Chapter TwoOrganization Strategy and Project Selection2–1

Chapter Two
Organization Strategy and Project Selection
2–1
Copyright © 2018 McGraw-Hill Education. All rights reserved.
No reproduction or distribution without the prior written
consent of McGraw-Hill Education.
Where We Are Now
2–2
Learning Objectives
Explain why it is important for project managers to understand
their organization’s strategy
Identify the significant role projects contribute to the strategic
direction of the organization
Understand the need for a project priority system
Apply financial and nonfinancial criteria to assess the value of
projects
Understand how multi-criteria models can be used to select
projects
Apply an objective priority system to project selection
Understand the need to manage the project portfolio
2–3

Chapter Outline
2.1 The Strategic Management Process: An
Overview
2.2 The Need for a Project Priority System
2.3 A Portfolio Management System
2.4 Selection Criteria
2.5 Applying a Selection Model
2.6 Managing the Portfolio System
2–4
2–5
Why Project Managers Need
to Understand Strategy
Changes in the organization’s mission and strategy
Project managers must respond to changes with appropriate
decisions about future projects and adjustments to current
projects.
Project managers who understand their organization’s strategy
can become effective advocates of projects aligned with the
firm’s mission.
Project Management 6e
2–5
2–6
The Strategic Management Process:

An Overview
Strategic Management
Requires every project to be clearly linked to strategy.
Provides theme and focus of firm’s future direction.
Responding to changes in the external environment—
environmental scanning
Allocating scarce resources of the firm to improve its
competitive position—internal responses to new programs
Requires strong links among mission, goals, objectives,
strategy, and implementation.
2–6
Four Activities of the Strategic
Management Process
Review and define the organizational mission
Set long-range goals and objectives
Analyze and formulate strategies to reach objectives
Implement strategies through projects
2–7
2–7
2–8

Strategic Management Process
FIGURE 2.1
2–8
2–9
Characteristics of Objectives
EXHIBIT 2.1
S Specific Be specific in targeting an objective
M Measurable Establish a measurable indicator(s) of
progress
A Assignable Make the objective assignable to one
person
for completion
R Realistic State what can realistically be done with
available resources
T Time related State when the objective can be achieved,
that is, duration
2–9

The Need for a Project Priority System
The Implementation Gap
The lack of understanding and consensus on strategy among top
management and middle-level (functional) managers who
independently implement the strategy.
Organization Politics
Project selection is based on the persuasiveness and power of
people advocating the projects.
Resource Conflicts and Multitasking
Multiproject environment creates interdependency relationships
of shared resources which results in the starting, stopping, and
restarting projects.
2–10
2–10
2–11
Benefits of Project Portfolio Management
Builds discipline into the project selection process
Links project selection to strategic metrics
Prioritizes project proposals across a common set of criteria,
rather than on politics or emotion
Allocates resources to projects that align with strategic
direction
Balances risk across all projects
Justifies killing projects that do not support strategy
Improves communication and supports agreement on project
goals
EXHIBIT 2.2

2–11
2–12
A Portfolio Management System
Design of a project portfolio system:
Classification of a project
Selection criteria depending upon classification
Sources of proposals
Evaluating proposals
Managing the portfolio of projects.
2–12
2–13
Portfolio of Projects by Type
FIGURE 2.2

2–13
2–14
A Portfolio Management System
Selection Criteria
Financial models: payback, net present value (NPV)
Non-financial models: projects of strategic importance to the
firm
Multi-Criteria Selection Models
Use several weighted selection criteria to evaluate project
proposals.
2–14
2–15
Financial Models
The Payback Model
Measures the time the project will take to recover
the project investment.
Uses more desirable shorter paybacks.
Emphasizes cash flows, a key factor in business.
Limitations of Payback:
Ignores the time value of money.
Assumes cash inflows for the investment period
(and not beyond).
Does not consider profitability.

2–15
2–16
Financial Models (cont’d)
The Net Present Value (NPV) Model
Uses management’s minimum desired rate-of-return (discount
rate) to compute the present value of all net cash inflows.
Positive NPV: project meets minimum desired rate
of return and is eligible for further consideration.
Negative NPV: project is rejected.
2–16
2–17
Example Comparing Two Projects
Using Payback Method
EXHIBIT 2.3A

2–17
2–18
Example Comparing Two Projects
Using Net Present Value Method
EXHIBIT 2.3b
2–18
2–19
Nonfinancial Strategic Criteria
To capture larger market share
To make it difficult for competitors to enter the market
To develop an enabler product, which by its introduction will
increase sales in more profitable products
To develop core technology that will be used in next-generation
products
To reduce dependency on unreliable suppliers
To prevent government intervention and regulation
To restore corporate image or enhance brand recognition
To demonstrate its commitment to corporate citizenship and
support for community development

2–19
2–20
Multi-Criteria Selection Models
Checklist Model
Uses a list of questions to review potential projects and to
determine their acceptance or rejection.
Fails to answer the relative importance or value of a potential
project and doesn’t to allow for comparison with other potential
projects.
Multi-Weighted Scoring Model
Uses several weighted qualitative and/or quantitative selection
criteria to evaluate project proposals.
Allows for comparison of projects with other potential projects.
2–20
2–21
Sample Selection Questions Used in Practice
EXHIBIT 2.4Topic Question Strategy/alignment What specific
strategy does this project align with? Driver What business
problem does the project solve? Success metrics How will we
measure success? Sponsorship Who is the project sponsor? Risk
What is the impact of not doing this project? Risk What is the
project risk to our organization? Risk Where does the proposed
project fit in our risk profile? Benefits, value, ROI What is the
value of the project to this organization? Benefits, value, ROI
When will the project show results? Objectives What are the
project objectives?

