Project management trade offs

Trade-off Analysis in a Project Environment

“When we try to pick out anything by itself, we find it hitched to everything else in the universe.”—MUIR’S LAW

715

Related Case Studies Related Workbook Exercises (from PMBOK® Guide, 4th (from Kerzner/Project Kerzner/Project Management Edition, Reference Management Case Studies, Workbook and PMP®/CAPM® Exam Section for the PMP®

3rd Edition) Study Guide, 10th Edition) Certification Exam

None • Multiple Choice Exam • Integration • Management • Procurement • Management • Scope • Management

16.0 INTRODUCTION

Successful project management is both an art and a science and attempts to control corporate resources within the constraints of time, cost, and performance. Most projects are unique, one-of-kind activities for which

there may not have been reasonable standards for forward planning. As a result, the project manager may find it extremely difficult to stay within the time–cost–performance triangle of Figure 16–1.

The time–cost–performance triangle is the “magic combination” that is continuously pursued by the project manager throughout the life cycle of the project. If the project were to flow smoothly, according to plan, there might not be a need for trade-off analysis. Unfortunately, this rarely happens.

PMBOK® Guide, 4th Edition Triple-Constraint Definition

16

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Trade-offs are illustrated in Figure 16–2, where the �s represent deviations from the original estimates. The time and cost deviations are normally overruns, whereas the performance error will be an underrun. No two projects are exactly alike, and trade-off analysis will be an ongoing effort throughout the life of the project, continuously influenced by both the internal and the external environment. Experienced project managers have predetermined trade-offs in reserve, recognizing that trade-offs are part of a continuous thought process.

Trade-offs are always based on the constraints of the project. Table 16–1 illustrates the types of constraints commonly imposed. Situations A and B are the typical trade-offs encountered in project man- agement. For example, situation A-3 portrays most research and development projects. The performance of an R&D project is usually well defined, and it is cost and time that may be allowed to go beyond bud- get and schedule. The determination of what to sacrifice is based on the available alternatives. If there are no alternatives to the product being developed and the potential usage is great, then cost and time are the trade-offs.

Most capital equipment projects would fall into situation A-1 or B-2, where time is of the essence. The sooner the piece of equipment gets into production, the sooner the return of investment can be realized. Often there are performance constraints that determine the profit potential of the project. If the project potential is determined to be great, cost will be the slippage factor, as in situation B-2.

Non–process-type equipment, such as air pollution control equipment, usually develops a scenario around situation B-3. Performance is fixed by the Environmental Protection Agency. The deadline for com- pliance can be delayed through litigation, but if the lawsuits fail, most firms then try to comply with the least expensive equipment that will meet the minimum requirements.

The professional consulting firm operates primarily under situation B-1. In situation C, the trade-off analysis will be completed based on the selection criteria and constraints. If everything is fixed (C-1), there is no room for any outcome other than total success, and if everything is variable (C-2), there are no constraints and thus no trade-off.

Many factors go into the decision to sacrifice either time, cost, or performance. It should be noted, how- ever, that it is not always possible to sacrifice one of these items without affecting the others. For example, reducing the time could have a serious impact on performance and cost (especially if overtime is required).

716 TRADE-OFF ANALYSIS IN A PROJECT ENVIRONMENT

RESOURCES

PERFORMANCE

TI M

E C

O ST

FIGURE 16–1. Overview of project management.

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There are several factors, such as those shown in Figure 16–3, that tend to “force” trade-offs. Poorly written documents (e.g., statements of work, contracts, and specifications) are almost always inward forces for conflict in which the project manager tends to look for performance relief. In many projects, the initial sale and negotiation, as well as the specification writing, are done by highly technical people who are driven to create a monument rather than meet the operational needs of the customer. When the

Introduction 717

�C

�T

C O

ST

TIM E

�P

PERFORMANCE

�T

�P

�C

DEVIATIONS FROM ORIGINAL ESTIMATE

FIGURE 16–2. Project management with trade-offs.

TABLE 16–1. CATEGORIES OF CONSTRAINTS

Time Cost Performance

A. One Element Fixed at a Time A-1 Fixed Variable Variable A-2 Variable Fixed Variable A-3 Variable Variable Fixed

B. Two Elements Fixed at a Time B-1 Fixed Fixed Variable B-2 Fixed Variable Fixed B-3 Variable Fixed Fixed

C. Three Elements Fixed or Variable C-1 Fixed Fixed Fixed C-2 Variable Variable Variable

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operating forces dominate outward from the project to the customer, project managers may tend to seek cost relief.

