Welcome

Do you want to make a difference in the world? Or

make a difference in your life or your community?
Then be a project manager!

Whether the project is an international marketing

campaign for a non-profit, constructing a new
building, setting up a new website, or creating an
app, people are using project management to change
our world every day.

In this text, I’ll introduce you to the fundamentals of

traditional project management techniques, as
codified by standards/certification bodies such as the
Project Management Insitute and International
Project Management Association. My goal is to teach
you new skills that you can build on as you develop
your career in project management.
Chapter 1

Project
Management
Defined
Chapter 1 Overview lifecycle) and the processes used to manage projects through
Projects are managed differently than other company or these stages.
organizational operations. It is important to start our study of
The final section of this chapter introduces you to the main
project management with some definitions and concepts from the
project management standards body in North America: Project
field of project management. The three sections in this chapter
Management Institute or PMI. PMI offers several certifications in
will provide you with a good overview of the project management
Project Management and we’ll take a look at two of the most
field, the ways that project managers approach projects, and the
applicable certifications for project managers: The Certified
types of tools that are used to manage projects.
Associate in Project Management (CAPM) and the Project
The first section will orient you to the field of project management Management Professional (PMP).
at a high level, covering:
Learning Objectives:
• Project Definition • Be able to define the characteristics that define a project.
• Operations vs. Projects • Understand the difference between traditional and Agile
• Traditional Project Management
project management.
• Agile Project Management
• Project Scope Triangle • Be able to explain how a project priority matrix is used.
• Project Management Priority Matrix • Understand how program management differs from
• Program Management project management.
• Project Management Office
• Understand the functions of a Project Management Office
• Project Portfolio Management
and Project Portfolio Management.
• Be able to explain the difference between a Project
Projects have a defined life cycle with a start and an ending. In Lifecycle and the PMI Project Processes.
addition, there are many different processes that can used at
• Understand the basic requirements for the CAPM and
various stages to effectively plan and manage the execution of a
PMP certifications.
project. The second section in this chapter discusses the stages
a project goes through from its beginning to end (the project

9
Section 1

Project Definitions

Project Definition Video 1.1 What is a Project

The term “project” is used several ways in popular culture, from
describing everyday tasks (planting a garden, hanging a picture,
running errands) to large scale enterprises (building a house,
constructing a new highway). However, when professional
project managers talk about projects, they use a narrower
definition.

Let's start out with the six defining characteristics of a project.

Just about every book, organization, or standards body in the
project management field agrees that a project:

1. is a temporary endeavor, with a defined start and end.

2. has a specific objective.
3. has customers or stakeholders. Watch this short video to learn what makes a project a project! Use the
4. has constraints, such as time, cost and scope. notetaker in the PMF Student Companion Guide to take notes. You can
watch this video at: http://pmf.video/video1
5. has measures for success.
6. includes some amount of uncertainty. What is the PMI Definition of a Project?

Watch the video on What is a Project for more information on A project is a temporary endeavor undertaken to
how these six aspects help define what a project is and is not. create a unique product, service, or result.
—Section 1.2 , page 2 from the Fifth Edition of the PMBOK Guide.

10
Operations vs. Projects These traditional techniques have been elaborated and
Projects are different from ongoing operations, even though some standardized by organizations such as the Project Management
techniques (such as network diagramming) overlap. Project Institute (PMI) in the US and The International Project
management addresses temporary endeavors, while operations Management Association (headquartered in Switzerland) and
management focuses on improving ongoing operations. For AXELOS (the organization behind the PRINCE2 certification used
example, constructing a new factory is a project, while producing in Great Britain).
bicycle tires in that factory is an operation.
These traditional techniques were also adapted to software
This textbook concentrates on traditional project management development. Techniques such as waterfall, and function point
techniques. Adaptations related to Agile project management, analysis were advanced as effective ways to manage software
which is often used for software development, are mentioned development projects. However, as the world of software
along the way, but Agile is not a main topic in this text. It is development changed—from large, time-consuming projects that
discussed in this first chapter so students will have an were loaded on mainframe computers to fast-moving, fast-
understanding of basic Agile concepts. changing, internet-based applications—many programmers
found waterfall and similar methods to be limiting. These
Traditional Project Management techniques lacked flexibility and were inadequate to deal with a
rapidly changing, competitive landscape. As a result, a
While project management can be traced back to the building of
“revolution” of sorts was mounted and out of that revolution came
the Great Pyramids in Egypt, it was really in the post-WW2
several so-called Agile project management methods.
industrial boom of the 1950s that project managers started to
develop the tools and techniques used in modern project
management. These tools were used to complete large industrial
and military projects, where the scope of work (what we need to What is the PMI Definition of Project Management?
accomplish in a project) was well defined. For example, the scope
Project management is the application of knowledge,
of what we have to do can be planned out well when we are skills, tools, and techniques to project activities to
constructing an apartment building, making a nuclear submarine meet the project requirements.
missile, building an oil refinery, etc. —Section 1.3 , page 4 from the
Fifth Edition of the PMBOK Guide.

11
Agile Project Management For many years, some “traditional” and Agile project managers
viewed each other with a certain amount of skepticism about the
Agile is broad term for project management techniques that are
value of each other’s methods. However, in recent years project
iterative in nature. Rather than trying to develop all aspects of a
managers have seen the value of the techniques used in both of
project or software application and then presenting that result to
these two “camps” of project management. As a result, it is not
the customer after a long development cycle (6 to 24 months),
unusual to see the design of a building using Agile techniques,
Agile techniques use short development cycles in which features
and software development projects conducting a traditional risk
of high value are developed first and a working product/software
analysis. Picasso is credited with saying “Good artists borrow,
can be reviewed and tested at the end of the cycle (20-40 days).
great artists steal.” The same holds true for project managers.
This allows the customer to verify that the features are being The great ones steal ideas that work from wherever they find
developed as they want, and to suggest improvements. It also them.
offers the customer the opportunity to release the product or
software earlier than originally planned if the version presented at
the end of a cycle is deemed good enough. This is one of the
many reasons Agile is favored for software development. With
Agile products can be brought to market quickly and then
continuously improved with subsequent updates.

Figure 1.1 Agile projects are iterative

Agile project management usually uses short development cycles that produce working versions of the software with each revision (albeit without all the
features). This allows the customer to provide continuous feedback and release the product as soon as possible.

12
Agile Methods Project Scope Triangle
There are many different types of Agile project management
Now, returning to our introduction to traditional project
methods. Here is a short list of some popular methods with links
management, let’s define some basic terms and concepts. First
for more information:
that all projects have constraints. The primary constrains on any
• Extreme programming (XP) project are:
• Lean software development
• Time: the amount of time we have to complete our
• Kanban
project.
• Scrum
• Cost: the budget for our project.

• Scope: the features that our end product will have.

Figure 1.2 The Scope Triangle

The Manifesto for Agile Software Development

We are uncovering better ways of developing software by doing it

and helping others do it. Through this work we have come to value:

Individuals and interactions over processes and tools

Working software over comprehensive documentation
Customer collaboration over contract negotiation
Responding to change over following a plan
That is, while there is value in the items on the right, we value the The Scope Triangle or “Triple Constraint” can represented in a number of
items on the left more. different ways. Regardless of how it is presented, understand that we
have to make trade-offs between these constraints as our project moves
—from http://www.agilemanifesto.org/ forward.

13
PMI and other organizations have since added risk, quality, and In order to make sure that all stakeholders are in agreement (or at
resources to the list of constraints. Regardless of how project least have a discussion) about the priorities of a project, a Project
constraints are presented, each project constraint interacts with Priority Matrix can be used to make sure the trade-offs between
the others in ways that force us to consider trade-offs. For Time, Scope, and Cost are clear and that the project manager
example, if we are going to hold fast to a deadline for finishing a has some guidance on the project priorities. Watch the video
project, we may need the flexibility to hire more resources to get about the Scope Triangle and the Project Priority Matrix to learn
the job done on time. more about how we can constrain, accept, or enhance these
aspects of our project.
Project Management Priority Matrix
Program Management
Video 1.2 The Scope Triangle and the Project Priority Matrix
A program is a set of coordinated projects. Program management
is the process of managing all these coordinated projects.

Figure 1.3 Programs and Projects

Watch this short video to learn more about the triple constraint and how a
Project Priority Matrix can be used to communicate trade-offs between A program is a set of related projects. Program managers work with the
time, cost and scope. Use the notetaker in the PMF Student Companion various project managers to balance resources across all project to
Guide to take notes. You can watch this video at: http://pmf.video/video2 make sure that deadlines are met.

14
Program managers work with the project managers on the Project Portfolio Management
various projects that make up the program, in order to balance
Almost every organization has more ideas for possible projects
resources, risk and scope.
than they could ever hope to complete. Each one of these project
My favorite example of a program is when a country hosts the ideas might be good and might result in a successful project that
Olympic games. Hosting the Olympics is a program, with many would move the organization forward. However, an organization
different projects that have to fit together and be ready by a very will simply not have the resources or time to complete all
specific deadline: constructing stadiums, and aquatic centers, possible projects.
creating marketing campaigns, installing new networks and
As a result, organizations will typically keep a list or portfolio of
power connections for media, etc. By coordinating all these
projects, program managers can make sure that all is ready in possible projects, and review this portfolio periodically to see if

time for the opening ceremonies. this is the right time to pursue a particular project. (For details on
project selection, see the Project Selection Chapter.)
Project Management Office
Project Portfolio Management (PPM) is the method used to judge
Organizations often have many project managers working on proposed projects based an organization’s strategic goals.
multiple projects, which may or may not be part of a coordinated
program. In order to support these project managers, a Project
Management Office (or PMO) is often developed to provide a
central place for development of project management best
practices, for collection of lessons learned, and to assist with
Project Portfolio Management (PPM). Some PMOs will also
provide support for project managers by conducting analyses (for
example, Monte Carlo risk analysis) and assisting with time and
cost estimates, etc.

15
Section 2

Project Management Life cycles and Processes

Project management life cycles represent the different stages that a project goes
through, from conception to its final completion. Different industries represent
project life cycles in ways that make sense for their area of expertise. Regardless
of the life cycle, at each stage of our project there are a number of processes that
we will use to manage the project.

16
PMI and Project Management Life cycles. Figure 1.5 Construction Project Life Cycle
PMI provides a generic project life cycle—shown in the figure
below—in which the project moves from starting to organizing
and preparing to carrying out the project work and finally to
closing the project.

This is just one example of a project management life cycle. The

figures on to the right shows other examples from various Figure 1.6 Marketing Project Life Cycle
industries/methodologies.

Figure 1.4 PMI’s Generic Project Life Cycle

Figure 1.7 Software Project Life Cycle

As our project progresses, the amount of work and costs (shown by

dashed line) increase and then drop off as our project ends.

17
When do Projects Fail? Video 1.3 A lack of risk management planning led to one
of the most famous bridge collapses.
When a project fails, we tend to notice that failure as the project
is ending; for example, when customers refuse to accept the
project, when testing shows that our project product does not
work as designed, or when budgets are overspent, when
deadlines are missed for completion. However, most project
managers would say that project failure really occurs in the
beginning stages of a project and is the result of poor planning
and design. That is why the project management field so heavily
emphasizes planning processes: good planning pays off!