2–21
2–22
Sample Selection Questions Used in Practice
EXHIBIT 2.4 cont’dTopic Question Organization culture Is our
organization culture right for this type of project? Resources
Will internal resources be available for this project? Approach
Will we build or buy? Schedule How long will this project take?
Schedule Is the time line realistic? Training/resources Will staff
training be required? Finance/portfolio What is the estimated
cost of the project? Portfolio Is this a new initiative or part of
an existing initiative? Portfolio How does this project interact
with current projects? Technology Is the technology available
or new?
2–22
2–23
Project Screening Matrix
FIGURE 2.3

2–23
2–24
Applying a Selection Model
Project Classification
Deciding how well a strategic or operations project fits the
organization’s strategy
Selecting a Model
Applying a weighted scoring model to align projects closer with
the organization’s strategic goals
Reduces the number of wasteful projects
Helps identify proper goals for projects
Helps everyone involved understand how
and why a project is selected
2–24
2–25
Sources and Solicitation of Project Proposals
Within the organization
Request for proposal (RFP) from external sources (contractors
and vendors)
Ranking Proposals and Selection of Projects
Prioritizing requires discipline, accountability, responsibility,
constraints, reduced flexibility,
and loss of power

Managing the Portfolio
Senior management input
The governance team (project office) responsibilities
Applying a Selection Model (cont’d)
2–25
2–26
A Proposal Form for an Automatic Vehicular Tracking (AVL)
Public
Transportation Project
FIGURE 2.4A
2–26
2–27
Risk Analysis for
500-Acre Wind Farm
FIGURE 2.4B

2–27
2–28
Project
Screening Process
FIGURE 2.5
2–28
2–29
Priority Screening
Analysis
FIGURE 2.6
2–29
2–30
Managing the Portfolio System

Senior Management Input
Provide guidance in selecting criteria that are aligned with the
organization’s strategic goals.
Decide how to balance available resources among current
projects.
The Governance Team Responsibilities
Publish the priority of every project.
Ensure that the project selection process is open and free of
power politics.
Reassess the organization’s goals and priorities.
Evaluate the progress of current projects.
2–30
Balancing the Portfolio for
Risks and Types of Projects
Bread-and-butter Projects
Involve evolutionary improvements
to current products and services.
Pearls
Represent revolutionary commercial opportunities using proven
technical advances.
Oysters
Involve technological breakthroughs
with high commercial payoffs.
White Elephants
Showed promise at one time
but are no longer viable.
2–31

2–31
2–32
Key Terms
Implementation gap
Net present value
Organizational politics
Payback
Priority system
Priority team
Project portfolio
Project screening matrix
Project sponsor
Sacred cow
Strategic management process
2–32
Chapter Seven
Managing Risk
7–1

7–2
Where We Are Now
2
Learning Objectives
Describe the risk management process
Understand how to identify project risks
Assess the significance of different project risks
Describe the four different responses to managing risks
Understand the role contingency plans play in risk management
process
Understand opportunity management and describe the four
different approaches to responding to opportunities in a project
Understand how contingency funds and time buffers are used to
manage risks on a project
Recognize the need for risk management being an ongoing
activity
Describe the change control process
7–3

Chapter Outline
7.1 Risk Management Process
7.2 Step 1: Risk Identification
7.3 Step 2: Risk Assessment
7.4 Step 3: Risk Response Development
7.5 Contingency Planning
7.6 Opportunity Management
7.7 Contingency Funding and Time Buffers
7.8 Step 4: Risk Response Control
7.9 Change Control Management
7–4
7–5
Risk Management Process
Risk
Uncertain or chance events that planning cannot overcome or
control
Risk Management
An attempt to recognize and manage potential and unforeseen
trouble spots that may occur when the project is implemented
What can go wrong (risk event)
How to minimize the risk event’s impact (consequences)
What can be done before an event occurs (anticipation)
What to do when an event occurs (contingency plans)
5

7–6
The Risk Event Graph
FIGURE 7.1
6
7–7
Risk Management’s Benefits
A proactive rather than reactive approach
Reduces surprises and negative consequences
Prepares the project manager to take advantage
of appropriate risks
Provides better control over the future
Improves chances of reaching project performance objectives
within budget and on time
7
7–8
The Risk Management Process
FIGURE 7.2

8
7–9
Managing Risk
Step 1: Risk Identification
Generate a list of possible risks through brainstorming, problem
identification and risk profiling
Use risk breakdown structure (RBS) in conjunction with work
breakdown structure (WBS) to identify and analyze risks
Macro risks first, then specific events
Risk profile is a list of questions addressing additional areas of
uncertainty on a project.
9
7–10
The Risk Breakdown Structure (RBS)
FIGURE 7.3
10
7–11

Partial Risk Profile for Product Development Project
FIGURE 7.4
11
7–12
Managing Risk
Step 2: Risk Assessment
Scenario analysis for event probability and impact
Risk assessment form
Risk severity matrix
Failure Mode and Effects Analysis (FMEA)
Risk Value = Impact x Probability x Detection
Probability analysis
Decision trees, NPV, and PERT
12
7–13
Defined Conditions for Impact Scales of a Risk on Major
Project Objectives (Examples for negative impacts only)
FIGURE 7.5

13
7–14
Risk Assessment Form
FIGURE 7.6
14
7–15
Risk Severity Matrix
FIGURE 7.7
Failure Mode and Effects Analysis (FMEA)
Impact × Probability × Detection = Risk ValueUser
BacklashInterface problemsSystem freezingHardware malfunc-
tioning
Likelihood
Impact
Red zone (major risk)
Yellow zone (moderate risk)
Green zone (minor risk)
5
5
4
4
3
3

2
2
1
1
15
7–16
Managing Risk (cont’d)
Step 3: Risk Response Development
Mitigating Risk
Reducing the likelihood an adverse event will occur
Reducing the impact of an adverse event
Avoiding Risk
Changing the project plan to eliminate the risk or condition
Transferring Risk
Paying a premium to pass the risk to another party
Requiring Build-Own-Operate-Transfer (BOOT) provisions
Accepting Risk
Making a conscious decision to accept the risk
16
7–17
Contingency Planning
Contingency Plan

An alternative plan that will be used if a possible foreseen risk
event actually occurs
A plan of actions that will reduce or mitigate the negative
impact (consequences) of a risk event
Risks of Not Having a Contingency Plan
Having no plan may slow managerial response
Decisions made under pressure can be potentially dangerous and
costly
17
7–18
Risk Response Matrix
FIGURE 7.8
18
7–19
Risk and Contingency Planning
Technical Risks
Backup strategies if chosen technology fails
Assessing whether technical uncertainties can be resolved
Schedule Risks
Use of slack increases the risk of a late project finish
Imposed duration dates (absolute project finish date)

