixed performance.

FIGURE 16-6. Trade-offs with fixed performance.

• The scope of work may be redefined and some work deleted without changing the project performance requirements. Performance standards may have been set too high, or the probability of success demanded of the project team may have been simply unrealistic. Reductions in cost and improvements in schedules would typically result from relaxing performance specifications, provided that the lower quality level will still meet the requirements of the customer.

• Available resources may be shifted in order to balance project costs or to speed up activities that are on the "critical" path work element that is trailing. This process of replanning shifts elements from noncritical to critical activities.

• Given a schedule problem, a change in the logic diagram may be needed to move from the current position to the desired position. Such a change could easily result in the replanning and reallocation of resources. An example of this would be to convert from "serial" to "parallel" work efforts. This is often risky.

Trade-offs with fixed performance levels must take into account the dependence of the firm on the customer, priority of the project within the firm, and potential for future business. A basic assumption here is that the firm may never sacrifice its reputation by delivering a product that doesn't perform to the specifications. The exception might be a change that would enhance performance and pull the project back on schedule. This is always worth investigating before entering into time-cost trade-offs.

Time and cost are interrelated in a labor-intensive project. As delivery slips, costs usually rise. Slipping delivery schedules and minimizing cost growth are usually the recommended alternative for projects in which the dependence of the firm on the customer, the priority of the project within the firm's stream of projects, and the future business potential in terms of sales represent a low- to medium-risk. Even in some high-risk situations, the contractor may have to absorb the additional cost. This decision is often based on estimating the future projects from this customer so that the loss is amortized against future business. Not all projects are financial successes.

A company's reputation for excellence is often hard to establish and can be extremely fragile. It is probably a contractor's greatest asset. This is particularly true in high-liability contracts, where the consequences of failure are extremely serious. There are companies that have been very successful in aerospace and advanced technology contracting but have seldom been the low bidder. Where the government is the contractor, performance is rated far above cost. Similarly, the consequences of a commercial aircraft crash are of such magnitude that the cost and time are relatively insignificant compared with precision manufacturing and extremely high reliability.

Sometimes projects may have fixed time and costs, leaving only the performance variable for trade-offs. However, as shown in the following scenario, the eventual outcome may be to modify the "fixed" cost constraint.

The hypothetical situation involves a government hardware subcontract, fixed-price, with delivery to the major government contractor. The major contractor had a very tight schedule, and the hardware being supplied had only a one-week "window" in which to be delivered, or the major contractor would suffer a major delay. Any delay at this point would place the general contractor in serious trouble. Both the government contracting officer and the purchasing manager of the general contractor had "emphasized" the importance of making the delivery schedule. There was no financial penalty for being late, but the contracting officer had stated in writing that any follow-on contracts, which were heavily counted on by the company's top management, would be placed with other vendors if delivery was not made on time.

Quality (performance) was critical but had never been a serious problem. In fact, performance had exceeded the contractual requirements because it had been company policy to be the "best" in the industry. This policy had, at times, caused cost problems, but it had ensured follow-on orders.

This project was in trouble at the halfway point, three months into the six-month schedule. The latest progress report indicated that the delivery would be delayed by three weeks. Costs were on target to date, but the shipping delay was expected to result in extra costs that would amount to 20 percent of the planned profit.

The project got off schedule when the flow of raw materials from a major vendor was interrupted for three weeks by a quality problem that was not discovered until the material was placed in production. Since the manufacturing time was process controlled, it was very difficult to make up lost time.

The first decision was that everything possible would be done to make delivery within one week of the original schedule. The potential lost revenue from future orders was so great that delivery must be made "at all costs," to quote the company president.

The quality system was then thoroughly investigated. It appeared that by eliminating two redundant inspection operations, one week could be saved in the total schedule. These two time-consuming inspection operations had been added when a quality problem developed on a former contract. The problem had been solved, and with present controls there was no reason to believe the inspections were still necessary. They would be eliminated with no determinable risk in performance.

Another two weeks were made up by working three production people seven days a week for the remainder of the project. This would permit delivery on the specified date of the contract, and would allow one week for other unforeseen problems so there would be a high probability of delivery within the required "window."

The cost of the seven-day-per-week work had the net effort of reducing the projected profit by 40 percent. Eliminating the two inspection operations saved 10 percent of the profit.

The plan outlined above met the time and performance specifications with increased cost that eventually reduced profit by an estimated 30 percent. The key to this situation was that only the labor, material, and overhead costs of the project were fixed, and the contractor was willing to accept a reduced profit.