This is not to say that projects will not have problems, but if
proper planning has occurred there will be mechanisms in place
for the project team to quickly address any problems and get the
project back on track.

Not all projects fail as spectacularly as the Tacoma Narrow Bridge. You
can watch this video at: http://pmf.video/video3

18
The five processes Figure 1.8 Project Management processes
PMI has identified five main groups of processes that are used in
project management. There are over forty individual processes
that project managers may use within these groups.

Beginning project managers will confuse these process groups

with a project management lifecycle; for good reason, most of the
initiation and planning processes are the focus at the start of a
project, and the closing processes can be a be focus at the close
of the project. However, these process groups are not the same
as a lifecycle and may be used many times in the management of
a project. That is to say that not all planning processes happen at
the beginning of the project and not all closing processes happen
at the end. These five processes are how we manage the project
during its lifecycle.

In addition, we may continuously repeat these processes as we

are managing various aspects of our project. For example, while
work on our project is underway, we may be continually executing
our risk management plan, monitoring and controlling risks, and
continuing our planning process to deal with newly identified risks
within our project. This may go on for several months or years,
depending on the complexity of our project.
While our project is being performed, we will be continuing to monitor
and control that work, and plan for changes, or new risks in our project.
If you are familiar with the Plan, Do, Check, Act cycle that was
popularized by Dr. Edwards Deming, then you will recognize
strong similarities to how PMI regards these five processes.

19
Process inputs and outputs Figure 1.9 Processes have Inputs, Tools and Deliverables.
PMI describes the inputs needed for each process, tools used in
the process, and the resulting deliverables once the process is
complete. For example the Develop Project Charter process has
the following inputs, tools and deliverables:

Develop Project Charter Inputs

• Enterprise Environmental Factors (for example,
organizational structure and culture).
• Project Contract (if applicable).
• Project Statement of Work.
• Organizational Process Assets (lessons learned from
other projects, etc.)

Develop Project Charter Tools

• Project Management Information Systems
• Project Management Methodologies (PMBOK standards
for example).
Each process has a number of inputs that are used to develop the final
• Project Selection Methods (we’ll look at those in a later output (or deliverable) of the process. In addition, the output of one
process can be used as the input in another process. For example, the
chapter). deliverable “Project Charter” is used as an input in the “Plan Scope
Management” process.
• Expert Judgement (the experience of project managers).

Develop Project Charter Deliverables

• Project Charter.

20
Studying the PMBOK Processes Initiating Processes
Many students who want to pass the PMI certification exams will Initiating processes help us produce a framework for our project
try to memorize the inputs for each process, the tools for each and obtain the authorization (in the Project Charter) for the project
process, and the deliverables created by each process. Starting manager to move forward with the project. By identifying the
out with this approach typically leads to failure on the exam. It is Stakeholders for our project, we are able to know who needs to
better to learn about the inputs, tools, and deliverables without be involved and informed about our project and its objectives.
trying to map them to specific processes. Once you understand Initiating Processes include:
and have mastered the tools the project managers use, it will be
• Develop Project Charter.
very clear what process these tools belong to, what inputs are
needed by the tools, but they produce, and how the processes • Identify Stakeholders.
are ordered.
For now, just review the process groups in the rest of this section.
Then, when you are done with this your study of project
Planning Processes
management, come back and review these process groups again, The majority of the processes are in the planning process group.
and you will see that the grouping and ordering of the progresses These processes are the most important for the success of our
makes perfect sense. project, and this book will concentrate on these processes.
Planning Processes include:

• Develop Project Management Plan

• Plan Scope Management
• Collect Requirements
• Define Scope
• Create WBS
• Plan Schedule Management
• Define Activities

21
• Sequence Activities Executing Processes
• Estimate Activity Resources
Executing Processes focus on the completion of actives and work
• Estimate Activity Durations packages. Executing Processes include:
• Develop Schedule
• Direct and Manage Project Work
• Plan Cost Management
• Perform Quality Assurance
• Estimate Costs
• Acquire Project Team
• Determine Budget
• Develop Project Team
• Plan Quality Management
• Manage Project Team
• Plan Human Resource Management
• Manage Communications
• Plan Communications Management
• Conduct Procurements
• Plan Risk Management
• Manage Stakeholder Engagement
• Identify Risks
• Perform Qualitative Risk Analysis
• Perform Quantitative Risk Analysis Monitoring and Controlling Processes
• Plan Risk Responses The Monitoring and Controlling Processes focus on
• Plan Procurement Management understanding how well our project is proceeding; how that
• Plan Stakeholder Management progress compares with our plan; and controlling scope,
schedule, costs, quality, communications and risks.

Monitoring and Controlling Processes include:

• Monitor and Control Project Work

• Perform Integrated Change Control
• Validate Scope

22
 • Control Scope
• Control Schedule
• Control Costs
• Control Quality
• Control Communications
• Control Risks

Closing Processes
At the end of a phase of our project, or the entire project, we
must get final approval from the customer, archive our records
from the project, compile the lessons learned, and pay any
outstanding bills. These and several other actives make up the
closing processes. Closing Processes Include:

• Close Project or Phase

• Close Procurements

23
Section 3

Project Management Standards and Certifications

As a science, project management continues to evolve and change. There are

several organizations around the world who work to develop standards and best
practices for project management. In North America, the main standards body is
the Project Management Institute, or PMI. This section takes a look PMI standards
and certifications.

24
The Science of Project Management Figure 1.11 Henry Laurence Gantt (1861 – 1919)
Project management has been around for centuries if not Gantt was mechanical engineer
millennium. From the building of the pyramids to the construction who is best known for developing
of the great buildings of 19th century London, people have the Gantt chart in the 1910s. These
developed ways to breakdown large projects into smaller more charts allowed managers to quickly
manageable chunks, scheduled the work and obtain the materials compare the planned schedule to
needed for the project. During that time, many tools were the actual work that was
developed to manage projects. However, it was not until the completed. Gantt’s ideas were the
large, highly complex defense projects undertaken by the United basis of Program Evaluation and
States during the 1950s drove a push for a more scientific and Review Technique (PERT) that was

data-driven, management approach to projects and was the developed in the 1950s.

beginning of the science of modern day project management.

Figure 1.10 A Gantt chart.

A Gantt chart is a simple, but effective way to display a project plan, and compare our progress to that plan.

25
Project Management Institute Project Management Body of Knowledge.
The Project Management Institute started in 1969 as an effort to PMI has codified the standards for project management in the
share best practices; those Today, it is a It is a non-for-profit Project Management Body of Knowledge (PMBOK) guide. The
organization with over 500,000 members. PMI has chapters PMBOK is best used as a reference guide, it is not recommend
throughout the world, each offered additional benefits in the form for cover to cover reading. The PMBOK Guide has been
of professional development and networking opportunities. recognized as a Standard by the American National Standards
Institute (ANSI) and the Institute of Electrical and Electronics
Engineers (IEEE). The PMBOK guide is organized into nine
knowledge domains:

• Project Integration Management

• Project Scope Management
• Project Time Management
• Project Cost Management
• Project Quality Management
• Project Human Resource Management

What is the mission of PMI? • Project Communications Management

At PMI, our primary goal is to advance the practice, • Project Risk Management

science and profession of project management • Project Procurement Management

throughout the world in a conscientious and proactive • Project Stakeholder Management
manner so that organizations everywhere will
embrace, value and utilize project management and
then attribute their successes to it.
—from PMI.org

26
Project Management Certifications taking a semester long project management course will easily
meet this education requirement.
PMI offered several project management certifications. These
credentials demonstrate the holders mastery of the concepts in Project Management Professional (PMP)
the PMBOK and experience in the field. The PMP is the most popular of the certifications that PMI offers
and requires a significant amount of experience managing
Certified Associate in Project Management (CAPM)
projects before taking the certification exam. This experience has
The CAPM is an entry level certificate that is an excellent way for
to be documented; Information for each each of the projects on
students to show that they understand how and will be an
which a potential PMP worked must be provided including the
effective project team member.
role they played in the project and contact information for third
The CAPM certification requirement are listed in the Table on the party verification. This part of the application is subject to auditing
next page. Please note that the 23 hours of project management by PMI. PMI randomly audits applications to take the PMP exam,
education is not credit hours, but contact hours. Most students as well as a small number of existing PMPs. This do this to make

Figure 1.12 Growth in PMP certifications

700000

525000

350000

175000

0
1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015

27
sure that they requirements are being met and the credential
Sidebar 1.1 Resources for CAPM and PMP Study
reflects a high level of expertise in the project management field.

The number of PMP’s continues to increase each year (see the There are several excellent books and web sites to help

figure below, and PMP’s continue to be in demand as companies people prepare for the CAPM and PMP exams. Below are

try to develop better ways to manage their projects. (one area of just a couple recommended resources.

substantial growth in the past years in demand for PMPs is in the Books
value of a PMP is health informatics).
• PMP Exam Prep, Eighth Edition - Rita's Course in a
Each year PMI releases a salary survey of PMI credential holders, Book for Passing the PMP Exam Eighth Edition by Rita
which shows that those project managers who have gone through Mulcahy.
the process of certification are compensated better than their
• Head First PMP 3rd Edition by Jennifer Greene and
non-certified colleagues.
Andrew Stellman.
Both certifications require a rigorous test. For more details visit • PMP: Project Management Professional Exam Study
PMI’s web site at: http://www.pmi.org/certification.aspx Guide 7th Edition by Kim Heldman
Websites

• PMP subgroup on Reddit: https://www.reddit.com/r/

pmp/

28
Table 1.1 Requirement for the CAPM and PMP exams.

CAPM PMP
Certified Associate in Project
Full Name Project Management Professional
Management
Project Role Contributes to Project Team Leads and Directs Project Teams

A secondary degree (high school diploma or the

A secondary degree (high school global equivalent) with at least five years of project
diploma or the global equivalent) management experience, with 7,500 hours leading
AND and directing projects and 35 hours of project
(At least 1,500 hours of project management education.
Eligibility
experience OR
Requirements
OR A four-year degree (bachelor’s degree or the global
23 hours of project management equivalent) and at least three years of project
education by the time you sit for the management experience, with 4,500 hours leading
exam.) and directing projects and 35 hours of project
management education.