Compression of project schedules due to a shortened project
duration date
19
7–20
Risk and Contingency Planning (cont’d)
Cost Risks
Time/cost dependency links: costs increase when problems take
longer to solve than expected.
Price protection risks (a rise in input costs) increase if the
duration of a project is increased.
Funding Risks
Changes in the supply of funds for the project can dramatically
affect the likelihood of implementation or successful
completion of a project.
No reproduction or distribution without the prior w ritten
20
7–21
Opportunity Management
Exploit
Seeking to eliminate the uncertainty associated with an
opportunity to ensure that it definitely happens
Share
Allocating some or all of the ownership of an opportunity to

another party who is best able to capture the opportunity for the
benefit of the project
Enhance
Taking action to increase the probability and/or the positive
impact of an opportunity
Accept
Being willing to take advantage of an opportunity if it occurs,
but not taking action to pursue it
21
7–22
Contingency Funding and Time Buffers
Contingency Funds
Funds to cover project risks—identified and unknown
Size of funds reflects overall risk of a project.
Budget reserves
Are linked to the identified risks of specific work packages.
Management reserves
Are large funds to be used to cover major unforeseen risks (e.g.,
change in project scope) of the total project.
Time Buffers
Amounts of time used to compensate for unplanned delays in
the project schedule
Severe risk, merge, noncritical, and scarce resource activities
22

7–23
Contingency Fund Estimate
TABLE 7.1
23
7–24
Managing Risk (cont’d)
Step 4: Risk Response Control
Risk control
Execution of the risk response strategy
Monitoring of triggering events
Initiating contingency plans
Watching for new risks
Establishing a Change Management System
Monitoring, tracking, and reporting risk
Fostering an open organization environment
Repeating risk identification/assessment exercises
Assigning and documenting responsibility for managing risk
24
7–25

Change Control Management
Sources of Change
Project scope changes
Implementation of contingency plans
Improvement changes
25
7–26
Change Management Systems
Identify proposed changes
List expected effects of proposed changes on schedule and
budget
Review, evaluate, and approve or disapprove of changes
formally
Negotiate and resolve conflicts of change, condition, and cost
Communicate changes to parties affected
Assign responsibility for implementing change
Adjust master schedule and budget
Track all changes that are to be implemented
26
7–27
The Change

Control Process
FIGURE 7.9
27
7–28
Benefits of a Change Control System
Inconsequential changes are discouraged by the formal process.
Costs of changes are maintained in a log.
Integrity of the WBS and performance measures is maintained.
Allocation and use of budget and management reserve funds are
tracked.
Responsibility for implementation is clarified.
Effect of changes is visible to all parties involved.
Implementation of change is monitored.
Scope changes will be quickly reflected in baseline and
performance measures.
28
7–29
Sample Change Request
FIGURE 7.10

29
7–30
Change Request Log
FIGURE 7.11
30
7–31
Key Terms
Accept risk
Avoiding risk
Budget reserve
Change management system
Contingency plan
Management reserve
Mitigating risk
Opportunity
Risk
Risk breakdown structure (RBS)
Risk profile
Risk register
Risk severity matrix
Scenario analysis
Time buffer

Transferring risk
31
Appendix 7.1
PERT and PERT Simulation
7–32
32
7–33
PERT—Program Evaluation Review Technique
Assumes each activity duration has a range that statistically
follows a beta distribution.
Uses three time estimates for each activity: optimistic,
pessimistic, and a weighted average to represent activity
durations.
Knowing the weighted average and variances for each activity
allows the project planner to compute the probability of meeting
different project durations.

33
7–34
Activity and Project Frequency Distributions
FIGURE A7.1
34
7–35
Activity Time Calculations
The weighted average activity time is computed by the
following formula:
(7.1)
35
7–36
Activity Time Calculations (cont’d)
The variability in the activity time estimates is approximated by
the following equations:
The standard deviation for the activity:
The standard deviation for the project:

Note the standard deviation of the activity is squared in this
equation; this is also called variance. This sum includes only
activities on the critical path(s) or path being reviewed.
(7.2)
(7.3)
36
7–37
Activity Times and Variances
TABLE A7.1
37
7–38
Probability of Completing the Project
The equation below is used to compute the “Z” value found in
statistical tables (Z = number of standard deviations from the
mean), which, in turn, tells the probability of completing the
project in the time specified.
(7.4)

38
7–39
Hypothetical Network
FIGURE A7.2
39
7–40
Hypothetical Network (cont’d)
FIGURE A7.2 (cont’d)
40
7–41
Possible Project Duration

Probability project is completed before scheduled time (TS) of
67 units
Probability project is completed by the 60th unit time period
(TS)
FIGURE A7.3
41
7–42
Z Values and Probabilities
TABLE A7.2
42
Chapter Six
Developing a Project Plan
6-1

6–2
Where We Are Now
Project Management 6e.
6-2
Learning Objectives
Understand the linkage between WBS and the project network
Diagram a project network using AON methods
Calculate early, late, and slack activities times
Identify and understand the importance of managing the critical
path
Distinguish free slack from total slack
Demonstrate understanding and application of lags in
compressing projects or constraining the start or finish of an
activity
6–3
Chapter Outline
6.1 Developing the Project Network
6.2 From Work Package to Network
6.3 Constructing a Project Network
6.4 Activity-on-Node (AON) Fundamentals
6.5 Network Computation Process
6.6 Using the Forward and Backward Pass

Information
6.7 Level of Detail for Activities
6.8 Practical Considerations
6.9 Extended Network Techniques to Come
Closer to Reality
6–4
6–5
Developing the Project Network
The Project Network
A flow chart that graphically depicts the logical sequences,
interdependencies, and start and finish times of the project
activities along with the longest path(s) through the network—
the critical path
Provides the basis for scheduling labor and equipment.
Enhances communication among project participants.
Provides an estimate of the project’s duration.
Provides a basis for budgeting cash flow.
Identifies activities that are critical.
Highlights activities that are “critical” and should not be
delayed.
Help managers get and stay on plan.
6-5
6–6

From WBS/Work Package to Network
FIGURE 6.1
6-6
6–7
Constructing a Project Network
Terminology
Activity: an element of the project that requires time but may
not require resources
Merge Activity: an activity that has two or more preceding
activities on which it depends (more than one dependency arrow
flowing into it)
Parallel Activities: Activities that can occur independently and,
if desired, not at the same time
A
C
D
B

