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Project Management Processes, Methodologies, and Economics

Third Edition

Avraham Shtub

Faculty of Industrial Engineering and Management

The Technion–Israel Institute of Technology

Moshe Rosenwein

Department of Industrial Engineering and Operations Research

Columbia University

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Library of Congress Cataloging-in-Publication Data

Names: Shtub, Avraham, author. | Rosenwein, Moshe, author. Title: Project management : processes, methodologies, and economics / Avraham Shtub, Faculty of Industrial Engineering and Management, The Technion-Israel Institute of Technology, Moshe Rosenwein, Department of Industrial Engineering and Operations Research, Columbia University. Other titles: Project management (Boston, Mass.) Description: 3E. | Pearson | Includes bibliographical references and index. Identifiers: LCCN 2016030485 | ISBN 9780134478661 (pbk.) Subjects: LCSH: Engineering—Management. | Project management. Classification: LCC TA190 .S583 2017 | DDC 658.4/04—dc23 LC record available at https://lccn.loc.gov/2016030485

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http://www.pearsoned.com/permissions/
https://lccn.loc.gov/2016030485
ISBN-10: 0-13-447866-5

ISBN-13: 978-0-13-447866-1

This book is dedicated to my grandchildren Zoey, Danielle, Adam, and Noam Shtub.

This book is dedicated to my wife, Debbie; my three children, David, Hannah, and Benjamin; my late parents, Zvi and Blanche Rosenwein; and my in-laws, Dr. Herman and Irma Kaplan.