16.1 METHODOLOGY FOR TRADE-OFF ANALYSIS

Any process for managing time, cost, and performance trade-offs should emphasize the systems approach to management by recognizing that even the smallest change in a project or system could easily affect all of the organization’s systems. A typical systems model is shown in Figure 16–4. Because of this, it is often better to develop a process for decision- making/trade-off analysis rather than to maintain hard-and-fast rules on trade-offs. The following six steps may help:

● Recognizing and understanding the basis for project conflicts ● Reviewing the project objectives ● Analyzing the project environment and status ● Identifying the alternative courses of action ● Analyzing and selecting the best alternative ● Revising the project plan

The first step in any decision-making process must be recognition and understanding of the conflict. Most projects have management cost and control systems that compare actual versus planned results, scrutinize the results through variance analyses, and provide status reports so that corrective action can be taken to resolve the problems. Project

718 TRADE-OFF ANALYSIS IN A PROJECT ENVIRONMENT

TIME CONTROLS

RESPONSE SERVICE

RELIABILITY

RESOURCES

MAR KET

POS ITIO

N PROFIT

R E

P U

TA TI

O N

CO ST

PERFO RM

ANCE

FIGURE 16–3. Trade-off forcing factors.

PMBOK® Guide, 4th Edition 3.2 Project Planning Group Figure 3–12 Planning Process

Group Triangle Chapter 4 Integration Management Chapter 5 Scope Management

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managers must carefully evaluate information about project problems because it may not always be what it appears to be. Typical questions to ask are:

● Is the information pertinent? ● Is the information current? ● Are the data complete? ● Who has determined that this situation exists? ● How does he know this information is correct? ● If this information is true, what are the implications for the project?

The reason for this first step is to understand the cause of the conflict and the need for trade-offs. Most causes can be categorized as human errors or failures, uncertain problems, and totally unexpected problems, as shown below:

● Human errors/failures ● Impossible schedule commitments ● Poor control of design changes ● Poor project cost accounting ● Machine failures ● Test failures ● Failure to receive a critical input ● Failure to receive anticipated approvals

● Uncertain problems ● Too many concurrent projects ● Labor contract expiration

Methodology for Trade-off Analysis 719

CONSTRAINTS • Physical • Financial • Timing • Policy

SELECTION CRITERIA • Performance • Cost/benefit • Response time • Policy

SYSTEM

O B J E C T I V E

REQUIREMENT

REQUIREMENT

REQUIREMENT

REQUIREMENT

ALTERNATIVE

ALTERNATIVE

ALTERNATIVE

ALTERNATIVE

ALTERNATIVE

ALTERNATIVE

ALTERNATIVE

ALTERNATIVE

T R A D E O F F

FEEDBACK

TRANS- LATION

ANALYSIS TRADE- OFF

SYNTHESIS

FIGURE 16–4. The systems approach.

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● Change in project leadership ● Possibility of project cancellation

● Unexpected problems ● Overcommitted company resources ● Conflicting project priorities ● Cash flow problems ● Labor contract disputes ● Delay in material shipment ● “Fast-track” people having been promoted off the project ● “Temporary” employees having to be returned to their home base ● Inaccurate original forecast ● Change in market conditions ● New standards having been developed

The second step in the decision-making process is a complete review of the project objectives as seen by the various participants in the projects, ranging from top manage- ment to project team members. These objectives and/or priorities were originally set after considering many environmental factors, some of which may have changed over the life- time of the project.

The nature of these objectives will usually determine the degree of rigidity that has been established between time, cost, and performance. This may require reviewing project documentation, including:

● Project objectives ● Project integration into sponsor’s objectives and strategic plan ● Statement of work ● Schedule, cost, and performance specifications ● Resources consumed and projected

The third step is the analysis of the project environment and status, including a detailed measurement of the actual time, cost, and performance results with the original

or revised project plan. This step should not turn into a “witch hunt” but should focus on project results, problems, and roadblocks. Factors such as financial risk, potential follow-up contracts, the status of other projects, and relative competitive positions are just a few of the environmental factors that should be reviewed. Some companies have established poli- cies toward trade-off analysis, such as “never compromise performance.” Even these policies, however, have been known to change when environmental factors add to the financial risk of the company. The following topics may be applicable under step 3:

● Discuss the project with the project management office to: ● Determine relative priorities for time, cost, and performance ● Determine impact on firm’s profitability and strategic plan ● Get a management assessment (even a hunch as to what the problems are)

● If the project is a contract with an outside customer, meet with the customer’s proj- ect manager to assess his views relative to project status and assess the customer’s priorities for time, cost, and performance.