6-7
6–8
Constructing a Project Network (cont’d)
Terminology
Path: a sequence of connected, dependent activities
Critical Path:
The longest path through the activity network that allows for
the completion of all project-related activities
The shortest expected time in which the entire project can be
completed.
Delays on the critical path will delay completion of the entire
project.
A
B
D
(Assumes that minimum of A + B > minimum of C in length of
times to complete activities.)
C
6-8
6–9
Constructing a Project Network (cont’d)
Terminology
Burst Activity: an activity that has more than one activity

immediately following it (more than one dependency arrow
flowing from it)
Two Approaches
Activity-on-Node (AON)
Uses a node to depict an activity.
Activity-on-Arrow (AOA)
Uses an arrow to depict an activity.
B
D
A
C
6-9
6–10
Basic Rules to Follow in Developing
Project Networks
Networks typically flow from left to right.
An activity cannot begin until all preceding connected activities
are complete.
Arrows indicate precedence and flow and can cross over each
other.
Each activity must have a unique identify number.
An activity identification number must be greater than that of
any predecessor activities.
Looping is not allowed.

Conditional statements are not allowed.
Use common start and stop nodes.
6-10
6–11
Activity-on-Node Fundamentals
FIGURE 6.2
6-11
6–12
Activity-on-Node Fundamentals (cont’d)
FIGURE 6.2 (cont’d)
6-12

6–13
Network Information
TABLE 6.1
6-13
6–14
Automated Warehouse—Partial Network
FIGURE 6.3
6-14
6–15
Automated Warehouse—Complete Network
FIGURE 6.4

6-15
6–16
Network Computation Process
Forward Pass—Earliest Times
How soon can the activity start? (early start—ES)
How soon can the activity finish? (early finish—EF)
How soon can the project finish? (expected time—TE)
Backward Pass—Latest Times
How late can the activity start? (late start—LS)
How late can the activity finish? (late finish—LF)
Which activities represent the critical path?
How long can the activity be delayed? (slack or float—SL)
6-16
6–17
Network Information
TABLE 6.2

6-17
6–18
Activity-on-Node Network
FIGURE 6.5
6-18
6–19
Activity-on-Node Network Forward Pass
FIGURE 6.6
6-19
6–20
Forward Pass Computation
Add activity times along each path in the network (ES +
Duration = EF).
Carry the early finish (EF) to the next activity where it becomes
its early start (ES) unless…

The next succeeding activity is a merge activity, in which case
the largest early finish (EF) number of all its immediate
predecessor activities is selected.
6-20
6–21
Activity-on-Node Network Backward Pass
FIGURE 6.7
6-21
6–22
Backward Pass Computation
Subtract activity times along each path starting with the project
end activity (LF - Duration = LS).
Carry the late start (LS) to the next preceding activity where it
becomes its late finish (LF) unless…
The next succeeding activity is a burst activity, in which case
the smallest late start (LS) number of all its immediate
successor activities is selected.

6-22
6–23
Forward and Backward Passes Completed with Slack Times
FIGURE 6.8
6-23
6–24
Determining Total Slack (TS)
Total Slack (or Float)
Tells us the amount of time an activity can be delayed and not
delayed the project.
Is how long an activity can exceed its early finish date without
affecting the project end date or an imposed completion date.
Is simply the difference between the LS and ES (LS – ES = SL)
or between LF and EF (LF – EF = SL).

6-24
6–25
Determining Free Slack (FS)
Free Slack (or Float)
Is the amount of time an activity can be delayed after the start
of a longer parallel activity or activities.
Is how long an activity can exceed its early finish date without
affecting early start dates of any successor(s).
Allows flexibility in scheduling scarce resources.
Only activities that occur at the end of a chain of activities,
where you have a merge activity, can have free slack.
6-25
6–26
The Critical Path
Is the network path(s) that has (have) the least slack in
common.
Is the longest path through the activity network.
Is the shortest expected time in which the entire project can be
completed.
Is important because it impacts completion time.
Is where you put best people on.
Is where you pay extra extension when doing risk assessment.
Is where you look when other managers asking to ‘borrow’
people or equipment.
Is where you look when you don’t have time to monitor all
activities.

6-26
6–27
Network Sensitivity
The likelihood the original critical path(s) will change once the
project is initiated.
A network schedule that has only one critical path and
noncritical activities that enjoy significant slack would be
labeled ‘insensitive’.
6-27
6–28
Practical Considerations
Network Logic Errors
Activity Numbering
Use of Computers to Develop Networks (and Gantt Chart)
Calendar Dates
Multiple Starts and Multiple Projects

6-28
6–29
Network Logic Errors: Illogical Loop
FIGURE 6.9
6-29
6–30
Automated Warehouse Order Picking System Network
FIGURE 6.10
6-30
6–31
Automated Order Warehouse Picking System Bar Chart
FIGURE 6.11

6-31
6–32
Extended Network Techniques
to Come Close to Reality
Laddering
Activities are broken into segments so the following activity
can begin sooner and not delay the work.
Lags
The minimum amount of time a dependent activity must be
delayed to begin or end.
Lengthy activities are broken down to reduce the delay
in the start of successor activities.
Lags can be used to constrain finish-to-start, start-to-start,
finish-to-finish, start-to-finish, or combination relationships.
6-32
6–33
Example of Laddering Using
Finish-to-Start Relationship
FIGURE 6.12

6-33
6–34
Use of Lags
FIGURE 6.13
FIGURE 6.14
Finish-to-Start Relationship
Start-to-Start Relationship
6-34
6–35
Use of Lags (cont’d)
FIGURE 6.15
Use of Lags to Reduce Schedule Detail and Project Duration

6-35
6–36
New Product Development Process
FIGURE 6.16
6-36
6–37
Use of Lags (cont’d)
FIGURE 6.17
FIGURE 6.18
FIGURE 6.19
Finish-to-Finish
Relationship
Start-to-Finish
Relationship
Combination
Relationships

6-37
6–38
Network Using Lags
FIGURE 6.20
6-38
6–39
Hammock Activities
Hammock Activity
Spans over a segment of a project.
Has a duration that is determined after the network plan is
drawn.
Is very useful in assigning and controlling indirect project
costs.
Is used to aggregate sections of the project to facilitate getting
the right level of detail for specific sections of a project.
6-39