Contents 1. Nomenclature xv

2. Preface xvii

3. What’s New in this Edition xxi

4. About the Authors xxiii

1. 1  Introduction 1

1. 1.1 Nature of Project Management 1

2. 1.2 Relationship Between Projects and Other Production Systems 2

3. 1.3 Characteristics of Projects 4

1. 1.3.1 Definitions and Issues 5

2. 1.3.2 Risk and Uncertainty 7

3. 1.3.3 Phases of a Project 9

4. 1.3.4 Organizing for a Project 11

4. 1.4 Project Manager 14

1. 1.4.1 Basic Functions 15

2. 1.4.2 Characteristics of Effective Project Managers 16

5. 1.5 Components, Concepts, and Terminology 16

6. 1.6 Movement to Project-Based Work 24

7. 1.7 Life Cycle of a Project: Strategic and Tactical Issues 26

8. 1.8 Factors that Affect the Success of a Project 29

9. 1.9 About the book: Purpose and Structure 31

1. Team Project 35

2. Discussion Questions 38

3. Exercises 39

4. Bibliography 41

5. Appendix 1A: Engineering Versus Management 43

6. 1A.1 Nature of Management 43

7. 1A.2 Differences between Engineering and Management 43

8. 1A.3 Transition from Engineer to Manager 45

9. Additional References 45

2. 2  Process Approach to Project Management 47

1. 2.1 Introduction 47

1. 2.1.1 Life-Cycle Models 48

2. 2.1.2 Example of a Project Life Cycle 51

3. 2.1.3 Application of the Waterfall Model for Software Development 51

2. 2.2 Project Management Processes 53

1. 2.2.1  Process Design 53

2. 2.2.2 PMBOK and Processes in the Project Life Cycle 54

3. 2.3 Project Integration Management 54

1. 2.3.1  Accompanying Processes 54

2. 2.3.2  Description 56

4. 2.4 Project Scope Management 60

1. 2.4.1  Accompanying Processes 60

2. 2.4.2  Description 60

5. 2.5 Project Time Management 61

1. 2.5.1  Accompanying Processes 61

2. 2.5.2  Description 62

6. 2.6 Project Cost Management 63

1. 2.6.1  Accompanying Processes 63

2. 2.6.2  Description 64

7. 2.7 Project Quality Management 64

1. 2.7.1  Accompanying Processes 64

2. 2.7.2  Description 65

8. 2.8 Project Human Resource Management 66

1. 2.8.1  Accompanying Processes 66

2. 2.8.2  Description 66

9. 2.9 Project Communications Management 67

1. 2.9.1  Accompanying Processes 67

2. 2.9.2  Description 68

10. 2.10 Project Risk Management 69

1. 2.10.1  Accompanying Processes 69

2. 2.10.2  Description 70

11. 2.11 Project Procurement Management 71

1. 2.11.1  Accompanying Processes 71

2. 2.11.2  Description 72

12. 2.12 Project Stakeholders Management 74

1. 2.12.1  Accompanying Processes 74

2. 2.12.2  Description 75

13. 2.13 The Learning Organization and Continuous Improvement 76

1. 2.13.1  Individual and Organizational Learning 76

2. 2.13.2  Workflow and Process Design as the Basis of Learning 76

1. Team Project 77

2. Discussion Questions 77

3. Exercises 78

4. Bibliography 78

3. 3 Engineering Economic Analysis 81

1. 3.1 Introduction 81

1. 3.1.1 Need for Economic Analysis 82

2. 3.1.2 Time Value of Money 82

3. 3.1.3 Discount Rate, Interest Rate, and Minimum Acceptable Rate of Return 83

2. 3.2 Compound Interest Formulas 84

1. 3.2.1 Present Worth, Future Worth, Uniform Series, and Gradient Series 86

2. 3.2.2 Nominal and Effective Interest Rates 89

3. 3.2.3 Inflation 90

4. 3.2.4 Treatment of Risk 92

3. 3.3 Comparison of Alternatives 92

1. 3.3.1 Defining Investment Alternatives 94

2. 3.3.2 Steps in the Analysis 96

4. 3.4 Equivalent Worth Methods 97

1. 3.4.1 Present Worth Method 97

2. 3.4.2 Annual Worth Method 98

3. 3.4.3 Future Worth Method 99

4. 3.4.4 Discussion of Present Worth, Annual Worth and Future Worth Methods 101

5. 3.4.5 Internal Rate of Return Method 102

6. 3.4.6 Payback Period Method 109

5. 3.5 Sensitivity and Breakeven Analysis 111

6. 3.6 Effect of Tax and Depreciation on Investment Decisions 114

1. 3.6.1 Capital Expansion Decision 116

2. 3.6.2 Replacement Decision 118

3. 3.6.3 Make-or-Buy Decision 123