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● Meet with the functional managers to determine their views on the problem and to gain an insight regarding their commitment to a successful project. Where does this project sit in their priority list?

● Review in detail the status of each project work package. Obtain a clear and detailed appraisal by the responsible project office personnel as to: ● Time to complete ● Cost to complete ● Work to complete

● Review past data to assess credibility of cost and schedule information in the pre- vious step.

The project manager may have sufficient background to quickly assess the signifi- cance of a particular variance and the probable impact of that variance on project team performance. Knowledge of the project requirements (possibly with the assistance of the project sponsor) will usually help a project manager determine whether corrective action must be taken at all, or whether the project should simply be permitted to continue as originally conceived.

Whether or not immediate action is required, a quick analysis of why a potential problem has developed is in order. Obviously, it will not help to “cure the symptoms” if the “disease” itself is not remedied. The project manager must remain objective in such problem identification, since he himself is a key member of the project team and may be personally responsible for problems that are occurring. Suspect areas typically include:

● Inadequate planning. Either planning was not done in sufficient detail or controls were not established to determine that the project is proceeding according to the approved plan.

● Scope changes. Cost and schedule overruns are the normal result of scope changes that are permitted without formal incorporation in the project plan or increase in the resources authorized for the project.

● Poor performance. Because of the high level of interdependencies that exist within any project team structure, unacceptable performance by one individual may quickly undermine the performance of the entire team.

● Excess performance. Frequently an overzealous team member will unintentionally distort the planned balance between cost, schedule, and performance on the project.

● Environmental restraints—particularly on projects involving “third-party approvals” or dependent on outside resources. Changes, delays, or nonperfor- mance by parties outside the project team may have an adverse impact on the team performance.

Some projects appear to be out of tolerance when, in fact, they are not. For example, some construction projects are so front-loaded with costs that there appears to be a major dis- crepancy when one actually does not exist. The front-end loading of cost was planned for.

The fourth step in the project trade-off process is to list alternative courses of action. This step usually means brainstorming the possible methods of completing the project by compromising some combination of time, cost, or performance. Hopefully, this step will

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refine these possible alternatives into the three or four most likely scenarios for project completion. At this point, some intuitive decision-making may be required to keep the list of alternatives at a manageable level.

In order fully to identify the alternatives, the project manager must have specific answers to key questions involving time, cost, and performance:

● Time ● Is a time delay acceptable to the customer? ● Will the time delay change the completion date for other proj-

ects and other customers? ● What is the cause for the time delay? ● Can resources be recommitted to meet the new schedule? ● What will be the cost for the new schedule? ● Will the increased time give us added improvement? ● Will an extension of this project cause delays on other projects in the customer’s

house? ● What will the customer’s response be? ● Will the increased time change our learning curve? ● Will this hurt our company’s ability to procure future contracts?

● Cost ● What is causing the cost overrun? ● What can be done to reduce the remaining costs? ● Will the customer accept an additional charge? ● Should we absorb the extra cost? ● Can we renegotiate the time or performance standards to stay within cost? ● Are the budgeted costs for the remainder of the project accurate?

● Will there be any net value gains for the increased funding? ● Is this the only way to satisfy performance? ● Will this hurt our company’s ability to procure future contracts? ● Is this the only way to maintain the schedule?

● Performance ● Can the original specifications be met? ● If not, at what cost can we guarantee compliance? ● Are the specifications negotiable? ● What are the advantages to the company and customer for specification

changes? ● What are the disadvantages to the company and customer for performance

changes? ● Are we increasing or decreasing performance? ● Will the customer accept a change? ● Will there be a product or employee liability incurred? ● Will the change in specifications cause a redistribution of project resources? ● Will this change hurt our company’s ability to procure future contracts?

Once the answers to these questions are obtained, it is often best to plot the results graphically. Graphical methods have been used during the past two decades to determine

722 TRADE-OFF ANALYSIS IN A PROJECT ENVIRONMENT

PMBOK® Guide, 4th Edition 3.2 Monitoring and Controlling

Process Group

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crashing costs for shortening the length of a project. To use the graphical techniques, we must decide on which of the three parameters to hold fixed.