6–40
Hammock Activity Example
FIGURE 6.21
6-40
6–41
Key Terms
Activity
Activity-on-arrow (AOA)
Activity-on-node (AON)
Burst activity
Concurrent engineering
Critical path
Early time
Free slack
Gantt chart
Hammock activity
Lag relationship
Late time
Merge activity
Parallel activity
Sensitivity
Total slack

6-41
6–42
Shoreline Stadium Case
TABLE 6.3
6-42
Chapter Five
Estimating Project Times and Costs
5–1
5–2
Where We Are Now

5-2
Learning Objectives
Understand estimating project times and costs are the
foundation for project planning and control
Describe guidelines for estimating time, cost, and resources
Describe the methods, uses, and advantages and disadvantages
of top-down and bottom-up estimating methods
Distinguish different kinds of costs associated with a project
Suggest a scheme for developing an estimating database for
future projects
Understand the challenge of estimating mega projects and
describe steps that lead to better informed decisions
Define a “white elephant” in project management and provide
examples
5–3
Chapter Outline
5.1 Factors Influencing the Quality of Estimates
5.2 Estimating Guidelines for Times, Costs, and
Resources
5.3 Top-Down versus Bottom-Up Estimating
5.4 Methods for Estimating Project Times and
Costs
5.5 Level of Detail
5.6 Types of Costs
5.7 Refining Estimates
5.8 Creating a Database for Estimating
5.9 Mega Projects: A Special Case
5–4

5–5
Estimating Projects
Estimating
The process of forecasting or approximating the time and cost
of completing project deliverables
The task of balancing expectations of stakeholders and need for
control while the project is implemented
Types of Estimates
Top-down (macro) estimates: analogy, group consensus, or
mathematical relationships
Bottom-up (micro) estimates: estimates of elements
of the work breakdown structure
5-5
5–6
EXHIBIT 5.1
To support good decisions
To schedule work
To determine how long the project should take and its cost
To determine whether the project is worth doing
To develop cash flow needs
To determine how well the project is progressing
Why Estimating Time and Cost Is Important

5-6
5–7
Factors Influencing the Quality of Estimates
Quality of Estimates
Project
Complexity
People
Project Structure and Organization
Padding
Estimates
Organization
Culture
Other (Nonproject)
Factors
Planning Horizon

5-7
5–8
Estimating Guidelines for Times,
Costs, and Resources
Have people familiar with the tasks make the estimate
Use several people to make estimates
Base estimates on normal conditions, efficient methods, and a
normal level of resources
Use consistent time units in estimating task times
Treat each task as independent, don’t aggregate
Do not make allowances for contingencies.
Add a risk assessment to avoid surprises to stakeholders
5-8
5–9
Developing Work Package Estimates
Preparing Initial Estimates
Use several people to make estimates
Assume normal conditions
Use consistent time units
Assume tasks are independent

Make no allowance for contingencies
Include a risk assessment
Use people familiar with
the tasks
5-9
5–10
Top-Down versus Bottom-Up Estimating
Top-Down Estimates
Are usually derived from someone who uses experience and/or
information to determine the project duration and total cost.
Are sometimes made by top managers who have little
knowledge of the processes used to complete the project.
Bottom-Up Approach
Can serve as a check on cost elements in the WBS
by rolling up the work packages and associated cost accounts to
major deliverables at the work package level.
5-10
5–11
Top-Down versus Bottom-Up Estimating
TABLE 5.1

Conditions for Preferring Top-Down or
Bottom-up Time and Cost Estimates
Top-down Bottom-up
Condition Estimates Estimates
- Strategic decision making X
- Cost and time important X
- High uncertainty X
- Internal, small project X
- Fixed-price contract X
- Customer wants details X
- Unstable scope X
5-11
5–12
Estimating Projects: Preferred Approach
Make rough top-down estimates
Develop the WBS/OBS
Make bottom-up estimates
Develop schedules and budgets
Reconcile differences between top-down
and bottom-up estimates
5-12

5–13
Top-Down Approaches for Estimating Project Times and Costs
Consensus methods
Ratio methods (sometimes called parametric)
Apportion method
Function point methods for software and system projects
Learning curves
Project Estimate
Times
Costs

5-13

5–14
Apportion Method of Allocating Project Costs Using the Work
Breakdown Structure
FIGURE 5.1
5-14
5–15
Simplified Basic Function Point Count Process
for a Prospective Project or Deliverable
TABLE 5.2
5-15
5–16
Example: Function Point Count Method
TABLE 5.3

5-16
5–17
Bottom-Up Approaches for Estimating Project Times and Costs
Template methods
Parametric procedures applied to specific tasks
Range estimates for
the WBS work packages
Phase estimating: A hybrid
5-17
5–18
Range Estimating Template
FIGURE 5.2
5-18
5–19
Phase Estimating over Product Life Cycle

FIGURE 5.3
5-19
5–20
Top-Down and Bottom-Up Estimates
FIGURE 5.4
5-20
5–21
Level of Detail
Level of detail in the WBS varies with the complexity of the
project, the need for control, the project size, cost, duration,
and other factors.
Excessive detail is costly.
Fosters a focus on departmental outcomes rather than on
deliverable outcomes
Creates unproductive paperwork
Insufficient detail is costly.
Lack of focus on goals
Wasted effort on nonessential activities

5-21
5–22
Types of Costs
Direct Costs
Costs that are clearly chargeable to a specific work package.
Labor, materials, equipment, and other
Direct (Project) Overhead Costs
Costs incurred that are directly tied to project deliverables or
work packages.
Salary, rents, supplies, specialized machinery
General and Administrative Overhead Costs
Organization costs indirectly linked to a specific package that
are apportioned to the project.
5-22
5–23
Contract Bid Summary Costs
FIGURE 5.5Direct costs $80,000 Direct overhead $20,000 Total
direct costs $100,000 G&A overhead (20%) $20,000 Total costs
$120,000 Profit (20%) $24,000 Total bid $144,000

5-23
5–24
Three Views of Cost
FIGURE 5.6
5-24
5–25
Refining Estimates
Reasons for Adjusting Estimates
Interaction costs are hidden in estimates.
Normal conditions do not apply.
Things go wrong on projects.
Changes in project scope and plans
Overly optimistic
Strategic misrepresentation
Adjusting Estimates
Time and cost estimates of specific activities are adjusted as the
risks, resources, and situation particulars become more clearly
defined.