4. 3.6.4 Lease-or-Buy Decision 124

7. 3.7 Utility Theory 125

1. 3.7.1 Expected Utility Maximization 126

2. 3.7.2 Bernoulli’s Principle 128

3. 3.7.3 Constructing the Utility Function 129

4. 3.7.4 Evaluating Alternatives 133

5. 3.7.5 Characteristics of the Utility Function 135

1. Team Project 137

2. Discussion Questions 141

3. Exercises 142

4. Bibliography 152

4. 4 Life-Cycle Costing 155

1. 4.1 Need for Life-Cycle Cost Analysis 155

2. 4.2 Uncertainties in Life-Cycle Cost Models 158

3. 4.3 Classification of Cost Components 161

4. 4.4 Developing the LCC Model 168

5. 4.5 Using the Life-Cycle Cost Model 175

1. Team Project 176

2. Discussion Questions 176

3. Exercises 177

4. Bibliography 179

5. 5 Portfolio Management—Project Screening and Selection 181

1. 5.1 Components of the Evaluation Process 181

2. 5.2 Dynamics of Project Selection 183

3. 5.3 Checklists and Scoring Models 184

4. 5.4 Benefit-Cost Analysis 187

1. 5.4.1 Step-By-Step Approach 193

2. 5.4.2 Using the Methodology 193

3. 5.4.3 Classes of Benefits and Costs 193

4. 5.4.4 Shortcomings of the Benefit-Cost Methodology 194

5. 5.5 Cost-Effectiveness Analysis 195

6. 5.6 Issues Related to Risk 198

1. 5.6.1 Accepting and Managing Risk 200

2. 5.6.2 Coping with Uncertainty 201

3. 5.6.3 Non-Probabilistic Evaluation Methods when Uncertainty Is Present 202

4. 5.6.4 Risk-Benefit Analysis 207

5. 5.6.5 Limits of Risk Analysis 210

7. 5.7 Decision Trees 210

1. 5.7.1 Decision Tree Steps 217

2. 5.7.2 Basic Principles of Diagramming 218

3. 5.7.3 Use of Statistics to Determine the Value of More Information 219

4. 5.7.4 Discussion and Assessment 222

8. 5.8 Real Options 223

1. 5.8.1 Drivers of Value 223

2. 5.8.2 Relationship to Portfolio Management 224

1. Team Project 225

2. Discussion Questions 228

3. Exercises 229

4. Bibliography 237

5. Appendix 5A: Bayes’ Theorem for Discrete Outcomes 239

6. 6 Multiple-Criteria Methods for Evaluation and Group Decision Making 241

1. 6.1 Introduction 241

2. 6.2 Framework for Evaluation and Selection 242

1. 6.2.1 Objectives and Attributes 242

2. 6.2.2 Aggregating Objectives Into a Value Model 244

3. 6.3 Multiattribute Utility Theory 244

1. 6.3.1 Violations of Multiattribute Utility Theory 249

4. 6.4 Analytic Hierarchy Process 254

1. 6.4.1 Determining Local Priorities 255

2. 6.4.2 Checking for Consistency 260

3. 6.4.3 Determining Global Priorities 261

5. 6.5 Group Decision Making 262

1. 6.5.1  Group Composition 263

2. 6.5.2  Running the Decision-Making Session 264

3. 6.5.3  Implementing the Results 265

4. 6.5.4  Group Decision Support Systems 265

1. Team Project 267

2. Discussion Questions 267

3. Exercises 268

4. Bibliography 271

5. Appendix 6A: Comparison of Multiattribute Utility Theory with the AHP: Case Study 275

6. 6A.1 Introduction and Background 275

7. 6A.2 The Cargo Handling Problem 276

1. 6A.2.1 System Objectives 276

2. 6A.2.2 Possibility of Commercial Procurement 277

3. 6A.2.3 Alternative Approaches 277

8. 6A.3 Analytic Hierarchy Process 279

1. 6A.3.1 Definition of Attributes 280

2. 6A.3.2 Analytic Hierarchy Process Computations 281

3. 6A.3.3 Data Collection and Results for AHP 283

4. 6A.3.4 Discussion of Analytic Hierarchy Process and Results 284

9. 6A.4 Multiattribute Utility Theory 286

1. 6A.4.1 Data Collection and Results for Multiattribute Utility Theory 286

2. 6A.4.2 Discussion of Multiattribute Utility Theory and Results 290

10. 6A.5 Additional Observations 290

11. 6A.6 Conclusions for the Case Study 291

12. References 291

7. 7 Scope and Organizational Structure of a Project 293

1. 7.1 Introduction 293

2. 7.2 Organizational Structures 294

1. 7.2.1 Functional Organization 295

2. 7.2.2 Project Organization 297

3. 7.2.3 Product Organization 298

4. 7.2.4 Customer Organization 298