With performance fixed, cost can be expressed as a function of time. Sample curves appear in Figures 16–5 and 16–6. In Figure 16–5, the cir- cled X indicates the target cost and target time. Unfortunately, the cost to complete the project at the target time is higher than the budgeted

cost. It may be possible to add resources and work overtime so that the time target can be met. Depending upon the way that overtime is burdened, it may be possible to find a minimum point in the curve where further delays will cause the total cost to escalate.

Curve A in Figure 16–6 shows the case where “time is money,” and any additional time will increase the cost to complete. Factors such as management support time will always increase the cost to complete. There are, however, some situations where the increased costs occur in plateaus. This is shown in curve B of Figure 16–6. This could result from having to wait for temperature conditioning of a component before additional work can be com- pleted, or simply waiting for nonscheduled resources to be available. In the latter case, the trade-off decision points may be at the end of each plateau.

With performance fixed, there are four methods available for constructing and ana- lyzing the time–cost curves:

● Additional resources may be required. This will usually drive up the cost very fast. Assuming that the resources are available, cost control problems can occur as a result of adding resources after initial project budgeting.

Methodology for Trade-off Analysis 723

Situation 1: Performance Is Held Constant (to Specifications)

C O

S T

T O

C O

M P

LE T

E

TARGET COST, TIME

ADDITIONAL TIME REQUIRED

X

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

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● 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 usu- ally rise. Slipping delivery schedules and minimizing cost growth are usually the recom- mended 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 poten- tial in terms of sales represent a low- to medium-risk. Even in some high-risk situations,

724 TRADE-OFF ANALYSIS IN A PROJECT ENVIRONMENT

X

A

B

TARGET TIME, COST C

O S

T T

O C

O M

P LE

T E

ADDITIONAL TIME REQUIRED

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

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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 man- ufacturing and extremely high reliability.

Sometimes projects may have fixed time and costs, leaving only the performance vari- able 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 mak- ing 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, per- formance 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 sched- ule. 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 mater- ial 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.

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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 con- tractor was willing to accept a reduced profit.

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 sched-

ule 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.

726 TRADE-OFF ANALYSIS IN A PROJECT ENVIRONMENT

Situation 2: Cost Is Fixed

X TIME

P E

R F

O R

M A

N C

E

TA R

G E

T

A

B

C

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

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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.

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

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Situation 3: Time Is Fixed

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customer and the possible negotiation of a trade-off of time and dollars or even technical per- formance. 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.

Another common situation is that in which neither time, cost, nor per- 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 per-

formance. 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 per- formance constraints. The final path selected depends on the size of the risk that the con- tractor 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

728 TRADE-OFF ANALYSIS IN A PROJECT ENVIRONMENT

TARGET COST

C O

S T

PERFORMANCE

TA R

G E

T P

E R

F O

R M

A N

C E

C

B

A

X

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

Situation 4: No Constraints Are Fixed

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Methodology for Trade-off Analysis 729

-EMPLOYEE SAFETY FACTOR

FAIR GOOD

EXCELLENT

P E

R F

O R

M A

N C

E

COST

FIGURE 16–9. Performance versus cost.

X

C O

S T

TIME

100% PER

FOR MAN

CE

75% P ERFO

RMAN CE

50% PER FORMAN

CE

FIGURE 16–10. Trade-off analysis with family of curves.

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though it were a linear programming or dynamic programming problem. This too is often difficult to perform and manage.

Trade-offs can also be necessary at any point during the life cycle of a project. Figure 16–12 identifies how the relative importance of the constraints of time, cost, and perfor- mance can change over the life cycle of the project. At project initiation, costs may not have accrued to a point where they are important. On the other hand, project performance may become even more important than the schedule. At this point, additional

730 TRADE-OFF ANALYSIS IN A PROJECT ENVIRONMENT

PERFORMANCE GOAL

P E

R F

O R

M A

N C

E

TIME

T IM

E G

O A

L

COST A

COST B

COST C

FIGURE 16–11. Cost–time–performance family of curves.

R E

LA TI

V E

IM P

O R

TA N

C E

TIME

COST

PERFORMANCE

SCHEDULE

FIGURE 16–12. Life-cycle trade-offs. (Schedule not necessarily typical.)

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performance can be “bought.” As the project nears termination, the relative importance of the cost constraint may increase drastically, especially if project profits are the company’s major source of revenue. Likewise, it is probable that the impact of performance and schedule will be lower.