Situation 2: Cost Is Fixed With cost fixed, performance will vary as a function of time, as shown in Figure 16-7. The decision of whether to adhere to the target schedule data is usually determined by the level of performance. In curve A, performance may increase rapidly to the 90 percent level at the beginning of the project. A 10 percent increase in time may give a 20 percent increase in performance. After a certain point, a 10 percent increase in time may give only a 1 percent increase in performance. The company may not wish to risk the additional time necessary to attain the 100 percent performance level if it is possible to do so. In curve C, the additional time must be sacrificed because it is unlikely that the customer will be happy with a 30 to 40 percent performance level. Curve B is the most difficult curve to analyze unless the customer has specified exactly which level of performance will be acceptable.

FIGURE 16-7. Trade-offs with fixed cost.

If cost is fixed, then it is imperative that the project have a carefully worded and understood contract with clear specifications as to the required level of performance and very clear statements of inclusion and exclusion. Careful attention to costs incurred because of customer changes or additional requirements can help reduce the possibility of a cost overrun. Experience in contracting ensures that costs that may be overlooked by the inexperienced project manager are included, thus minimizing the need for such trade-offs downstream. Common, overlooked items that can drive up costs include:

• Excessive detailed reporting

• Unnecessary documentation

• Excessive tracking documentation for time, cost, and performance

• Detailed specification development for equipment that could be purchased externally for less cost

• Wrong type of contract for this type of project

Often with a fixed-cost constraint, the first item that is sacrificed is performance. But such an approach can contain hidden disasters over the life of a project if the sacrificed performance turns out to have been essential to meeting some unspecified requirement such as long-term maintenance. In the long run, a degraded performance can actually increase costs rather than decrease them. Therefore, the project manager should be sure he has a good understanding of the real costs associated with trade-offs in performance.

Situation 3: Time Is Fixed Figure 16-8 identifies the situation in which time is fixed and cost varies with performance. Figure 16-8 is similar to Figure 16-7 in that the rate of change of performance with cost is the controlling factor. If performance is at the 90 percent level with the target cost, then the contractor may request performance relief. This is shown in curve A. However, if the actual situation reflects curve B or C, additional costs must be incurred with the same considerations of situation 1—namely, how important is the customer and what emphasis should be placed on his follow-on business?

Completing the project on schedule can be extremely important in certain cases. For example, if an aircraft pump is not delivered when the engine is ready for shipment, it can hold up the engine manufacturer, the airframe manufacturer, and ultimately the customer. All three can incur substantial losses due to the delay of a single component. Moreover, customers who are unable to perform and who incur large unanticipated costs tend to have long memories. An irate vice president in the customer's shop can kill further contracts out of all proportion to the real failure to deliver on time.

Sometimes, even though time is supposedly fixed, there may be latitude without inconvenience to the customer. This could come about because the entire program (of which your project is just one subcontract) is behind schedule, and the customer is not ready for your particular project.

Another aspect of the time factor is that "early warning" of a time overrun can often mitigate the damage to the customer and greatly increase his favorable response. Careful planning and tracking, close coordination with all functions involved, and realistic dealing with time schedules before and during the project can ensure early notification to the

FIGURE 16-8. Trade-offs with fixed time.

customer and the possible negotiation of a trade-off of time and dollars or even technical performance. The last thing that a customer wants is to have a favorable progress report right up to the end of scheduled time and then to be surprised with a serious schedule overrun.

When time is fixed, the customer may find that he has some flexibility in determining how to arrive at the desired performance level. As shown in Figure 16-9, the contractor may be willing to accept additional costs to maximize employee safety.

Situation 4: No Another common situation is that in which neither time, cost, nor per-

Constraints Are formance is fixed. The best method for graphically showing the trade off relationships is to develop parametric curves as in Figure 16-10. Cost and time trade-offs can now be analyzed for various levels of performance. The curves can also be redrawn for various cost levels (i.e., 100, 120, 150 percent of target cost) and schedule levels.

Another method for showing a family of curves is illustrated in Figure 16-11. Here, the contractor may have several different cost paths for achieving the desired time and performance constraints. The final path selected depends on the size of the risk that the contractor wishes to take.

There have been several attempts to display the three-dimensional trade-off problem graphically. Unfortunately, such a procedure is quite complex and difficult to follow. A more common approach is to use some sort of computer model and handle the trade-off as

Project Management Made Easy

Project Management Made Easy

What you need to know about… Project Management Made Easy! Project management consists of more than just a large building project and can encompass small projects as well. No matter what the size of your project, you need to have some sort of project management. How you manage your project has everything to do with its outcome.

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