5. 7.2.5 Territorial Organization 299

6. 7.2.6 The Matrix Organization 299

7. 7.2.7 Criteria for Selecting an Organizational Structure 302

3. 7.3 Organizational Breakdown Structure of Projects 303

1. 7.3.1 Factors in Selecting a Structure 304

2. 7.3.2 The Project Manager 305

3. 7.3.3 Project Office 309

4. 7.4 Project Scope 312

1. 7.4.1 Work Breakdown Structure 313

2. 7.4.2 Work Package Design 320

5. 7.5 Combining the Organizational and Work Breakdown Structures 322

1. 7.5.1 Linear Responsibility Chart 323

6. 7.6 Management of Human Resources 324

1. 7.6.1 Developing and Managing the Team 325

2. 7.6.2 Encouraging Creativity and Innovation 329

3. 7.6.3 Leadership, Authority, and Responsibility 331

4. 7.6.4 Ethical and Legal Aspects of Project Management 334

1. Team Project 335

2. Discussion Questions 336

3. Exercises 336

4. Bibliography 338

8. 8 Management of Product, Process, and Support Design 341

1. 8.1 Design of Products, Services, and Systems 341

1. 8.1.1 Principles of Good Design 342

2. 8.1.2 Management of Technology and Design in Projects 344

2. 8.2 Project Manager’s Role 345

3. 8.3 Importance of Time and the Use of Teams 346

1. 8.3.1 Concurrent Engineering and Time-Based Competition 347

2. 8.3.2 Time Management 349

3. 8.3.3 Guideposts for Success 352

4. 8.3.4 Industrial Experience 354

5. 8.3.5 Unresolved Issues 355

4. 8.4 Supporting Tools 355

1. 8.4.1 Quality Function Deployment 355

2. 8.4.2 Configuration Selection 358

3. 8.4.3 Configuration Management 361

4. 8.4.4 Risk Management 365

5. 8.5 Quality Management 370

1. 8.5.1 Philosophy and Methods 371

2. 8.5.2 Importance of Quality in Design 382

3. 8.5.3 Quality Planning 383

4. 8.5.4 Quality Assurance 383

5. 8.5.5 Quality Control 384

6. 8.5.6 Cost of Quality 385

1. Team Project 387

2. Discussion Questions 388

3. Exercises 389

4. Bibliography 389

9. 9 Project Scheduling 395

1. 9.1 Introduction 395

1. 9.1.1 Key Milestones 398

2. 9.1.2 Network Techniques 399

2. 9.2 Estimating the Duration of Project Activities 401

1. 9.2.1 Stochastic Approach 402

2. 9.2.2 Deterministic Approach 406

3. 9.2.3 Modular Technique 406

4. 9.2.4 Benchmark Job Technique 407

5. 9.2.5 Parametric Technique 407

3. 9.3 Effect of Learning 412

4. 9.4 Precedence Relations Among Activities 414

5. 9.5 Gantt Chart 416

6. 9.6 Activity-On-Arrow Network Approach for CPM Analysis 420

1. 9.6.1 Calculating Event Times and Critical Path 428

2. 9.6.2 Calculating Activity Start and Finish Times 431

3. 9.6.3 Calculating Slacks 432

7. 9.7 Activity-On-Node Network Approach for CPM Analysis 433

1. 9.7.1 Calculating Early Start and Early Finish Times of Activities 434

2. 9.7.2 Calculating Late Start and Late Finish Times of Activities 434

8. 9.8 Precedence Diagramming with Lead–Lag Relationships 436

9. 9.9 Linear Programming Approach for CPM Analysis 442

10. 9.10 Aggregating Activities in the Network 443

1. 9.10.1 Hammock Activities 443

2. 9.10.2 Milestones 444

11. 9.11 Dealing with Uncertainty 445

1. 9.11.1 Simulation Approach 445

2. 9.11.2 Pert and Extensions 447

12. 9.12 Critique of Pert and CPM Assumptions 454

13. 9.13 Critical Chain Process 455

14. 9.14 Scheduling Conflicts 457

1. Team Project 458

2. Discussion Questions 459

3. Exercises 460

4. Bibliography 467

5. Appendix 9A: Least-Squares Regression Analysis 471

6. Appendix 9B: Learning Curve Tables 473

7. Appendix 9C: Normal Distribution Function 476

10. 10 Resource Management 477

1. 10.1 Effect of Resources on Project Planning 477

2. 10.2 Classification of Resources Used in Projects 478

3. 10.3 Resource Leveling Subject to Project Due-Date Constraints 481

4. 10.4 Resource Allocation Subject to Resource Availability Constraints 487

5. 10.5 Priority Rules for Resource Allocation 491

6. 10.6 Critical Chain: Project Management by Constraints 496