Steps to Obtaining Application Process and Multiple-

Application Process and Multiple-Choice Exam
Credential! Choice Exam

Exam Information 3 hours, 150 questions 4 hours, 200 questions

$225 PMI Member $405 PMI Member
Fees
$300 non-Member $555 non-Member
Credential Every 3 years, must earn 60 Professional
5-years, re-exam
Maintenance Development Units

29
Chapter 2

Project
Management
Roles
Chapter 2 Overview The last section explores the importance of identifying and
In many ways, managing projects is really about managing managing project stakeholders. Stakeholders are defined as
relationships with people. In this chapter, we will explore three anyone with an interest in a particular project, including:
main categories of people who will influence the success of our
• Internal Stakeholders
project: the project manager, the project team, and the project
stakeholders. • Top Management
• Functional Managers
The first section explores the role of the project manager. The
• Project Team Members
project manager (or PM) is the person who is responsible for
• External Stakeholders
• Communicating with stakeholders
• Clients
• Generating project planning documents
• Competitors
• Assembling, motivating and managing the project team.
• Suppliers
• Monitoring and reporting on project progress.
• Regulatory Bodies
The second section explores how teams develop and how a
• Government
project manager can nurture and help build high-performance
• Citizen Groups
teams. This section will look at some of the stages that teams go
through during the life of a project, including:

• Forming Learning Objectives:

• Understand the characteristics that make a good project
• Storming
manager.
• Norming
• Explain Theory X and Y as it relates to project managers
• Performing
• Understand the basic needs of our team members.
• Adjourning

31
• Explain the stages that a project team goes through and
be able to identify the role that a project manager should
try to play during each stage.
• Understand the importance of stakeholder identification
and management.
• Understand how a Stakeholder Register and Stakeholder
Matrix are used.

32
Section 1

The Project Manager

Just like the term “project,” the term “project manager” can used very loosely in
common parlance. PMI recognizes that while the authority of project managers
varies greatly from one organization to another, true project managers will have the
responsibility of the planning, execution, and closing of a project.

33
The Role of the Project Manager The Project Manager as Team Leader
The project manager is involved in a project throughout its life In the late 1960s Douglas McGregor put forth two models to
cycle. The PM develops the project plans, makes sure those explain how managers view the motivation of their employees
plans are executed, with appropriate changes as needed, and and team members: Theory X and Theory Y. These theories
turns over the project when it is complete. describe two very different viewpoints on how employees act and
how they are motivated.
Being a project manager can be extremely rewarding but comes
with its set of challenges. A project manager may have Project managers who are aligned with Theory X will think that
responsibility for a project’s success but often does not have full employees generally try to avoid work when they can, don’t take
authority over the resources required to complete the project responsibility for getting work done, and may be incompetent or
successfully. This is one reason why having great interpersonal incapable of performing good quality work. These project
skills is important for project managers: they may have to managers will try to micromanage their employees. Unfortunately,
negotiate for project resources from upper management or this often leads to a self-fulfilling prophecy, whereby employees
functional managers within the organization. become unmotivated because they are not trusted.

Being a great communicator, and working well with a variety of

personalities, are key skills for a project manager (skills that can
be developed and improved in anyone, by the way). A project Sidebar 2.1 Characteristics of an effective project
manager will use these skills not just with upper management, but manager.
also with other stakeholders and the project team. One of the
main responsibilities of a PM is motivating and building project 1. Great communication and interpersonal skills.
teams. How a PM behave in this role will depend on how they 2. Knowledge of project management processes.
view the motivation of their team members. 3. Supports his or her team members.
4. Welcomes new ideas,
5. Has a tolerance for ambiguity.
6. Creative problem solver.

34
Think about your own experience. Have you ever been given a
simple task to perform, but the person who asked you to do it
keep telling you how to do it or wanting constant updates on
progress? If so, how did that affect your motivation?

Project Managers aligned with Theory Y believe that team

members put forth their best efforts without being closely
managed, will ask questions without prompting, have a desire to
meet their goals and will take responsibility for their work. These
project managers will trust their team and not try to
micromanage.

In general, a project manager with a Theory Y mindset will be able

to establish trust with team members and lead them from the
formation of a team to becoming a high performing team.

Stephen M.R. Covey has written an excellent book titled The

Speed of Trust. In his book, he talks about how easy it is to get
work done with a colleague or partner you trust, and how difficult
it can be to work with someone that you don't trust. If there is
someone on the team who cannot be trusted, it is the project
manager’s duty to get rid of them quickly. Project managers who
can build trust between team members early on in the process
will have a team that can work well together when challenges
arise.

35
Section 2

The Project Team

The project team works with the project manager to develop the project
management plans, schedule the work of the project, acquire the needed
resources, monitor project progress and see the project through to its successful
completion. Team members may be devoted solely to working on the management
aspects of a project, or may also be performing the work of the project. How well
the project team works together will determine the success or failure of a project.

36
Team Member Motivation Figure 2.1 Maslow’s Hierarchy of Needs
The last section mentioned McGregor’s Theory X and Theory Y in
regard to how project managers may view the motivation of team
members. Let’s now take a look at what motivates individuals,
teams, and organizations.

Basic Needs: Maslow’s Hierarchy of Needs

Abraham Maslow provided a model to understand basic human
needs which is usually represented as a pyramid (see Figure 2.1).
Each need builds on the others: A person’s esteem needs are not
that important if they are struggling with meeting the biological
need to eat. Here are each of the levels in Maslow’s hierarchy:

1. Biological and Physiological: What a person needs to

survive, such as food, water, and shelter.
2. Safety: The need to be safe in your person, have For project managers, this model is useful in several ways. It
financial security, and protection against accidents and explains why team members who have problems with their
illness. health, family relations or other “lower” needs, will have a problem
3. Love and Belongingness: The need to be loved by performing their best on the job.
one’s family and community.
4. Esteem: The need to be respected and valued by Projects managers will also try to meet the esteem needs of their

others. team members by acknowledging their contributions and

5. Self-Actualization: At the top of the pyramid is the celebrating successes. This can be an award formally presented
at a celebration dinner, or a simple email expressing thanks.
desire to becoming the best self that you can: to become
Anecdotally, it doesn’t seem that the size or formality of the
the best artist, parent, or project manager you can
acknowledgement matters much, what is important is that it is
become.
given sincerely.
37
Understanding Team Development work ahead. The project manager should participate by
working as a facilitator for the group.
A number of management professionals and academics have
studied project team development. Let’s review the model that Performing: At this point the group has a clear vision and
PMI considers the most valuable in understanding team purpose and is focused on meeting performance goals,
development. project milestones and other benchmarks. The project
manager should be able to delegate more and more
Tuckman's stages of Team Development
responsibility to the team, with less supervision.
Dr. Bruce Tuckman observed that teams go through a series of
developmental stages: Forming, Storming, Norming, Performing,
and Adjourning. Each stage has predictable characteristics.
Figure 2.2 Stages of Team Development
Forming: The group is brought together for the first time.
The team is orienting themselves to the task at hand. At this
stage, there maybe little agreement on how to approach the
project and team members may struggle with understanding
the purpose of the project. The project manager needs to
provide guidance and direction during this stage.

Storming: Team members are trying to figure out their roles

in the group. Conflict and power struggles are common, but
so is a clearer vision for the group. During this time of inter-
group conflict, the project manager needs to provide
support and coaching.

Norming: At this stage, the team will have developed a

consensus regarding roles, processes and approach to the Team performance depends on the stage of development the team is in.
Note that during the storming period, the effectiveness of the team may
decrease substantially.

38
 Adjourning: Once the project is completed, the team should
Sidebar 2.2 Gersick's Punctuated Equilibrium model
collect lessons learned and transition to other projects or
roles. The project manager should provide recognition of
the work done by the team and help them transition to their
next project (provide recommendations, etc.)

Fast-tracking Team Development.

Project managers who can quickly move the team from the
Forming stage to the Performing stage will have huge advantages
in terms of performance. To do this, project managers incorporate
team building activities into the project.

Starting the project with some team building activities will let the
team start to form, resolve interpersonal conflicts and develop
norms of behavior in a low-risk environment. Unfortunately, some
project managers perceive taking time for team building as a
waste of time. However, time invested here pays off with a much Under some circumstances teams will not follow Tuckman’s

more motivated and better performing team. stages of team development. Dr. Connie Gersick observed a
second model in some situations in which, teams start with a
There are lots of opportunities to incorporate team building low level of performance and then go through a period of
activities into the planning process. Perhaps the most important process re-engineering and re-organization that allows them to
process a project manager can facilitate is helping team members have a breakthrough in performance levels. Gersick divides her
learn to trust each other. model into Phase 1, a Midpoint, and then Phase 2. Often this
re-organization is due to failure to meet deadlines or other
reasons that require the team to take radical action. This type
of team development is not generally embraced by project
managers.

39
Section 3

Stakeholders

Stakeholders are not just those who are paying for, or will benefit from, our project.
They include anyone who can have an influence on our project. Failure to consider
the interests of stakeholders can lead to significant delays or even the failure of a
project.

40
Stakeholders approve of the development per se, they ultimately wielded
a large amount of influence over the project.
A project stakeholder is anyone who can have an interest in or
influence on our project. Project managers should consider all A proper stakeholder analysis would have identified the city’s
the possible stakeholders for a project, no matter how little citizens as an important stakeholder group; a group that should
interest or influence those stakeholders might posses. Failure to have been informed about plans for a new downtown apartment
do so can lead to serious problems. Here is one simple example: complex well before it was approved.

A developer in Columbia, Missouri, started a project to build Stakeholder Influence and Interest
a new student housing complex in the campus/downtown
How we manage and interact with project stakeholders will
area, an area considered by many local citizens to be
depend on what level of influence (or power) they have over our
historic. The developer decided that the only external
project, and what interest they have in the project. These two
project stakeholders were the Columbia City Council and
aspects about a stakeholder are independent of each other:
the Planning and Zoning Commission, since those were the
governmental bodies which gave formal approval for the • A powerful CEO might be able to swoop down and kill
project, issued building permits, etc. The developer quickly your project, or take away resources at any moment, but
got a development agreement approved by both of these have very little interest in your project. In this case, the
bodies and set off to start the project. stakeholders power is high and the interest is low.

The citizens of Columbia were startled to hear that a 400- • Likewise, someone in another division might have a high
bed apartment had been approved for construction in their level of interest in your project because of the impact it
treasured downtown. A large group of citizens did not like will have on them, but very little power to help or hurt
the proposed structure, and an even larger group disliked your project.
the hasty approval of the project. These citizens organized a
successful petition drive to reverse the city Council's
decision, and causing many delays and additional expenses
for the developer and city. While the citizens of Columbia
were not paying for the development, and did not have to
41
Identifying Stakeholders resources from other departments, and it will be the
functional managers who will be assigning personnel to
The first step in managing stakeholders is to identify the
the project. A good working relationship with the
stakeholders for our project. There are several general categories
functional managers is vital to getting the resources that
of stakeholders that we can start with:
are needed for the project to succeed.