Once the alternative courses of action are determined, step 5 in the methodology is employed in order to analyze and select the feasible alternatives. Analyzing the alterna- tives should include the preparation of the revised project objectives for cost, performance, and time, along with an analysis of the required resources, general schedules, and revised project plans necessary to support each scenario. It is then the function of top management in conjunction with the project and functional managers to choose the solution that mini- mizes the overall impact to the company. This impact need not be measured just in short- term financial results, but should include long-term strategic and market considerations.

The following tasks can be included in this step:

● Prepare a formal project update report including alternative work scopes, sched- ules, and costs to achieve. ● Minimum cost overrun ● Conformance to project objectives ● Minimum schedule overrun

● Construct a decision tree including costs, work objectives, and schedules, and an estimate of the probability of success for each condition leading to the decision point.

● Present to internal and external project management the several alternatives along with an estimate of success probability.

● With management’s agreement, select the appropriate completion strategy, and begin implementation. This assumes that management does not insist on an impos- sible task.

The last item requires further clarification. Many companies use a checklist to estab- lish the criteria for alternative evaluation as well as for assessment of potential future prob- lems. The following questions may be part of such a checklist:

● Will other projects be affected? ● Will rework be required in previous tasks? ● Are repair and/or maintenance made more difficult? ● Will additional tasks be required in the future? ● How will project personnel react? ● What is the effect on the project life cycle? ● Will project flexibility be reduced? ● What is the effect on key employees? ● What is the effect on the customer(s)?

The probability of occurrence and severity should be assessed for all potential future problems. If there is a high probability that the problem will recur and be severe, a plan should be developed to reduce this probability. Internal restrictions, such as manpower,

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materials, machines, money, management, time, policies, quality, and changing require- ments, can cause problems throughout the life cycle of a project. External restrictions of capital, completion dates, and liability also limit project flexibility.

One of the best methods for comparing the alternatives is to list them and then rank them in order of perceived importance relative to certain factors such as customer, potential fol- low-on business, cost deficit, and loss of goodwill. This is shown in Table 16–2. In the table each of the objectives is weighted according to some method established by management. The percentages represent the degree of satisfactory completion for each alternative. This type of analysis, often referred to as decision-making under risk, is commonly taught in operations research and management science coursework. Weighting factors are often used to assist in the decision-making process. Unfortunately, this can add mass confusion to the already confused process.

Table 16–3 shows that some companies perform trade-off analysis by equating all alter- natives to a lowest common denominator—dollars. Although this conversion can be very difficult, it does ensure that we are comparing “apples to apples.” All resources such as capital equipment can be expressed in terms of dollars. Difficulties arise in assigning dollar values to such items as environmental pollution, safety standards, or the possible loss of life.

There are often several types of corrective action that can be utilized, including:

● Overtime ● Double shifts ● Expediting ● Additional manpower ● More money ● Change of vendors ● Change of specifications ● Shift of project resources ● Waiving equipment inspections ● Change in statement of work ● Change in work breakdown structure ● Substitution of equipment

732 TRADE-OFF ANALYSIS IN A PROJECT ENVIRONMENT

TABLE 16–2. WEIGHING THE ALTERNATIVES

Objectives Increase Ready Meet Meet Future on Current Current Maximize Business Time Cost Specs Profits

Alternatives 0.4 0.25 0.10 0.20 .05

Add resources 100% 90% 30% 90% 10% Reduce scope of work 60% 90% 90% 30% 95% Reduce specification change 90% 80% 95% 5% 80% Complete project late 80% 0% 20% 95% 0% Bill customer for added cost 30% 85% 0% 60% 95%

Weights

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● Substitution of materials ● Use of outside contractors ● Providing bonus payments to contractors ● Single-sourcing ● Waiving drawing approvals

The corrective actions defined above can be used for time, cost, and performance. However, there are specific alternatives for each area. Assuming that a PERT/CPM analysis was done initially to schedule the project, then the following options are available for schedule manipulation:

● Prioritize all tasks and see the effect on the critical path of eliminating low-priority efforts.

● Use resource leveling. ● Carry the work breakdown structure to one more level, and reassess the time esti-

mates for each task.

Performance trade-offs can be obtained as follows:

● Excessive or tight specifications that are not critical to the project may be eased. (Many times standard specifications such as mil-specs are used without regard for their necessity.)