5-25
5–26
Estimating Database Templates
FIGURE 5.7
5-26
Mega Projects: A Special Case
Mega Projects
Are large-scale, complex ventures that typically cost $1 billion
or more, take many years to complete, and involve multiple
private and public stakeholders.
High-speed rail lines, airports, healthcare reform, the Olympics,
development of new aircraft
Often involve a double whammy.
Cost much more than expected but underdelivered on benefits
they were to provide.
Are sometimes called “White Elephants”
Over budget, under value, high cost of maintaining (exceeds the
benefits received)
5–27

Three Steps of the Reference Class Forecasting (RCF) Process
Select a reference class of projects similar to your potential
projects.
Collect and arrange outcome data as a distribution. Create a
distribution of cost overruns as a percentage of the original
project estimate.
Use the distribution data to arrive at a realistic forecast.
Compare the original cost estimate for the project with the
reference class projects.
5–28
5–29
Key Terms
Apportionment
Bottom-up estimates
Delphi method
Direct costs
Function points
Learning curves
Overhead costs
Padding estimates
Phase estimating
Range estimating
Ratio methods
Reference class forecasting (RCF)
Template method
Time and cost databases

Top-down estimates
White elephant
5-29
5–30
WBS Figure
Exercise Figure 5.1
5-30
5–31
Learning Curves Unit Values
TABLE A5.1
5-31

5–32
Learning Curves Cumulative Values
TABLE A5.2
5-32
Chapter Four
Defining the Project
4–1
4–2
Where We Are Now
4-2

Learning Objectives
Identify key elements of a project scope statement and
understand why a complete scope statement is crucial to project
success
Understand why it is important to establish project priorities in
terms of cost, time, and performance
Demonstrate the importance of a work breakdown structure
(WBS) to the management of projects and how it serves as a
data base for planning and control
Demonstrate how the organization breakdown structure (OBS)
establishes accountability to organizational units
Describe a process breakdown structure (PBS) and when to use
it
Create responsibility matrices for small projects
Create a communication plan for a project
4–3
Chapter Outline
4.1 Step 1: Defining the Project Scope
4.2 Step 2: Establishing Project Priorities
4.3 Step 3: Creating the Work Breakdown
Structure
4.4 Step 4: Integrating the WBS with the
Organization
4.5 Step 5: Coding the WBS for the Information
System
4.6 Process Breakdown Structure
4.7 Responsibility Matrices
4.8 Project Communication Plan
4–4

4–5
Defining the Project
Step 1: Defining the Project Scope
Step 2: Establishing Project Priorities
Step 3: Creating the Work Breakdown Structure
Step 4: Integrating the WBS with the Organization
Step 5: Coding the WBS for the Information System
4-5
4–6
Step 1: Defining the Project Scope
Project Scope
A definition of the end result or mission of the project—a
product or service for the client/customer
Purposes of the Project Scope Statement
To clearly define the deliverable(s) for the end user.
To focus the project on successful completion
of its goals.
To be used by the project owner and participants
as a planning tool and for measuring project success

4-6
4–7
Project Scope Checklist
Project objective
Deliverables
Milestones
Technical requirements
Limits and exclusions
Reviews with customer
4-7
4–8
Project Scope: Terms and Definitions
Scope Statements
Also called statements of work (SOW)
Project Charter
Can contain an expanded version of scope statement.
A document authorizing the project manager to initiate and lead
the project
Scope Creep
The tendency for the project scope to expand over time due to
changing requirements, specifications, and priorities

4-8
4–9
Step 2: Establishing Project Priorities
Causes of Project Trade-offs
Shifts in the relative importance of criterions related
to cost, time, and performance parameters
Budget–Cost
Schedule–Time
Performance–Scope
Managing the Priorities of Project Trade-offs
Constrain: original parameter is a fixed requirement.
Enhance: optimizing a criterion over others
Accept: reducing (or not meeting) a criterion requirement
4-9
4–10
FIGURE 4.1
Project Management Trade-offs
No reproduction or distribution without the prior w ritten

4-10
4–11
Project Priority Matrix
FIGURE 4.2
4-11
4–12
Step 3: Creating the Work Breakdown Structure
Work Breakdown Structure (WBS)
A hierarchical outline (map) that identifies the products and
work elements involved in a project
Defines the relationship of the final deliverable
(the project) to its subdeliverables, and in turn,
their relationships to work packages.
Best suited for design and build projects that have tangible
outcomes rather than process-oriented projects
4-12

4–13
Hierarchical Breakdown of the WBS
FIGURE 4.3
* This breakdown groups work packages by type of work within
a deliverable and allows assignment of responsibility to an
organizational unit. This extra step facilitates a system for
monitoring project progress (discussed in Chapter 13).
4-13
4–14
How WBS Helps the Project Manager
WBS
Facilitates evaluation of cost, time, and technical performance
of the organization on a project.
Provides management with information appropriate
to each organizational level.
Helps in the development of the organization breakdown
structure (OBS), which assigns project responsibilities to
organizational units and individuals
Helps manage plan, schedule, and budget.
Defines communication channels and assists
in coordinating the various project elements.