Internal Stakeholders • Project Team. The project team is a very important

These are the people within our own organization. They can stakeholder, with a great deal of influence. It seems
include: obvious that the project team would want the project to
succeed, but it is important to realize that the team might
• Project champion or sponsor. In some organizations, an
be composed of individuals with different and competing
upper-level executive will be charged with, or volunteer to goals for what they want to see out of the project.
be, project’s champion or sponsor. This person acts as
• Shareholders and Owners. Those who a vested financial
the liaison between the project team and upper
interest in the future of the company will have a great
management. They may provide the project manager with
interest in how resources are being used for a project and
direction, information about how the project fits into the
the goals of the project.
company’s strategic goals, and assistance with getting
the resources needed to complete the project. The best
project sponsors are cheerleaders for the project,
enthusiastically supporting the project and its team
members.
• Top management. Other members of the top
management maybe interested in a project for a number
of reasons from strategic planning to resource allocation.
• Functional managers. Depending on the organizational
structure of the company (see the section on
Organizational Structures), the project may need talent

42
External Stakeholders Stakeholder Identification & Analysis Tools.
These are people or groups not directly employed or invested in
Stakeholder analysis allows us to identify, classify, and develop a
our organization. External Stakeholders may include:
plan for managing project stakeholders. There are several tools
• External customers. If our project is being completed for we can use to help us in this process.
the benefit of a paying customer, that customer will have
Stakeholder Register
a high level of interest and influence on the project.
A Stakeholder register is a tool that allows the project team to
• Government. A project may involve processes, work,
identify the stakeholders in a project and to attempt to rank their
materials, or other issues that may be subject to importance to the project. Table 2.3.1 presents a typical
regulation or approval by a governmental organization. stakeholder register, that collects the following information:
Certainly an organization must adhere to regulation
regarding hiring, firing, health and safety of employees. • Name. The name of the stakeholder
Heavily regulation industries (financial, pharmaceutical, • Project Role. The role the stakeholder has on the project.
manufacturing, et.) will have their own set of special Examples include sponsor, customer, regulator, resource
regulations and rules to follow. owner, etc
• Subcontractors and Suppliers. If an organization • Major Concerns. What are the major items of concern to
doesn’t have expertise or time requited to perform work the stakeholder?
on a project, subcontractors are often used. These
• Relationship Owner. The member of the project team
subcontractors will have a high level of influence on the
designated to manage the relationship with the
project (price and performance) and hopefully a high
stakeholder. For high priority stakeholder relationships
interest as well. Likewise, potential suppliers of raw
this should be the project manager.
materials and goods for a project will also interested and
the quality of their work and materials will influence the • Importance. How important is the stakeholder to the

project. success of the project? Do they have the power to help

or hurt the project?

43
 • Interest. How interested is the stakeholder in the project? the project manager is to develop a strategy for managing
Do they have a strong interest in the outcome of the relationships with stakeholders. It is important to take time to
project ? Or are they just aware of the project and largely think through how to manage project stakeholders so that they
indifferent to its success or problems? become an asset to the project and not a problem. Here are some

• Score. Score is calculated by multiplying the previous basic steps that can help you develop a plan for each
stakeholder/stakeholder group:
two fields together. Higher values identify stakeholders
who will be high priorities for involvement in our project 1. Think about what you need from each stakeholder.
and with whom we must maintain communication.
What resources, advice or expertise can they provide?
Using a register can help your team track and analyze the Will you need their approval to proceed at some point?
stakeholders in your project. While identifying stakeholders is Will they play a direct role in performing project work?
listed as an initiation process, realize that it is a process that may 2. Develop a message strategy for each stakeholder.
be initiated throughout the project life cycle. As new phases of What information does this stakeholder need in order to
the project begin we will re-evaluate our stakeholder register and help the project and make decisions? What performance
update it. metrics will they want to see and how should that be
presented? How often should we communicate with this
Stakeholder Mapping
stakeholder and what is the mode of communications?
A stakeholder map places a stakeholder in a particular quadrant
3. Identify actions that you can take to involve each
relative to the influence and interest of the stakeholder. Where the
stakeholder in the project. Should they be involved in
stakeholder lands in this map will determine how closely you
the kick-off meeting and/or weekly project update
manage and involve that stakeholder; see Table 2.3.2 for details.
meetings, invited to help with the risk identification
Stakeholder Management process, or asked to help with the development of
project plans?
The process of identifying stakeholders may yield hundreds of
stakeholders. Often individual stakeholders can be grouped
together and a management strategy can be applied to that entire
group of stakeholders. An important job of the project team and

44
Table 2.1 Stakeholder Register

Influ. Interest
Name Project Role Major Concerns Relationship Owner Score
(1-5) (1-5)

45
Table 2.2 Stakeholder Mapping
General Strategies for managing
Stakeholders based on a
Importance of Project to Stakeholder (interest) Stakeholder Map.

None or Box A: Stakeholders who have a

Little Some Moderate Significant High high degree of influence and
Unknown
interest on the project, The
project team will need to work
closely with these stakeholders
High and involve them in project
planning.
Box B: These Stakeholders have
a high degree of interest in the
Significant
C A project, but less influence, or
power, to affect the project.
These stakeholders need to be
keep informed of project
progress.
Moderate Box C: Stakeholders with high
Stakeholder influence but little interest.
Influence These stakeholders need to be
kept satisfied and informed
(Power)
about the project so they are not
Some surprised if there are changes, or
delays. These stakeholders can
be a source of risk to the
project.

Little
D B Box D: Stakeholders in this box,
do not require much interaction
from our project team. These
stakeholders should be
monitored in case their level of
No or interest or influence changes,
unknown but are generally the lowest
priority for our team.

46
Chapter 3

Project
Management
and the
Organization
Chapter 3 Overview Learning Objectives:
An organization’s structure, culture, and social norms have a huge • Understand the different types of organizational
influence on that organization’s ability to successfully complete structures.
projects. In this chapter, we’ll look at how organizational structure • Explain the relative advantages and disadvantages of
can impact the role of the project manager and project team each structure as it relates to project management.
members.

The first section will explain the ways that organizations can be
structured and the relative advantages and disadvantages of
those structures for the successful completion of projects. The
following organizational types will be discussed.

1. Functional
2. Matrix
- Weak Matrix
- Balanced Matrix
- Strong Matrix
3. Projectized
4. Dedicated Project Team

48
Section 1

Organizational Structures

There are three three broad structures by which an organization can be organized.:
functional, matrix, and projectized. These structures represent a continuum, from
structures where the project manager has very little authority (functional) to those
where project managers have very broad power (projectized) (See Figure 3.1).

There have been many studies about the impact that organizational structure has
on project success, and it is not uncommon for corporations to change their
organizational structure in order to increase their relative success in executing
projects on time and within budget. This type of change takes great effort and may
take a long period of time to fully implement.

Instead of changing their entire structure, an organization may elect to create a

dedicated project team in order to carry out a critical project without reorganizing
the entire enterprise. This way, they can get many of the same benefits of the

Figure 3.1 Project Manager Authority and Organization Type

49
projectized organization without reorganizing the enterprise. This Projects often require work across disciplines. In the functional
approach is not without risk, as we’ll explore in the section on organization, with staff isolated inside their departmental “silos,”
dedicated project teams. communication is directed through the functional managers.
These managers often have differing priorities, which can make
Functional Organizations communications slow and error-prone in an functional
Large organizations are traditionally organized by function into organization.
various departments, with staff in each department reporting to a
departmental manager or head of department. This allows for
groupings of specialists within the organization where they can
Figure 3.2 Functional Organization Structure
work together, share knowledge and prioritize their work.

Traditional functional departments might include:

• Human resources
• Accounting
• Procurement
• Marketing
• Sales
• Shipping

These functional units work independently of each other, and the

functional managers serve as conduits for communications and
collaboration (See Figure 3.2). This type of structure is very
efficient for operations management where continuous process
improvement can be conducted on all regular departmental
Functional Managers have control of project resources in a functional
operations. However, it is not optimal for the completion of organization. Coordination of a project is done between Functional
Managers.
projects.
50
The success of projects within a functional organization depends PMI identifies the following project characteristics for projects
on functional managers working together and cooperating. While conducted in functional organizations:
someone maybe designated as the project manager for a
• Project Manager’s Authority: Little or None
particular project, that person may not have much authority (See
Figure 3.3). Often titles such as Project Coordinator, Project • Resource Availability: Little or None
Scheduler, or Project Expediter will be used instead. Regardless • Who Manages the Project Budget: Functional Manager
of title, those in charge of projects are often put in the role of • Project Manager’s Role: Part-time
simply trying to maintain a schedule of what is happening.
• Project Management Administrative Staff: Part-time

Projectized Organizations
Figure 3.3 A “Project Manager” in a functional Projectized organizations are at the opposite end of the
organization.
organizational spectrum from functional organizations.
Organizational energy and resources are focused on completing
projects rather than ongoing operations. In a projectized
organization, operations are minimal and the project manager has
great authority over resources and personnel decisions.

Projectized organizations may have organizational units called

departments and these groups either report directly to the project
manager or provide support services to projects.

In the project-based structure, personnel are specifically assigned

to the project and report directly to the project manager (See
Figure 3.4). The project manager is responsible for the
performance appraisal and career progression of all project team
The project manager has to work through the functional managers to get members while on the project.
staff assigned to complete tasks.

51
As you can imagine, employees in this type of environment are Examples of project-based organizations include construction
able to focus their loyalty to a project rather than their particular companies, aeronautical manufacturers such as Lockheed Martin,
discipline. Not all people can succeed in such an organization, as and many software development companies.
they must adapt to the leadership styles and organizational skills
This type of organizational structure can put additional stress on
of different project managers.
employees as they have no home to return to once their project is
This is the most efficient organizational type for conducting over, if they are not selected for a subsequent project. But it is
projects, and it is used in those types of organizations that bid on generally considered ideal for project management since there is
and undertake large projects—military, industrial, scientific, etc.— a significant reduction in the layers of bureaucracy that a project
that may last several years. manager must navigate.

PMI identifies the following project characteristics for projects

Figure 3.4 Projectized Organizations
conducted in projectized organizations:

• Project Manager’s Authority: High or Absolute

• Resource Availability: High or Absolute
• Who Manages the Project Budget: Project Manager
• Project Manager’s Role: Full-time
• Project Management Administrative Staff: Full-time

The project manager has a large degree of control over staffing and
resource allocations in a Projectized Organization.

52
Matrix Organizations However, there are several advantages to a matrix structure in
terms of projects:
While the functional structure may work well in times of little
• It significantly disrupts the communication “silos” of a
change, it has some serious limitations when the success of a
functional organization, creating a more horizontal
company depends on being adaptable. A matrix structure tries to
structure for teams and increasing the flow of information.
combine the strengths a functional organization provides for
operations management with the strengths a projectized • Allows people to concentrate of their areas of speciality,
organization provides for project management. and bring that strength to current projects.
PMI recognizes three types of matrix structures, as described
In a matrix organization, the functional and project manager share
below (See also Figure 3.5).
authority and responsibility. This can lead to several negatives:
• Weak Matrix: The project manager has less over
• Employees can have two supervisors to which they have
resources and people than the functional managers.
to report, breaking the rule of a solitary chain of
Project managers in a weak matrix may go by other titles
command.
such as a project coordinator or project scheduler.
• Employees have to balance their work between the needs
• Balanced Matrix: In a balanced matrix, the project
of the projects they are working on, and their functional
manager and functional managers equally share authority
unit.
over resources and staff. This allows the organization to
• Supervisors may find that it is more difficult to achieve a experience the “best of both worlds” by receiving the
consistent rate of progress since employees are often benefits of a projectized organization and functional
pulled in different directions. organization at the same time. However, this system
• Costs and communication channels can increase. presents many challenges:
• Functional managers and project managers have to
work well together and maintain regular
communications.