● Requirements for testing can be altered to accommodate automation (such as accelerated life testing) to minimize costs.

● Set an absolute minimum acceptable performance requirement below which you will not pursue the project. This gives a bound at the low end of performance that can’t be crossed in choosing between trade-off alternatives.

● Give up only those performance requirements that have little or no bearing on the overall project goals (including implied goals) and their achievement. This may require the project manager to itemize and prioritize major and minor objectives.

Methodology for Trade-off Analysis 733

TABLE 16–3. TRADE-OFF ANALYSIS FOR IMPROVING PERFORMANCE CAPABILITY

Time to Ranking Capital Complete, Project in

Assumption Description Expenditure, $ Months Profit, $ Profit, $

1 No change 0 6 100,000 5 2 Hire higher-salaried 0 5 105,000 3

people 3 Refurbish equipment 10,000 7 110,000 2 4 Purchase new 85,000 9 94,000 6

equipment 5 Change 0 6 125,000 1

specifications 6 Subcontract 0 6 103,000 4

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● Consider absorbing tasks with dedicated project office personnel. This is a resource trade-off that can be effective when the tasks to be performed require in-depth knowledge of the project. An example would be the use of dedicated pro- ject personnel to perform information gathering on rehabilitation-type projects. The improved performance of these people in the design and testing phases due to their strong background can save considerable time and effort.

The most promising areas for cost analysis include:

● Incremental costing (using sensitivity analysis) ● Reallocation of resources ● Material substitution where lower-cost materials are utilized without changing

project specifications

Depending on the magnitude of the problem, the timeliness of its identification, and the potential impact on the project results, it may be that no actions exist that will bring the project in on time, within budget, and at an acceptable level of performance. The following viable alternatives usually remain:

● A renegotiation of project performance criteria could be attempted with the project sponsor. Such action would be based on a pragmatic view of the acceptability of the probable outcome. Personal convenience of the project manager is not a factor. Professional and legal liability for the project manager, project team, or parent organization may be very real concerns.

● If renegotiation is not considered a viable alternative, or if it is rejected, the only remaining option is to “stop loss” in completing the project. Such planning should involve both line and project management, since the parent organization is at this point seeking to defend itself. Options include: ● Completing the project on schedule, to the minimum quality level required by

the project sponsor. This results in cost overruns (financial loss) but should produce a reasonably satisfied project sponsor. (Project sponsors are not really comfortable when they know a project team is operating in a “stop-loss” mode!)

● Controlling costs and performance, but permitting the schedule to slide. The degree of unhappiness this generates with the project sponsor will be deter- mined by the specific situation. Risks include loss of future work or conse- quential damages.

● Maintaining schedule and cost performance by allowing quality to slip. The high-risk approach has a low probability of achieving total success and a high probability of achieving total failure. Quality work done on the project will be lost if the final results are below minimum standards.

● Seeking to achieve desired costs, schedule, and performance results in the light of impossible circumstances. This approach “hopes” that the inevitable won’t happen, and offers the opportunity to fail simultaneously in all areas. Criminal liability could become an issue.

734 TRADE-OFF ANALYSIS IN A PROJECT ENVIRONMENT

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● Project cancellation, in an effort to limit exposure beyond that already encoun- tered. This approach might terminate the career of a project manager but could enhance the career of the staff counsel!

The sixth and final step in the methodology of the management of project trade-offs is to obtain management approval and replan the project. The project manager usually identi- fies the alternatives and prepares his recommendation. He then submits his recommendation to top management for approval. Top-management involvement is necessary because the project manager may try to make corrective action in a vacuum. Top management normally makes decisions based on the following:

● The firm’s policies on quality, integrity, and image ● The ability to develop a long-term client relationship ● Type of project (R&D, modernization, new product) ● Size and complexity of the project ● Other projects underway or planned ● Company’s cash flow ● Bottom line—ROI ● Competitive risks ● Technical risks ● Impact on affiliated organizations

After choosing a new course of action from the list of alternatives, management and especially the project team must focus on achieving the revised objectives. This may require a detailed replanning of the project, including new schedules, PERT charts, work breakdown structures, and other key benchmarks. The entire management team (i.e., top management, functional managers, and project managers) must all be committed to achieving the revised project plan.

16.2 CONTRACTS: THEIR INFLUENCE ON PROJECTS

The final decision on whether to trade-off cost, time, or performance can vary depending on the type of contract. Table 16–4 identifies seven com- mon types of contracts and the order in which trade-offs will be made.