4-14
4–15
Work Breakdown Structure
FIGURE 4.4
4-15
4–16
Work Packages
A work package is the lowest level of the WBS.
It is output-oriented in that it:
Defines work (what).
Identifies time to complete a work package (how long).
Identifies a time-phased budget to complete
a work package (cost).
Identifies resources needed to complete
a work package (how much).
Identifies a person responsible for units of work (who).
Identifies monitoring points for measuring success (how well).
4-16

4–17
Step 4: Integrating the WBS
with the Organization
Organizational Breakdown Structure (OBS)
Depicts how the firm is organized to discharge its work
responsibility for a project.
Provides a framework to summarize
organization unit work performance.
Identifies organization units responsible
for work packages.
Ties organizational units to cost control accounts.
4-17
4–18
Integration of
WBS and OBS
FIGURE 4.5
4-18
4–19

Step 5: Coding the WBS for
the Information System
WBS Coding System
Defines:
Levels and elements of the WBS
Organization elements
Work packages
Budget and cost information
Allows reports to be consolidated at any level in the
organization structure
WBS Dictionary
Provides detailed information about each element in the WBS.
4-19
4–20
Coding
the WBS
EXHIBIT 4.1
4-20

4–21
Process Breakdown Structure (PBS) for
Software Development Project
FIGURE 4.6
4-21
4–22
Responsibility Matrices
Responsibility Matrix (RM)
Also called a linear responsibility chart
Summarizes the tasks to be accomplished and who is
responsible for what on the project.
Lists project activities and participants responsible for each
activity.
Clarifies critical interfaces between units
and individuals that need coordination.
Provide a means for all participants to view their
responsibilities and agree on their assignments.
Clarifies the extent or type of authority that
can be exercised by each participant.
4-22

4–23
Responsibility Matrix for a Market Research Project
FIGURE 4.7
4-23
4–24
Responsibility Matrix for the Conveyor Belt Project
FIGURE 4.8
4-24
4–25
Project Communication Plan
What information needs to be collected
and when?
Who will receive the information?
What methods will be used to gather
and store information?
What are the limits, if any, on who has access to certain kinds
of information?

When will the information be communicated?
How will it be communicated?
4-25
4–26
Developing a Communication Plan
Stakeholder analysis
Information needs
Sources of information
Dissemination modes
Responsibility and timing
4-26
4–27
Stakeholder Communications
FIGURE 4.9

4-27
4–28
Information Needs
Project status reports
Deliverable issues
Changes in scope
Team status meetings
Gating decisions
Accepted request changes
Action items
Milestone reports
4-28
4–29
Shale Oil Research Project Communication Plan
FIGURE 4.10

4-29
4–30
Key Terms
Cost account
Milestone
Organization breakdown structure (OBS)
Priority matrix
Process breakdown structure (PBS)
Project charter
Responsibility matrix
Scope creep
Scope statement
WBS dictionary
Work breakdown structure (WBS)
Work package
4-30
Chapter Three
Organization: Structure and Culture
3–1
3–2

Where We Are Now
3-2
Learning Objectives
Identify different project management structures and understand
their strengths and weaknesses
Distinguish three different types of matrix structures and
understand their strengths and weaknesses
Understand organizational and project considerations that
should be considered in choosing an appropriate project
management structure
Appreciate the significant role that organizational culture plays
in managing projects
Interpret the culture of an organization
Understand the interaction between project management
structure and the culture of an organization
3–3
Chapter Outline
3.1 Project Management Structures
3.2 What Is the Right Project Management
Structure?
3.3 Organizational Culture
3.4 Implications of Organizational Culture for

Organizing Projects
3–4
3–5
Project Management Structures
Challenges to Organizing Projects
The uniqueness and short duration of projects relative to
ongoing longer-term organizational activities
The multidisciplinary and cross-functional nature of projects
creates authority and responsibility dilemmas.
Choosing an Appropriate Project Management Structure
A good system balances
the needs of the project
with the needs of the
organization.
3-5
3–6
Project Management Structures (cont’d)
Organizing Projects: Functional Organization
Different segments of the project are delegated
to respective functional units.
Coordination is maintained through normal management
channels.

It is used when the interest of one functional area dominates the
project or one functional area has
a dominant interest in the project’s success.
3-6
3–7
Functional Organizations
FIGURE 3.1
3-7
3–8
Functional Organization
Advantages
No structural change
Flexibility
In-depth expertise
Easy post-project transition
Disadvantages
Lack of focus

Poor integration
Slow
Lack of ownership
3-8
3–9
Organizing Projects: Dedicated Project Teams
Teams operate as separate units under the leadership of a full -
time project manager.
In a projectized organization where projects are the dominant
form of business, functional departments are responsible for
providing support for its teams.
3-9
3–10
Dedicated Project Team
FIGURE 3.2

3-10
3–11
Project Organization: Dedicated Team
Advantages
Simple
Fast
Cohesive
Cross-functional integration
Disadvantages
Expensive
Internal strife
Limited technological expertise
Difficult post-project transition
3-11
3–12
Projectized Organization Structure
FIGURE 3.3

3-12
3–13
Organizing Projects: Matrix Structure
Hybrid organizational structure (matrix) is overlaid on the
normal functional structure.
Two chains of command (functional and project)
Project participants report simultaneously to both functional and
project managers.
Matrix structure optimizes the use of resources.
Allows for participation on multiple projects while performing
normal functional duties
Achieves a greater integration of expertise and project
requirements
3-13
3–14
Matrix Organization Structure
FIGURE 3.4

3-14
3–15
Division of Project Manager and Functional Manager
Responsibilities in a Matrix Structure
TABLE 3.1
Project Manager Negotiated Issues Functional Manager
What has to be done? Who will do the task? How will it
be done?
When should the task be done? Where will the task be
done?
How much money is available Why will the task be done?
How will the project involvement
to do the task? impact normal functional activities?
How well has the total project Is the task satisfactorily How
well has the functional
been done? completed? input been integrated?
3-15
3–16

Different Matrix Forms
Weak Form
The authority of the functional manager predominates and the
project manager has indirect authority.
Balanced Form
The project manager sets the overall plan and the functional
manager determines how work to be done.
Strong Form
The project manager has broader control and functional
departments act as subcontractors
to the project.
3-16
3–17
Project Organization: Matrix Structure
Advantages
Efficient
Strong project focus
Easier post-project transition
Flexible
Disadvantages
Dysfunctional conflict
Infighting
Stressful
Slow

3-17
3–18
What Is the Right Project
Management Structure?
Organization Considerations
How important is the project to the firm’s success?
What percentage of core work involves projects?
What level of resources (human and physical)
are available?
3-18
3–19
What Is the Right Project
Management Structure? (cont’d)
Project Considerations
Size of project
Strategic importance
Novelty and need for innovation
Need for integration (number of departments involved)
Environmental complexity (number of external interfaces)
Budget and time constraints
Stability of resource requirements