7. 10.7 Mathematical Models for Resource Allocation 496

8. 10.8 Projects Performed in Parallel 499

1. Team Project 500

2. Discussion Questions 500

3. Exercises 501

4. Bibliography 506

11. 11 Project Budget 509

1. 11.1 Introduction 509

2. 11.2 Project Budget and Organizational Goals 511

3. 11.3 Preparing the Budget 513

1. 11.3.1 Top-Down Budgeting 514

2. 11.3.2 Bottom-Up Budgeting 514

3. 11.3.3 Iterative Budgeting 515

4. 11.4 Techniques for Managing the Project Budget 516

1. 11.4.1 Slack Management 516

2. 11.4.2 Crashing 520

5. 11.5 Presenting the Budget 527

6. 11.6 Project Execution: Consuming the Budget 529

7. 11.7 The Budgeting Process: Concluding Remarks 530

1. Team Project 531

2. Discussion Questions 531

3. Exercises 532

4. Bibliography 537

5. Appendix 11A: Time–Cost Tradeoff with Excel 539

12. 12 Project Control 545

1. 12.1 Introduction 545

2. 12.2 Common Forms of Project Control 548

3. 12.3 Integrating the OBS and WBS with Cost and Schedule Control 551

1. 12.3.1 Hierarchical Structures 552

2. 12.3.2 Earned Value Approach 556

4. 12.4 Reporting Progress 565

5. 12.5 Updating Cost and Schedule Estimates 566

6. 12.6 Technological Control: Quality and Configuration 569

7. 12.7 Line of Balance 569

8. 12.8 Overhead Control 574

1. Team Project 576

2. Discussion Questions 577

3. Exercises 577

4. Bibliography 580

13. Appendix 12A: Example of a Work Breakdown Structure 581

14. Appendix 12B:  Department of Energy Cost/Schedule Control Systems Criteria 583

15. 13 Research and Development Projects 587

1. 13.1 Introduction 587

2. 13.2 New Product Development 589

1. 13.2.1 Evaluation and Assessment of Innovations 589

2. 13.2.2 Changing Expectations 593

3. 13.2.3 Technology Leapfrogging 593

4. 13.2.4 Standards 594

5. 13.2.5 Cost and Time Overruns 595

3. 13.3 Managing Technology 595

1. 13.3.1 Classification of Technologies 596

2. 13.3.2 Exploiting Mature Technologies 597

3. 13.3.3 Relationship Between Technology and Projects 598

4. 13.4 Strategic R&D Planning 600

1. 13.4.1 Role of R&D Manager 600

2. 13.4.2 Planning Team 601

5. 13.5 Parallel Funding: Dealing with Uncertainty 603

1. 13.5.1 Categorizing Strategies 604

2. 13.5.2 Analytic Framework 605

3. 13.5.3 Q-Gert 606

6. 13.6 Managing the R&D Portfolio 607

1. 13.6.1 Evaluating an Ongoing Project 609

2. 13.6.2 Analytic Methodology 612

1. Team Project 617

2. Discussion Questions 618

3. Exercises 619

4. Bibliography 619

5. Appendix 13A: Portfolio Management Case Study 622

16. 14 Computer Support for Project Management 627

1. 14.1 Introduction 627

2. 14.2 Use of Computers in Project Management 628

1. 14.2.1 Supporting the Project Management Process Approach 629

2. 14.2.2 Tools and Techniques for Project Management 629

3. 14.3 Criteria for Software Selection 643

4. 14.4 Software Selection Process 648

5. 14.5 Software Implementation 650

6. 14.6 Project Management Software Vendors 656

1. Team Project 657

2. Discussion Questions 657

3. Exercises 658

4. Bibliography 659

5. Appendix 14A: PMI Software Evaluation Checklist 660

6. 14A.1 Category 1: Suites 660

7. 14A.2 Category 2: Process Management 660

8. 14A.3 Category 3: Schedule Management 661

9. 14A.4 Category 4: Cost Management 661

10. 14A.5 Category 5: Resource Management 661

11. 14A.6 Category 6: Communications Management 661

12. 14A.7 Category 7: Risk Management 662

13. 14A.8 General (Common) Criteria 662

14. 14A.9 Category-Specific Criteria Category 1: Suites 663

15. 14A.10 Category 2: Process Management 663

16. 14A.11 Category 3: Schedule Management 664

17. 14A.12 Category 4: Cost Management 665

18. 14A.13 Category 5: Resource Management 666

19. 14A.14 Category 6: Communications Management 666

20. 14A.15 Category 7: Risk Management 668

17. 15 Project Termination 671