The firm-fixed-price (FFP) contract. Time, cost, and performance are all specified within the contract, and are the contractor’s responsibility.

Because all constraints are equally important with respect to this type of contract, the sequence of resources sacrificed is the same as for the project-driven organization shown previously in Table 16–1.

The fixed-price-incentive-fee (FPIF) contract. Cost is measured to determine the incentive fee, and thus is the last constraint to be considered for trade-off. Because per- formance is usually more important than schedule for project completion, time is consid- ered the first constraint for trade-off, and performance is the second.

Contracts: Their Influence on Projects 735

PMBOK® Guide, 4th Edition Chapter 12 Procurement

Management 12.3 Contract Administration

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The cost-plus-incentive-fee (CPIF) contract. The costs are reimbursed and measured for determination of the incentive fee. Thus cost is the last constraint to be considered for trade-off. As with the FPIF contract, performance is usually more important than schedule for project completion, and so the sequence is the same as for the FPIF contract.

The cost-plus-award-fee (CPAF) contract. The costs are reimbursed to the contractor, but the award fee is based on performance by the contractor. Thus cost would be the first constraint to be considered for trade-off, and performance would be the last constraint to be considered.

The cost-plus-fixed-fee (CPFF) contract. Costs are reimbursed to the contractor. Thus, cost would be the first constraint to be considered for trade-off. Although there are no incentives for efficiency in time or performance, there may be penalties for bad perfor- mance. Thus time is the second constraint to be considered for trade-off, and performance is the third.

16.3 INDUSTRY TRADE-OFF PREFERENCES

Table 16–5 identifies twenty-one industries that were surveyed on their preferential process for trade-offs. Obviously, there are variables that affect each decision. The data in the table reflect the interviewees’ general responses, neglecting external considerations, which might have altered the order of preference.

Table 16–6 shows the relative grouping of Table 16–5 into four categories: project- driven, non–project-driven, nonprofit, and banks.

In all projects in the banking industry, whether regulated or nonregulated, cost is the first resource to be sacrificed. The major reason for this trade-off is that banks in general do not have a quantitative estimation of what actual costs they incur in providing a given service. One example of this phenomenon is that a number of commercial banks heavily emphasize the use of Functional Cost Analysis, a publication of the Federal Reserve, for pricing their services. This publication is a summary of data received from member banks, of which the user is one. This results in questionable output because of inaccuracies of the input.

736 TRADE-OFF ANALYSIS IN A PROJECT ENVIRONMENT

TABLE 16–4. SEQUENCE OF RESOURCES SACRIFICED BASED ON TYPE OF CONTRACT

Firm- Fixed-Price- Fixed- Incentive- Cost-Plus- Cost-Plus- Cost-Plus- Price Fee Cost Cost Incentive- Award-Fee Fixed-Fee (FFP) (FPIF) Contract Sharing Fee (CPIF) (CPAF) (CPFF)

Time 2 1 2 2 1 2 2 Cost 1 3 3 3 3 1 1 Performance 3 2 1 1 2 3 3

1 = first to be sacrificed. 2 = second to be sacrificed. 3 = third to be sacrificed.

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In cases where federal regulations prescribe time constraints, cost is the only resource of consideration, since performance standards are also delineated by regulatory bodies.

In nonregulated banking projects, the next resource to be sacrificed depends on the competitive environment. When other competitors have developed a new service or prod- uct that a particular bank does not yet offer, then the resource of time will be less critical

Industry Trade-off Preferences 737

TABLE 16–5. INDUSTRY GENERAL PREFERENCE FOR TRADE-OFFS

Industry Time Cost Performance

Construction 1 3 2 Chemical 2 1 3 Electronics 2 3 1 Automotive manu. 2 1 3 Data processing 2 1 3 Government 2 1 3 Health (nonprofit) 2 3 1 Medicine (profit) 1 3 2 Nuclear 2 1 3 Manu. (plastics) 2 3 1 Manu. (metals) 1 2 3 Consulting (mgt.) 2 1 3 Consulting (eng.) 3 1 2 Office products 2 1 3 Machine tool 2 1 3 Oil 2 1 3 Primary batteries 1 3 2 Utilities 1 3 2 Aerospace 2 1 3 Retailing 3 2 1 Banking 2 1 3

Note: Numbers in table indicate the order (first, second, third) in which the three parameters are sacrificed.