53
 • Staff will have two managers to which they have to
Figure 3.5 Matrix Organization
report, breaking the concept of the chain of command
and organization.
• If functional and project managers have conflicting
priorities, subordinates may be unable to meet
expectations.
• Strong Matrix: In a strong matrix, the project manager
has more direct control over resources and staffing, while
the functional manager will provide support to the project
staff in terms of hiring, technical expertise, and
professional development. Of all the matrix structures,
Matrix organizations are a mix of the good (and bad) aspects of the
this is the one in which the project manager has the most functional and projectized organizations.
authority, and the functional manager has the least

54
Dedicated Project Team A classic case of the use of a dedicated project team—and the
problems it can cause to the functional organization—was when
Many functional organizations find that they often need to carry
Steve Jobs picked the best and brightest engineers from Apple to
out important projects but do not want to change their entire
work on the development of the macintosh computer. The project
organizational structure. Recognizing the advantages that are
was very successful, but there was a lot of tension between the
achieved by giving authority to a project manager, functional
project team and the functional organization.
organizations often organize dedicated project teams where a
project manager can have authority over the staff assigned to that
particular project. The project manager and project team
members are sometimes located in a special office, away from
the desks and duties that they normally have within the functional
organization (See Figure 3.6). This can be a very effective way to
Figure 3.6 Dedicated Project Team
complete projects. However, some difficulties can arise:

• Temporary loss of staff from the functional groups.

• Integration of project team members back into the

functional organization after the project is completed can
be difficult.

• An “us versus them” mentality, where the people on the

project team are deemed to be more special than those
working in the functional departments. There have been
numerous case studies of conflict arising from dedicated
project teams.

By leaving the functional organization in place and breaking off a team of

staff that directly report to a project manager, functional organizations
can gain significant efficiencies in conducting projects.

55
Summary Video 3.1 Review of the PM Organizational Structures.
How effective our organization is in conducting projects on-time,
within scope and on-budget will be influenced by the type of
structure in which we operate. Watch the Review of the PM
Organizational Structures (Video 3.1) for a summary of what you
have learned and a look at some of the data on project
effectiveness. Table 3.1 below summarized PMI’s evaluation of
project characteristics across various organizational structures.

You can also view this video at: http://pmf.video/video4

Table 3.1 PMI’s evaluations of the project characteristics in various organizational structures.
Organizational Structure
Matrix
Functional Projectized
Weak Matrix Balances Matrix Strong Matrix
Authority of Project
Minor or None Low Low to Moderate Moderate to High High or Absolute
Manager

Project Manager’s
Part-Time Part-Time Full-Time Full-Time Full-Time
Role

Shared between
Budget Control Functional Manager Functional Manager Functional & Project Project Manager Project Manager
Manager
Resources for
Little or None Low Low to Moderate Moderate to High High or Absolute
Projects

56
Chapter 4

Project
Charter
Chapter 4 Overview Learning Objectives:
This chapter explores the main guiding document for any major • Understand the major portions of a project charter and
project: the project charter. The project charter lays out what the the information provided in each.
project is about and what will be needed to complete the project. • Understand the value of a project charter to project
The one and only section in this chapter explores the project success.
charter, which:
1. Provides the project manager with the “mandate” for the
project.
2. Provides information on the constraints, business case,
stakeholders and assumptions for the project.
3. Is used to develop other planing documents (i.e, serves
as an input for other planning processes/documents).
.

58
Section 1

Project Charter

Developing the project charter is an initiating process designed to produce a

document that outlines a project’s framework and major goals, provides initial
identification of project stakeholders and risks, and authorizes the project manager
to move forward with the project. Developing the project charter produces a clear
mandate for a successful project.

59
The Project Charter The charter is developed by the key stakeholders to outline their
common vision for the project (sometimes with the help of a
The project charter provides essential information about a project
project manager or PMO). Creating the charter provides an
and is used to gain authorization to start the project. The charter
opportunity to check stakeholder assumptions regarding the
document can be just a couple pages in length or can be 50-100
purpose of the project. Any differences in understanding about
pages. Ideally it will be short (less than 5 pages) and written in
the goals of project can then be resolved as quickly as possible.
clear and concise language so that anyone who reads it will have
a clear understanding of the project, regardless of their technical What Should be in a Charter?
background. Most project charters include a place at the end of
There are many templates available for project charters and these
the document for approval sign off by the project sponsors or
vary greatly in the content and level of detail. (The PMI affiliated
customers (i.e. those people that are paying for the project).
web site ProjectManagement.com offers a number of project
The project charter is used by the project manager during the charter templates at http://pmf.video/link2.) At a minimum, good
planning process. The project charter informs the project project charters will contain the following sections.
manager about what skills will be required on the project team, as
Background
well as the general scope of work for the project.
The background should provide a broad overview of the project
Some organizations forgo creation of a project charter, viewing it and answer the following questions:
as a document that merely takes time to create and contains
• What is the purpose of the project?
information that "everyone already knows." This can be a big
mistake. The charter can be referenced by the project manager • Where did the project originate? Have we conducted
and stakeholders if some of the goals of the project are not met similar projects in the past?
or they are asked to do something outside the scope of the • Who is the project manager and what level of authority
project. A well drafted project charter can prevent political does the project manager have?
interference in achieving the goals of the project and reduce
scope creep.

60
Business Case Key stakeholders
The Business Case describes why this project was selected over This section describe the key stakeholders and their interest in
others and answers the following questions: the project. This doesn’t have to be an exhaustive list of
• Why was this project selected to move forward (project stakeholders, but should contain a list of people that are
justification)? What selection criteria where used? (Project interested in the project, as well as people who will pay for, or
selection techniques are covered in a later chapter.) benefit from, the project.

• What problems is this project solving or what Major milestones

opportunities is it creating? What are the high-level This section provides a summary of the major milestones for the
requirements? project. A listing of any hard deadlines for the project should be
included. Milestones can relate to project work (when are major
Goals
deliverables expected to be complete?) as well as invoicing and
Listing the goals for the project ensures that the stakeholders will
payment deadlines.
not be disappointed when the project is completed. This section
should answer the following questions: Project budget
The project budget section should provide a summary of the
• What are the broad goals of this project?
budget for the project and information about how it was
• How will we know if the project is a success (what are our
determined. It answers the following questions:
metrics for success)?
• Are there industry standards that we are trying to meet or • What is the initial budget for this project?
benchmarks for performance that we want this project to • How was that budget developed?
attain? • Are the numbers used for budgeting rough estimates
based on top-down estimation techniques, such as
analogous or parametric estimating, or are they hard
constraints?
• What contingency funds have been allocated?

61
Constraints Project authorization
This section will list any constraints on our project or the final This part of the project charter will provide a place for the project
product. For example, if we are creating a website, does it need sponsors in the company or organization to sign off. By signing
to be viewable on mobile devices as well as PCs? Are there the document the sponsors are giving the project manager
regulatory constraints that our product must meet if it is to be authorization to proceed with developing the planning documents
successfully marketed in certain countries (for example, not using and to get the project started. Obviously the project manager will
lead solder). Are there other limitations that we need to consider be communicating regularly with those who are authorizing the
in terms of our scope of work? project.

Assumptions
What assumptions are we making about this project or the
environment in which we are operating? If we're using a lot of
copper for wiring or other uses in our project, are we assuming
that the price of copper will remain stable over the lifetime of the
project? Are we assuming that we will be paid on time, and that
are key programmers or engineers will not retire or find other
positions? This will help the project manager mitigate risks later in
the planning process.

Risks
This section will list the risks that can currently be identified. This
list will be expanded when a formal risk management plan is
developed, but, for now, what do the stakeholders who are
creating the project charter believe are the major risks involved in
this type of project? The list of assumptions will help inform this
list of risks.

62
Figure 4.1 A short and well written project charter will ensure that everyone has the same vision for the project.

Image from http://www.projectcartoon.com/, shared via creative commons by attribute.

63
Chapter 5

Project
Selection
Methods
Chapter 5 Overview Learning Objectives:
The problem facing most businesses and organizations is not • Explain the three broad categories of projects.
what projects are possible to do, but which projects should • Understand SMART criteria for developing and defining
be undertaken given current resource and time limitations. An projects.
organization may be considering projects to implement internally
• Explain the types of costs that need to be considered
or projects for external customers.
(Project, Opportunity, Sunk Costs, and Total Cost of
This chapter reviews the various types of project selection Ownership).
methods, from Murder Boards to calculating Net Present Value. It • Understand how to use a simple checklist and a weighted
also describes the costs that project managers need to scoring model.
understand (opportunity costs, sunk costs, and ongoing • Know the relative advantages and disadvantages of
maintenance costs) as well as other factors that can affect why a various scoring models.
project might be selected.
• Be able to calculate Payback, Net Present Value, Internal
The first section in this chapter, “Choosing A Project,” reviews Rate of Return and Benefit-Cost Ratio.
classifications of projects and the basic criteria that are used for • Understand how to interpret the values when given the
project selection. results of a Payback, Net Present Value, Internal Rate of
The two remaining sections review methods for comparing and Return or Benefit-Cost Ratio analysis.
selecting projects from among many choices. The section on
Qualitative Scoring Methods discusses two methods that can be
used to solicit input from stakeholders and experts about the
potential of various projects. The section on Economic Scoring
Methods presents several common quantitative measures for
assessing a project’s potential performance.

65
Section 1

Choosing a project

Companies and organizations must employ some method to choose the projects
that are most likely to move the organization forward toward meeting its strategic
goals. There are many methods for making decisions about which projects to
undertake; some are simple and others are very complex. The method(s) that are
chosen should reflect the priorities and values of the organization.

Keep in mind that project selection methods, however sophisticated, are only
partial representations of the reality they are meant to reflect.

66
Project Types Figure 5.1 Three broad categories of projects.
There are three broad categories of projects to consider:
Strategic Projects, Operational Projects, and Compliance Projects
(Figure 5.1).

• Strategic Projects involve creating something new and

innovative. A new product, a new service, a new retail
location, a new branch or division, or even a new factory
might be a strategic project, because it will allow an
organization to gain strategic advantage over its
competitors.

• Operational Projects improve current operations. These

projects may not produce radical improvements but they
will reduce costs, get work done more efficiently, or
produce a higher quality product.

• Compliance Projects must be done in order to comply

with an industry or governmental regulation or standard.
Often there is no choice about whether to implement a
project to meet a regulation, but there may be several
project options to consider, any of which would result in
meeting compliance requirements.