1. 15.1 Introduction 671

2. 15.2 When to Terminate a Project 672

3. 15.3 Planning for Project Termination 677

4. 15.4 Implementing Project Termination 681

5. 15.5 Final Report 682

1. Team Project 683

2. Discussion Questions 683

3. Exercises 684

4. Bibliography 685

18. 16 New Frontiers in Teaching Project Management in MBA and Engineering Programs 687

1. 16.1 Introduction 687

2. 16.2 Motivation for Simulation-Based Training 687

3. 16.3 Specific Example—The Project Team Builder (PTB) 691

4. 16.4 The Global Network for Advanced Management (GNAM) MBA New Product Development (NPD) Course 692

5. 16.5 Project Management for Engineers at Columbia University 693

6. 16.6 Experiments and Results 694

7. 16.7 The Use of Simulation-Based Training for Teaching Project Management in Europe 695

8. 16.8 Summary 696

1. Bibliography 697

1. Index 699

Nomenclature AC annual cost

ACWP actual cost of work performed

AHP analytic hierarchy process

AOA activity on arrow

AON activity on node

AW annual worth

BAC budget at completion

B/C benefit/cost

BCWP budgeted cost of work performed

BCWS budgeted cost of work scheduled

CBS cost breakdown structure

CCB change control board

CCBM critical chain buffer management

CDR critical design review

CE certainty equivalent, concurrent engineering

C-E cost-effectiveness

CER cost estimating relationship

CI cost index; consistency index;

criticality index

CM configuration management

COO chief operating officer

CPIF cost plus incentive fee

CPM critical path method

CR capital recovery, consistency ratio

C/SCSC cost/schedule control systems criteria

CV cost variance

DOD Department of Defense

DOE Department of Energy

DOH direct overhead costs

DSS decision support system

EAC estimate at completion

ECO engineering change order

ECR engineering change request

EMV expected monetary value

EOM end of month

EOY end of year

ERP enterprise resource planning

ETC estimate to complete

ETMS early termination monitoring system

EUAC equivalent uniform annual cost

EV earned value

EVPI expected value of perfect information

EVSI expected value of sample information

FFP firm fixed price

FMS flexible manufacturing system

FPIF fixed price incentive fee

FW future worth

GAO General Accounting Office

GDSS group decision support system

GERT graphical evaluation and review technique

HR human resources

IPT integraded product team

IRR internal rate of return

IRS Internal Revenue Service

ISO International Standards Organization

IT information technology

LCC life-cycle cost

LOB line of balance

LOE level of effort

LP linear program

LRC linear responsibility chart

MACRS modified accelerated cost recovery system

MARR minimum acceptable (attractive) rate of return

MAUT multiattribute utility theory

MBO management by objectives

MIS management information system

MIT Massachusetts Institute of Technology

MPS master production schedule

MTBF mean time between failures

MTTR mean time to repair

NAC net annual cost

NASA National Aeronautics and Space Administration

NBC nuclear, biological, chemical

NPV net present value

OBS organizational breakdown structure

O&M operations and maintenance

PDMS product data management system

PDR preliminary design review

PERT program evaluation and review technique

PMBOK project management body of knowledge

PMI Project Management Institute

PMP project management professional

PO project office

PT project team

PV planned value

PW present worth

QA quality assurance

QFD quality function deployment

RAM reliability, availability, and maintainability; random access memory

R&D research and development

RDT&E research, development, testing, and evaluation

RFP request for proposal

ROR rate of return

SI schedule index

SOW statement of work

SOYD sum-of-the-years digits