3-19
3–20
Organizational Culture
Organizational Culture Defined
A system of shared norms, beliefs, values, and assumptions
which binds people together, thereby creating shared meanings.
The “personality” of the organization that sets it
apart from other organizations.
Provides a sense of identity to its members
Helps legitimize the management system of the organization
Clarifies and reinforces standards of behavior
Helps create social order
3-20
3–21
Key Dimensions Defining an Organization’s Culture
FIGURE 3.5

3-21
3–22
Identifying Cultural Characteristics
Study the physical characteristics
of an organization
Read about the organization
Observe how people interact
within the organization
Interpret stories and folklore
surrounding the organization
3-22
3–23
Organizational Culture Diagnosis Worksheet
FIGURE 3.6
Power Corp.
I. Physical Characteristics:
Architecture, office layout, décor, attire
Corporate HQ is 20 Story modern building—president on top
floor. Offices are bigger in the top floors than lower floors.
Formal business attire (white shirts, ties, power suits, . . . )
Power appears to increase the higher up you are.
II. Public Documents:
Annual reports, internal newsletters, vision statements
At the heart of the Power Corp. Way is our vision . . . to be the

global energy company most admired for its people, partnership
and performance. Integrity. We are honest with others and
ourselves. We meet the highest ethical standards in all business
dealings. We do what we say we will do.
III. Behavior:
Pace, language, meetings, issues discussed, decision-making
style, communication patterns, rituals
Hierarchical decision-making, pace brisk but orderly, meetings
start on time and end on time, subordinates choose their words
very carefully when talking to superiors, people rarely work
past 6:00 P.M., president takes top performing unit on a boat
cruise each year . . .
IV. Folklore:
Stories, anecdotes, heroines, heroes, villains
Young project manager was fired after going over his boss’s
head to ask for additional funds.
Stephanie C. considered a hero for taking complete
responsibility for a technical error.
Jack S. was labeled a traitor for joining chief competitor after
working for Power Corp. for 15 years.
3-23
3–24
Implications of Organizational Culture
for Organizing Projects
Challenges for Project Managers
in Navigating Organizational Cultures
Interacting with the culture and subcultures
of the parent organization

Interacting with the project’s clients
or customer organizations
Interacting with other organizations
connected to the project
3-24
3–25
Cultural Dimensions of an Organization Supportive
of Project Management
FIGURE 3.7
3-25
3–26
Key Terms
Balanced matrix
Dedicated project team
Matrix
Organizational culture
Projectized organization
Project Office (PO)

Strong matrix
Weak matrix
3-26
Chapter One
Modern Project Management
1–1
1–2
An Overview of Project Management 7th ed
.
1-2
Learning Objectives
Understand why project management is crucial in today’s world

Distinguish a project from routine operations
Identify the different stages of project life cycle
Understand the importance of projects in implementing
organization strategy
Understand that managing projects involves balancing the
technical and sociocultural dimensions of the project
1–3
Chapter Outline
1.1 What Is a Project?
1.2 Current Drivers of Project Management
1.3 Project Governance
1.4 Project Management Today—A Socio-
Technical Approach
1–4
1–5
What Is a Project?
Project Defined (according to PMI)
A temporary endeavor undertaken to create a unique product,
service, or result
Major Characteristics of a Project
Has an established objective
Has a defined life span with a beginning and an end
Requires across-the-organizational participation
Involves doing something never been done before
Has specific time, cost, and performance requirements

1-2
1–6
Program versus Project
Program Defined
A group of related projects designed to accomplish a common
goal over an extended period of time
Program Management
A process of managing a group of ongoing, interdependent,
related projects in a coordinated way to achieve strategic
objectives
Examples:
Project: completion of a required course
in project management.
Program: completion of all courses required
for a business major.
1-6
Comparison of Routine Work with Projects
1–7
TABLE 1.1
Routine, Repetitive Work
Taking class notes

Daily entering sales receipts into the accounting ledger
Responding to a supply-chain request
Practicing scales on the piano
Routine manufacture of an Apple iPod
Attaching tags on a manufactured product
Projects
Writing a term paper
Setting up a sales kiosk for a professional accounting meeting
Developing a supply-chain information system
Writing a new piano piece
Designing an iPod that is approximately 2 X 4 inches, interfaces
with PC, and
stores 10,000 songs
Wire-tag projects for GE and
Wal-Mart
.
1-7
Project Life Cycle
1–8
FIGURE 1.1

1-8
1–9
The Challenge of Project Management
The Project Manager
Manages temporary, non-repetitive activities and frequently acts
independently of the formal organization.
Marshals resources for the project.
Is linked directly to the customer interface.
Provides direction, coordination, and integration
to the project team.
Is responsible for performance and success of the project.
Must induce the right people at the right time to address the
right issues and make the right decisions.
1-9
1–10
Current Drivers of Project Management
Factors leading to the increased use of project management:
Compression of the product life cycle
Knowledge explosion
Triple bottom line (planet, people, profit)
Increased customer focus
Small projects represent big problems

1-10
1–11
Project Governance
Integration (or centralization) of project management provides
senior management with:
An overview of all project management activities
A big picture of how organizational resources are used
A risk assessment of their portfolio of projects
A rough metric of the firm’s improvement in managing projects
relative to others in the industry
Linkages of senior management with actual project execution
management
1-11
Integrated Management of Projects
1–12
FIGURE 1.2
.

1-12
Alignment of Projects with
Organizational Strategy
Problems resulting from the uncoordinated project management
systems include:
Projects that do not support the organization’s overall strategic
plan and goals.
Independent managerial decisions that create internal
imbalances, conflicts and confusion resulting in dissatisfied
customers.
Failure to prioritize projects results in the waste of resources on
non-value-added activities/projects.
1–13
1-13
A Project Management Today:
A Socio-Technical Approach
The Technical Dimension (The “Science”)
Consists of the formal, disciplined, purely logical parts of the
process.
Includes planning, scheduling, and controlling projects.
The Sociocultural Dimension (The “Art”)
Involves contradictory and paradoxical world of
implementation.
Centers on creating a temporary social system within a larger

organizational environment that combines the talents of a
divergent set of professionals working to complete the project.
1–14
1-14
1–15
A Socio-Technical Approach to Project Management
FIGURE 1.3
.
1-15
1–16
Key Terms
Program
Project
Project life cycle
Project Management Professional (PMP)

Chapter TwoOrganization Strategy and Project Selection2–1

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