67
SMART Criteria for Projects Measurable – How will project progress and success
be measured? What will be the measurable difference
In the early 1980s, George T. Doran introduced the SMART set of
once our project is completed successfully? These
criteria for projects, goals and objectives. SMART is an acronym
measures should be quantifiable.
for Specific, Measurable, Assignable, Realistic, and Time-
Related. The smart criteria have been applied in many different Assignable – Who will do the work? Can people be
areas of management, including project management. Let's take identified who have the expertise in the organization to
a look at each of Doran’s criteria as they apply to project complete this work? Or can the expertise be hired from
management. outside of the organization?

Specific – A project needs to be specific about what it will Realistic – Is it realistic that the organization can
accomplish. Unlike many organizational goals, the goal of a achieve this project, given its talents and resources?
project should not be vague or nebulous. An organization This is a very important consideration for businesses of
may want to “make Columbia, Missouri a great place to all sizes. Yes, it would be great to produce a new
live,” but its projects need to focus on a specific goal; for driverless car, but is that realistic given the resources
example, to build a downtown farmers market. A project that the organization has available?
that is specific is one that can be clearly communicated to
Time-related – when will the project be completed
all team members and stakeholders.
and how long will it take?
A specific project goal will answer the five ‘W’ questions:
These criteria can be very useful when defining a project. If the
1. What do we want to accomplish? description for a project does not meet all these criteria, then it is
2. Why are we undertaking this project? time to go back to the drawing board and make sure that what is
3. Who is involved or will be affected by the project? being described is really a project, rather than a program or
4. Where will this project be conducted? strategic goal.
5. Which constraints (scope, time, money, risk, etc.) have
been placed on our project?

68
Costs Opportunity Costs

When evaluating potential projects, there are several types of Whenever a project is selected to move forward, there are others
costs that we must keep in mind: Project Costs, Opportunity that are rejected and will never be completed. We will never be
Costs, Sunk Costs and Total Cost of Ownership. able to reap the rewards of the projects we don’t complete. The
cost of NOT doing a project is considered the Opportunity Cost.
Project Costs
Here is an example to illustrate the concept of Opportunity Cost.
Project Costs are those costs directly associated with the project,
Dave decided spend four years of his life at a university to get a
including:
college education. His education costs $12,000 per year, but he
1. Direct costs, such as materials, labor, and equipment. will be able to make $45,000 per year after he graduates. His
2. Indirect costs, such as insurance and project manager other option was to go directly into the workforce and start out
labor. earning $20,000 per year. The income that he gives up by not
3. Contingency funds and budgetary reserves. going directly into the workforce is the Opportunity Cost of his
decision. Eventually the investment in his education will pay off
These costs add up to the total estimated cost of our project. with a high salary over the long term.
Details regarding how to calculate these costs are covered in later In this example, one should also consider the Opportunity Cost of
chapters. NOT going to college (the opportunity to make $25,000 more per
year after four years of college). Table 5.1 on the next page shows
the calculation of these opportunity costs. Five years after
graduation, the individual with the college degree has a clear
financial benefit from the experience despite losing four years of
potential income.

69
Table 5.1 Opportunity Cost of a College Education.

DIRECT TO WORKFORCE FOUR YEAR COLLEGE DEGREE

Opportunity Cost Return on Opportunity
of Not Having a Investment Cost of Not
Year Degree Income (ROI) Working Cost of College Income ROI

1 $0 $20,000 $20,000 -$20,000 -$12,000 $0 -$32,000

2 $0 $20,000 $40,000 -$20,000 -$12,000 $0 -$64,000

3 $0 $20,000 $60,000 -$20,000 -$12,000 $0 -$96,000

4 $0 $20,000 $80,000 -$20,000 -$12,000 $0 -$128,000

5 -$25,000 $20,000 $75,000 NA NA $45,000 -$83,000

6 -$25,000 $20,000 $70,000 NA NA $45,000 -$38,000

7 -$25,000 $20,000 $65,000 NA NA $45,000 $7,000

8 -$25,000 $20,000 $60,000 NA NA $45,000 $52,000

9 -$25,000 $20,000 $55,000 NA NA $45,000 $97,000

10 -$25,000 $20,000 $50,000 NA NA $45,000 $142,000

11 -$25,000 $20,000 $45,000 NA NA $45,000 $187,000

12 -$25,000 $20,000 $40,000 NA NA $45,000 $232,000

13 -$25,000 $20,000 $35,000 NA NA $45,000 $277,000

14 -$25,000 $20,000 $30,000 NA NA $45,000 $322,000

The green highlight indicates the point at which it becomes more profitable to attend college.

70
Sunk Costs However, with a project that produces a physical product or
deliverable, such as a building, not all costs are sunk forever.
Sunk Costs are those costs that have been put into a project and
When a building has outlived the useful life for which it was
can’t be recovered. In project management, a Sunk Cost is the
designed, it can still have some value as an asset.
money which we have already put into a project or idea. Sunk
Costs should never be considered when making a decision, only For example, ABC Corp decides to build a new factory for 5
future costs. million dollars and calculates that the factory will have a useful life
of 30 years before it needs to be upgraded or replaced. ABC
For example, ABC Corporation has spent twenty thousand dollars
Corporation will calculate the costs of building, financing, and
on developing an new iPhone app. Unfortunately, several similar
operating the factory over 30 years, along with the revenue from
apps have been released since the project began. As a result the
the products produced by the factory, and then decide if it is a
potential profits of the app have been severely diminished. It will
worthwhile project to pursue. Then, at the end of 30 years, the
take another thirty thousand to complete the app. Some people
factory will still have some value. For example, the factory can be
on such a project will argue that since twenty thousand has
resold to another business or it can be torn down and the metal
already been spent, the project should be completed. However,
can be sold for scrap. This value is called salvage value and will
ABC corporation can not recover the original twenty thousand
be calculated into the financial calculations for a project.
dollars and investing another thirty thousand might just be
“throwing good money after bad.” Total Cost of Ownership (TCO).

Sunk Costs are especially important to consider because of the When our project involves the creation of a physical product, we
fact that people don’t make decisions just based on data, but need to consider the cost of operating or maintaining that product
also on emotions. Project Managers want their projects to move after the project is complete. For example, consider the
forward and are generally optimistic about the future. As a result, construction of a new school with 20 classrooms. Each
their judgement can be clouded by what they want to happen. It classroom will have a digital projector for use by the teacher. If
may be difficult for them to step back and realize that a project the project team just evaluates the projectors based on their initial
should be cancelled, rather than investing more time and money cost and accepts the lowest bid that meets the technical specs,
in a project that will not be useful or profitable. then over time the school may suffer higher costs for operating
and maintaining the projectors. The total of the initial cost of the
71
projectors (or any item) and the cost to operate (e.g., electricity Other Reasons for Project Selection
costs) and maintain (e.g., cost to replace the bulbs) the projectors
Before exploring the methods that are used for project selection,
is called Total Cost of Ownership, or TCO.
it is worth mentioning that sometimes projects are selected as a
Table 5.2 shows a sample comparison of the TCO of various result of political or emotional considerations rather than purely
projectors. Note that the more expensive projector will cost the objective comparison.
school ~$7,700 dollars less in the long run.
For example, a high-level executive may have an idea for a
project, and the power to make sure it moves forward, regardless
of the soundness of the project or its imagined benefits. These
projects are referred to as “sacred cows,” because the project is
being completed to meet the wishes of an executive or leader
within the organization and can’t be killed off. This is simply a
reality that many project managers face in their daily work.
Table 5.2 TCO for Projector Purchase.
However, when you are taking a PMI exam, remember that PMI
Projector Projector Projector assumes that organizations will always follow a proper and
A B C rational approach to project management selection, and that

Cost of Projector $1,500.00 $2,500.00 $3,500.00 politics will not intrude into the decision making process.

Cost of Bulb $450.00 $350.00 $500.00

Bulb Life in Hours 3,000 5,000 9,500

Number of Bulbs
required for 100,000 33 20 11
hours of use
Cost of bulbs over
$15,000 $7,000 $5,263.16
200,000 hours
TCO (Projector + Bulbs) $16,500 $9,500 $8,763.16

72
Project Selection Methods success. Scoring methods will be examined in the next
section of this chapter.
Projects are selected by comparing the costs and benefits of
• Economic Scoring Methods. These methods assess the
potential projects. Some of the selection methods are more
ability of the project to help the bottom line, either by
subjective than others, but all try to use a standard set of criteria
increasing profits or reducing costs. These models often
to determine which project is the best for an organization to
look at the cash flow that a project will generate after it is
pursue. Methods can include:
completed. The final section of this chapter examines
• Murder Boards. A group of experts (internal and economic models in more detail.
external) attempt to “murder” a project proposal by • Constrained Optimization Methods. Constrained
pointing out its flaws and weaknesses. This can be very Optimization Methods of project selection are
useful in high-risk projects where there is little data from mathematically intensive means of analyzing a series of
previous projects from which we can learn, or in projects and are not easily generalized (see http://
situations where the environment has changed en.wikipedia.org/wiki/Constrained_optimization ). In
significantly since the development of the original scope project management, these methods can include:
of the project. Participants in a murder board session are
• Linear Programming
encouraged to be aggressive and not hold back in their
• Dynamic Programming
attempt to murder the project.
• Branch and Bound Algorithms
• Qualitative Scoring Methods. Scoring methods can take
a variety of factors into account. These can range from • Integer Programming
simple checklists to complex weighted scoring systems. We might also refer to Constrained Optimization Methods
Scoring systems can assist staff with evaluating the as mathematical approaches to project selection. These
relative merit of different projects while limiting political methods are beyond the scope of this text, but students
influence. Scoring models might survey a wide variety of preparing to take PMI exams should know that if they see
experts and have them rate the project in terms of any type of programming or algorithms used for project
importance to the company or relative chance of selection, a Constrained Optimization Method is being
used.

73
Of course, companies are not limited to just one methodology
when choosing a project. They can, and typically do, use a
combination of selection criteria.

Next, we will explore Qualitative Scoring Methods and Economic

Scoring Methods in detail.

74
Section 2

Qualitative Scoring Methods

Qualitative Scoring Methods for project selection allow for the solicitation of input
from many people about the projects up for review. There are two basic scoring
methods: a simple checklist and a weighted scoring model.

75
Simple Checklist Disadvantages of a simple checklist:

Checklists are simple to use and understand. A set of selection • All criteria are treated equally and given the same weight.
criteria is generated and agreed upon by the major project • Criterial that are “must haves” are not separated from
stakeholders or sponsors. Those who study the field of those that are “wants.”
management might refer to these criteria as Critical Success
• Easy to add too many non-important criteria to the
Factors (CSF). These can be measurable indicators of success.
checklist.
For example, “The project is likely to attract 3,000 new customers
• Result of checklist is a relative score, not a go or no-go
to our store in the next 12 months,” or “The project is likely to
decision.
make a 30% return on investment.”

The selection criteria are organized into a checklist format, and Table 5.3 A Simple Checklist for selecting a new sorting
then each project is reviewed and scored (see Table 5.3). Scoring facility.
can be done by a wide range of people inside and outside the Criteria
Project Project Project
A B C
organization. It is best to solicit input from a diverse group of
subject matter experts. The project with the most boxes checked
✓ ✓ ✓
Project aligns with our values and
mission statement.
is deemed to be the best project.
✓
Will not increase our carbon
Advantages of a simple checklist: footprint.