TABLE 16–6. SPECIAL CASES

Type of Organization

Project-Driven Organizations Banks

Early Life- Late-Life- Non–Project- Cycle Cycle Driven Nonprofit Phases Phases Organizations Organizations Leader Follower

Time 2 1 1 2 3 2 Cost 1 3 3 3 1 1 Performance 3 2 2 1 2 3

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than the performance criteria. A specific case is the development of the automatic teller machine (ATM). After the initial introduction of the system by some banks (leaders), the remainder of the competitors (followers) chose to provide a more advanced ATM with little consideration for the time involved for procurement and installation. On the other hand, with the introduction of negotiable order of withdrawal (NOW) accounts, the January 1, 1981, change in federal regulations allowed banks and savings and loans to offer interest-bearing checking accounts. The ensuing scramble to offer the service by that date led to varying performance levels, especially on the part of savings and loans. In this instance the competitors sacrificed performance in order to provide a timely service.

In some banking projects, the time factor is extremely important. A number of projects depend on federal laws. The date that a specific law goes into effect sets the dead- line for the project.

Generally, in a nonprofit organization, performance is the first resource that will be compromised. The United Way, free clinics, March of Dimes, American Cancer Society, and Goodwill are among the many nonprofit agencies that serve community needs. They derive their income from donations and/or federal grants, and this funding mechanism places a major constraint on their operations. Cost overruns are prohibited by the very nature of the organization. Inexperienced staff and time constraints result in poor customer service.

The non–project-driven organization is structured along the lines of the traditional vertical hierarchy. Functional managers in areas such as marketing, engineering, account- ing, and sales are involved in planning, organizing, staffing, and controlling their func- tional areas. Many projects that materialize, specifically in a manufacturing concern, are a result of a need to improve a product or process and can be initiated by customer request, competitive climate, or internal operations. The first resource to be sacrificed in the non–project-driven organization is time, followed by performance and cost, respectively. In most manufacturing concerns, budgetary constraints outweigh performance criteria.

In a non–project-driven organization, new projects will take a back seat to the day- to-day operations of the functional departments. The organizational funds are allocated to individual departments rather than to the project itself. When functional managers are required to maintain a certain productivity level in addition to supporting projects, their main emphasis will be on operations at the expense of project development. When it becomes necessary for the firm to curtail costs, special projects will be deleted in order to maintain corporate profit margins.

Resource trade-offs in a project-driven organization depend on the life-cycle phase of a given project. During the conceptual, definition, and production phases and into the oper- ational phase of the project, the trade-off priorities are cost first, then time, and finally per- formance. In these early planning phases the project is being designed to meet certain performance and time standards. At this point the cost estimates are based on the figures supplied to the project manager by the functional managers.

During the operational phase the cost factor increases in importance over time and performance, both of which begin to decrease. In this phase the organization attempts to recover its investment in the project and therefore emphasizes cost control. The perfor- mance standards may have been compromised, and the project may be behind schedule, but management will analyze the cost figures to judge the success of the project.

738 TRADE-OFF ANALYSIS IN A PROJECT ENVIRONMENT

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The project-driven organization is unique in that the resource trade-offs may vary in priority, depending on the specific project. Research and development projects may have a fixed performance level, whereas construction projects normally are constrained by a date of completion.

16.4 CONCLUSION

It is obvious from the above discussion that a project manager does have options to con- trol a project during its execution. Project managers must be willing to control minor trade- offs as well as major ones. However, the availability of specific options is a function of the particular project environment.

Probably the greatest contribution a project manager makes to a project team organi- zation is stability in adverse conditions. Interpersonal relationships have a great deal to do with the alternatives available and their probability of success since team performance will be required. Through a combination of management skill and sensitivity, project managers can make the trade-offs, encourage the team members, and reassure the project sponsor in order to produce a satisfactory project.

16.5 STUDYING TIPS FOR THE PMI® PROJECT MANAGEMENT CERTIFICATION EXAM

This section is applicable as a review of the principles to support the knowledge areas and domain groups in the PMBOK® Guide. This chapter addresses:

● Integration Management ● Scope Management ● Procurement Management ● Initiating ● Planning ● Execution ● Controlling

Understanding the following principles is beneficial if the reader is using this text to study for the PMP® Certification Exam:

● What is meant by a trade-off ● Who are the major players in performing trade-offs ● That assumptions and circumstances can change mandating that trade-offs take

place

Studying Tips for the PMI® Project Management Certification Exam 739

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