✓ ✓
Improves product delivery time by
• Easy to understand and tally 20%.
• Multiple Criteria can be considered.
✓
Cost to maintain over 10 years is
not more than initial cost.
• Can be used to quickly gather input from a wide range of

✓
stakeholders. Can be complete with in-house
personal and resources.
• Easily changed to reflect management direction/policy
• Can be posted online to gather public input.
Design is aesthetically pleasing. ✓ ✓
TOTAL 4 3 3

76
Weighted Scoring Weights can also be assigned to the CSFs to reflect the relative
value of some factors over others. For example, in Table 5.3,
In order to make sure that a project meets an organization’s “must
equal weight was given to the looks of the design and to the cost
have” criteria, a separate section containing these most important
of maintaining the facility. In the model shown in Table 5.4 below,
criteria can be added to the checklist. If the project fails to meet
weights are given to different criteria to reflect the relative
one or more of these factors then it will be rejected.
importance of each to the organization.

Table 5.4 Weighted Scoring Model with Critical Factors and Weighted Scoring.

Critical Factors Project A Project B Project C

Should not cost more than $120,000 ✓ ✓ ✓

Compliance with all local governmental regulations. ✓ ✓ ✓

Will not harm our company operations/image. ✓ ✓

Project A Project A Project B Project B Project C Project C

Weighted Scoring Weight
Score (0-3) Value Score (0-3) Value Score (0-3) Value

Likely to produce spin-offs or other products 30 1 30 2 60 2 60

Likely to make $30,000 or more per year 80 2 160 2 160 1 80

Doesn’t require outside consultants 30 2 60 2 60 1 30

Likely to gain us good press 10 0 0 2 20 2 20

Total 250 300 190

The weighted value for the project is calculated by multiplying the weight by the project score (0=very unlikely, 1= likely, 2= very likely).
While Project B scores the highest, it fails to meet one of our Critical factors and would be rejected or revised so that it can meet this
criterion.

77
Weighted scoring models have several significant advantages
over simple checklists:

• Political games/sacred cows are exposed.

• Allows ranking of projects according to impact on key
performance indicators for the company.

78
Section 3

Economic Scoring Methods

Economic scoring methods for project selection compare the costs and benefits of
different projects. All of these models are objective as long as the inputs are not
biased.

79
Payback Period For example, consider “Project Faster” but this time ABC
Corporation estimates that it will save the company $156,000 in
The payback period method simply calculates the amount of time
Year 1, $105,000 in Year 2, $100,000 in Year 3, $95,000 in Year 4,
it will take to recover the costs of the project, by means of either
and $76,000 in Year 5 in decreased labor costs. To calculate the
increased revenue or reduced operating costs. It is calculated by
payback for this project, subtract the annual cash flows from the
taking the entire cost of the project and dividing by the annual
cost of the project, to yield a project balance (see Table 5.4).
profit or cost savings.
In this example, the project has recovered all but $44,000 by the
Cost of Project
Payback = end of Year 4. The estimated cash flow in Year 5 is $76,000. So to
Annual Profit/Savings calculate at what point in Year 5, we will have recovered our

For example, ABC Corporation is considering “Project Faster” to

Table 5.5 “Project Faster” payback example with uneven
construct an automated package assembly and sorting facility. cash flows
The project is estimated to cost $500,000. However, ABC
Corporation estimates that it will save the company $125,000 per Cash flow from Profit/Savings Project Balance
year in decreased labor costs. To calculate the payback for this
Year 1 $156,000.00 -$344,000.00
project, we divide the cost of the facility by the estimated annual
savings: Year 2 $105,000.00 -$239,000.00

$500, 000 Year 3 $100,000.00 -$139,000.00

Payback = = 4 years
$125, 000 Year 4 $95,000.00 -$44,000.00

So, by making this investment now, we should be able to recover Year 5 $76,000.00 $32,000.00

our investment in four years. Payback Period (percent of year) 4.58

In the case where the estimated cash flow is not constant in every Payback Period (Years and months)
4 years, 7
months
year, the payback is calculated by subtracting the cash flow for
each year from the cost of the project. Payback Period (Years and months) 55 Months

80
costs, we can divide the project balance of $44,000 by $76,000 to
Table 5.6 The Time Value of Money
find that it will take 0.58 of year 5 to payback the costs of the
Interest Income Total at End of
project from the project profits/savings. (to calculate in months, Principal
(at 5%) Year
multiple 12 by .58: 6.95 months, round to 7 months).
Year 1 $20,000.00 $1,000.00 $21,000.00
While the payback is simple to calculate and understand, it
Year 2 $21,000.00 $1,050.00 $22,050.00
doesn’t account for the time value of money. Money today is
worth more than it will be in the future; this concept will be Year 3 $22,050.00 $1,102.50 $23,152.50
explored in the next section. In order to account for the time value
of money we can use either a Net Present Value calculation or an
Internal Rate of Return calculation; both of these methods will be
discussed shortly. Payback also doesn’t reflect the size of the Net Present Value (NPV)
investment in the project, just the payback period. Net Present Value is one way to account for the time value of
money in project selection. NPV uses a discount rate which
Time Value of Money
reflects the decrease in value of money each year in the future. In
Future dollars are always going to be worth less than current addition to the discount rate, NPV is calculated over a set number
dollars. How much less depends on how well you can make your of years that we are expecting our capital to be able to generate
current dollars work for you. savings or profits for use.

To illustrate this concept, imagine you could have the choice of This discount rate can also be considered the cost of capital
receiving $20,000 now, or $22,000 in three years. Which do you dollars, which we may have to obtain via a bond, loan or equity
choose? If you receive the $20,000 now and are able to invest to sale. Regardless of how the capital for the project is obtained, the
in an account that will earn 5% annually, you will be better off to cost of capital will be calculated and known by the organizations
take the $20,000 now, and in three years you will have $23,152.50 in which projects are selected. A Net Present Value analysis uses
(See Table 5.6). However if the offer was $20,000 now or $25,000 the costs of capital or discount rate to calculate the value of
in three years, you would be better off taking the money three future dollars in terms of what they would be worth today (called
years from now. Present Value or PV).

81
Note: The acronym PV is used for Present Value when discussing The formula for the NPV for the entire time period in which we are
NPV and project selection. However, the same acronym, PV, is making calculations is:
also used in project management during earned value analysis to
N
represent Planned Value! Be sure that you understand the context
CFt
NPV =
in which the acronym PV is being used if you are taking a PMI or ∑ (1 + r)t
t= 0
other exam!.

The present value of earned or saved dollars for each time period • Where N is the total number of years for calculating NPV.

is calculated using this formula: • Where t is the time period for which we are calculating
(for example, year 1, year 2, etc. ). Note: We often we will
CFt
Present Value = put our capital outlays in year 0.
(1 + r)t • Where r is the discount rate.
• Where CF is the expected cash flow.
• Where t is the time period for which we are calculating
(for example, year 1, year 2, etc. ). Note: We often will put
our capital outlays in year 0.
Consider the same example that was used in the discussion of
• Where r is the discount rate. payback. However, this time imagine that the $500,000 has to be
• Where CF is the expected cash flow for the given year financed by a bond which will incur interest and has fees
(net cash flow). associated with the bonding. In this case, our costs for the first
year will be $500,000. For the years in which we will have cost
savings, we will calculate what the value of those savings is in
present dollars. In this case, we will use a 13% discount rate (cost
of capital). As you can see from Table 5.7 on the next page, the
perspective on our project shifts a little when we figure in the time
value of money. In this case, it will take 6 years to earn back
our initial investment instead of the 4 years we calculated

82
using the simple payback method. However,
Figure 5.2 “Project Future” Calculations: Simple Payback vs. NPV
this is a more accurate from a financial
UnDiscounted Discounted
viewpoint.
$500,000
When calculating NPV for a project with a
given time horizon, projects that have a $250,000
negative NPV should be rejected and those
with a positive NPV should be considered. $0
When choosing between two or more projects
that are mutually exclusive using NPV, the -$250,000
project with the highest positive NPV
should be selected. -$500,000
Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Untitled 4

Table 5.7 Calculating the discounted value of money in the future for “Project Faster.”
Cumulative present value
Year Capital Costs Annual Savings (Non Discounted) Annual Savings (Discounted)
of future cash flows

0 -$500,000.00 -$500,000.00 -$500,000.00

1 $125,000.00 $110,619.47 -$389,380.53

2 $125,000.00 $97,893.34 -$291,487.20

3 $125,000.00 $86,631.27 -$204,855.93

4 $125,000.00 $76,664.84 -$128,191.08

5 $125,000.00 $67,844.99 -$60,346.09

6 $125,000.00 $60,039.82 -$306.28

7 $125,000.00 $53,132.58 $52,826.30

83
NPV Selection Example how these calculation are made with a spreadsheet program in
Video 5.1.
The ABC Corporation is in the process of entering the nut
distribution market and is considering two projects: Project Note: Programs like Excel, have build-in formulas for NPV but
Walnut and Project Filbert. The project selection committee has these formulas don’t take into account the project costs (Year 0),
been tasked with providing an NPV analysis on these projects so one must modify the formulas accordingly.
and has been given the following data.

Project Walnut
Video 5.1 NPV Calculations using Excel
Capital Costs: $340,000
Annual Operating Costs: $30,000
Annual Operating Revenue: $90,000

Project Filbert

Capital Costs: $1,050,000

Annual Operating Costs: $390,000
Annual Operating Revenue: $800,000

ABC is looking at these projects over a five year span and the
cost of capital at the ABC Corp is calculated at 8 percent. Note:
We will need to account for the Annual Operating Costs by
subtracting them from our Annual Operating Revenue.

As you can see from the tables on the next page, Project Filbert
has a positive NPV after four years, where Project Walnut does
not. Project Filbert is the clear winner in this case. You can see Watch this video to learn how to make NPV calculation in Excel, using the
formula presented in this chapter and Excel’s built-in NPV formula. You
can also view this video at: http://pmf.video/video19

84
Table 5.8 NPV for Project Walnut
Annual Annual Cumulative
Discounted Net
Year Capital Costs Operating Operating Net Revenue present value of
Revenue
Revenue Costs future cash flows

0 -$340,000.00 -$340,000.00 -$340,000.00

1 $90,000.00 $30,000.00 $60,000.00 $55,555.56 -$284,444.44

2 $90,000.00 $30,000.00 $60,000.00 $51,440.33 -$233,004.12

3 $90,000.00 $30,000.00 $60,000.00 $47,629.93 -$185,374.18

4 $90,000.00 $30,000.00 $60,000.00 $44,101.79 -$141,272.39

5 $90,000.00 $30,000.00 $60,000.00 $40,834.99 -$100,437.40

Table 5.9 NPV for Project Filbert

Annual Annual Cumulative
Discounted Net
Year Capital Costs Operating Operating Net Revenue present value of
Revenue
Revenue Costs future cash flows

0 -$1,050,000.00 -$1,050,000.00 -$1,050,000.00

1 $800,000.00 $390,000.00 $410,000.00 $379,629.63 -$670,370.37

2 $800,000.00 $390,000.00 $410,000.00 $351,508.92 -$318,861.45

3 $800,000.00 $390,000.00 $410,000.00 $325,471.22 $6,609.76

4 $800,000.00 $390,000.00 $410,000.00 $301,362.24 $307,972.00

5 $800,000.00 $390,000.00 $410,000.00 $279,039.11 $587,011.12

85
Internal Rate of Return (IRR) In order to calculate IRR percentage, we use a formula similar to
the NPV formula and set the NPV equal to 0. We then solve for
Internal Rate of Return (IRR) is another measure that takes into
the return rate (r).
account the future value of money, but rather than calculating a
N
dollar amount, IRR is expressed as a percentage. This CFt
NPV =
∑ (1 + r)t
percentage represents the amount of return that a company will = 0
receive from an investment. t= 0

If project A has an IRR of 17% and Project B has a IRR of 30%, • Where N is the total number of years for calculating IRR
Project B would be considered the better investment. Using this
• Where t is the time for which we are calculating (for
measure, a higher number indicates a higher return and a better
example, year 1, year 2, etc. ).
project.
• Where r is the return rate.
However, realize that because IRR is expressed as a rate, rather • Where CF is the expected cash flow..
than an amount, we don’t know the magnitude of the return:
IRR is difficult to calculate mathematically. Instead a trial-and-
Project A with a 17% return might yield a profit of three million
error method is used to derive the rate. However, spreadsheet
dollars in present day value, while Project B with a 30% IRR
programs and financial calculators can make these “Solver”
might just yield a net profit of one hundred dollars in present day
calculations easier to perform. See Video 5.2 on calculating IRR
value.
for an example.
When calculating IRR for a project, projects that have a negative
IRR should be rejected and those with a positive IRR should be
considered. When choosing between two or more projects that
are mutually exclusive using IRR, the project with the highest
positive IRR should be selected.

86
Video 5.2 IRR Calculations using Excel Benefit-Cost Ratio
Another way to look at the financial aspects of projects is with the
Benefit-Cost Ratio (BCR) method. It will also factor in the time
value of money. The formula for BCR is

Discounted Value of Benefits

BCR =
Discounted Value of Costs

BCR can be evaluated this way:

• A BCR that is < 1 means that the costs are greater than
the benefits.
• A BCR that is = 1 means that the project will break even
• A BCR that is > 1 means that the benefits are greater than
the costs.
Watch this video to learn how to make IRR calculations in Excel. You can
also view this video at: http://pmf.video/video20

Benefit-Cost Ratios are often used on large public works projects,

and have even been attempted in the context of analyzing public
policy (for example, climate change). Quantifying benefits and
costs can be a lengthy and difficult process and companies will
have their own ways of arriving at those numbers.

When calculating BCR for a project, projects that have a BCR

less than one should be rejected and those with a BCR of one
or higher should be considered. When choosing between two or

87
more projects that are mutually exclusive using BCR, the project
Sidebar 5.1 Economic Scoring in Practice
with the highest BCR above one should be selected.

Summary of Economic Scoring Methods:

• Payback shows the time it will take to recover our
investment in the project, but doesn’t account for the
time value of money. With payback calculations, a
lower number is better.
• Net Present Value (NPV) accounts for the time value of
money, and is expressed as a dollar figure. Higher values
are better.
• Internal Rate of Return (IRR) accounts for the time value
of money, and is expressed as a percentage. Higher
percentages are better. IRR doesn’t express the
magnitude (amount of dollars) of the project return.
Calculating Payback, NPV, IRR and BCR can require the
• A Benefit-Cost Ratio accounts for the time value of
consideration of many factors and is often done with
money and is expressed as a ratio. Higher numbers are assistance from our accounting departments. These
better. Like IRR, BCR doesn’t express the magnitude calculations might also take into account salvage costs of
(amount of dollars) of the project return. equipment at the end of its life and other internal factors that
might influence returns.

88
Chapter 6

Project Scope
and Work
Breakdown
Structure
Chapter 6 Overview Learning Objectives:
Defining the work of a project is one of the first and most • Understand the differences between project and product
important steps in developing project plans. The project scope of scope.
work describes what work will need to be completed for the • Understand what is contained in a project scope
project. The project scope also provides a de facto definition of statement and its value.
what work will not be done as part of a project.
• Define scope creep and gold plating.
The first section of this chapter discusses project and product
• Understand how cost and time are summarized in a
scope, the project scope statement, scope creep, gold plating
WBS.
and other concepts regarding how work for a project is defined.
• Understand the how the process of decomposition is
The second section discusses the work breakdown structure
used to create a WBS
(WBS). A WBS is a hierarchical map or tree diagram representing
• Understand the difference between a deliverable and
all the deliverables and work for a project, and it is a useful tool
work package.
for defining the project scope of work. Through a process of
decomposition, a project is broken down into deliverables, sub- • Understand the WBS numbering system.
deliverables and work packages/activities and organized into a
WBS. The creation of a WBS is the first stage in planning and
scheduling the work for a project.

90
Section 1

Project Scope

The scope of a project represents, in the broadest sense, the work that will need to
be completed for the project to finished successfully. A well-defined scope of work
is a key asset for any project team.

91
Types of Scope The Project Scope Statement
In project management, the term scope has two distinct uses — The project scope statement is a formal document that outlines
project scope and product scope. the purpose and parameters of the project and is used to develop
project management plans. This may also be referred to as the
• Project scope focuses on the work that will be done in
statement of work (SOW). The project scope statement may
order to complete the project.
include:
• Product scope focuses on the features of the final
• A list of the high level project requirements, activities and
product. This may or may not have an impact on the
goals. These activities and goals should be described in a
project scope.
way that sets clear boundaries for the work that will need
For example, imagine a project that involves the construction of
to be performed.
a one-story office building. The project scope would include the
• A list of major deliverables for the project.
work that must be completed: a foundation must be laid, the
exterior of the building needs to be covered with vinyl siding, etc. • A description of the business justification/rationale for the
project, explaining what it will do for the organization, and
A change to the planned color of the siding (product scope), why was it picked over other possible projects.
would not have any impact on the project scope (the project
• A description of any project constraints in terms of time
manager would still have to make sure that someone with siding
and cost.
experience will be scheduled to install the siding). However, if the
product scope changes to have brick siding, there will be a • A timeline with major milestones.

change to the project scope (now the project manager needs to

hire someone with bricklaying skills, the walls may need to be Sidebar 6.1 Scope in Agile Projects
changed to provide anchors for the bricks, etc.). In agile projects, scope is represented by user stories and the
backlogs associated with each iteration or release. In agile,
The project manager is mainly concerned with project scope. The
changes to the scope are welcomed if they will increase value
more well defined the project scope is at the initiation of a project,
to customers, whereas in more traditional projects later
the easier it is for a project manager to develop the project plans
changes to scope are discouraged.
and execute those plans.
92
 • A list of any assumptions that have been made about the small addition, a precedent has been set that the project team will
project (that certain assistance will be available, etc.). regularly take on work that is beyond the scope of the project.
• A detailed work breakdown structure and WBS dictionary
Preventing Scope Creep
(see next section for information about how thses are
There are several ways that project managers can reduce the
created). PMI considers this a must have item for a
chance of scope creep:
project scope statement.
• Information about the acceptance criteria for the project. • Have a well defined scope of work and detailed work
breakdown structure. Make sure that everyone on the
• Cost estimates for the project and information about hwo
project is familiar with these documents.
the cost estimates were made.
• Implement a change control system so that all changes to
The project scope statement may also include a section with
scope are reviewed and considered. This system should
information about the activities or deliverables that are specifically
consider the impact a requested change will have on
outside of the scope of the project.
schedule, budget, and the project’s other activities.
Scope Creep • Maintain good communication so that all stakeholders
understand the cost of adding new features to the project
Scope creep, also called feature creep, function creep or
scope.
requirement creep, is the gradual expansion of scope as the
project is executed. Scope creep can be very harmful to a Gold Plating
project, eventually causing delays, cost overruns, and bad Gold plating is a type of scope creep that occurs when people
feelings between the customer and project team. In a project working on the project add features, upgrade the materials, or
where the scope of work is poorly defined, the chance of scope add work to the project without the customer requesting the
creep is increased. upgrade or extra work.

Scope creep often starts with a request for a small addition or Some members of the project team may incorrectly think that, if a
small amount of extra work that is outside the project scope. project is under budget or ahead of schedule, is it appropriate to
Resisting the urge to “go the extra mile” for the customer is reinvest that time or money into upgrading some aspect of the
difficult, especially for new team members. By making that first project to impress the customer or increase the value to the
93
project. Such thinking is common when the project team doesn’t
understand the difference between quality and grade:

• Quality in project management is defined as meeting the

specifications of the project. Any deviations from the
project specifications reduce the quality of a project.
• Grade in project management is the type of material that
is used in a project.
For example, assume that a project involves building a room in
which the walls are specified to be covered in drywall and painted
white. The project manager decides that the project budget is big
enough to allow him to cover the walls with hardwood paneling,
making the room look much more impressive. PMI and most
project managers would consider this to be a low quality result.
Hardwood is not higher quality, just a higher grade of wall
covering. The project specifications called for painted drywall.
The project manager deviated from the specification and didn’t
deliver what the customer requested.

Also consider that the customer may not want an impressive

looking room and might have rather had money left over at the
end of the project to put toward the next project.

94
Section 2

The Work Breakdown Structure

The Work Breakdown Structure (WBS) is a hierarchical outline of all the

deliverables involved in completing a project. The WBS is part of a project scope
statement. The creation of a WBS is one of the first steps in organizing and
scheduling the work for a project.

95
Work Breakdown Structure (WBS) Deliverables vs. Work Packages
The WBS is a breakdown of a project into sub-deliverables and Deliverables and sub-deliverables are things such as physical
eventually work packages. Each level of the WBS, represents objects, software code, or events. In a WBS, deliverables and
more detailed information about a project. Figure 6.1 shows how sub-deliverables are represented by nouns (see Figure 6.2).
the project is broken down into major deliverables and then into
Work packages are assignable units of work that will be
sub-deliverables and work packages.
performed to create the related deliverable. A work package can
be assigned to one particular project team member, one outside
Figure 6.1 A Work BreakDown Structure contractor, or another team. The work packages maybe further
broken down into activities or tasks by the project team or the
experts who will perform that work (see WBS dictionary later in
this section). Work packages are action oriented and will be
represented by phrases containing verbs (see Figure 6.2).

The cost of a deliverable is the sum of all of its related sub-

deliverables. In Figure 6.2, the cost of the Walls deliverable is the
sum of the Stud Walls and the Electrical sub-deliverables
($17,740 + $3,680 = $21,420). Likewise, the cost of a sub-
deliverable is a summary of all of the work packages that must be
completed to complete the sub-deliverable. In Figure 6.2, the
cost and duration of the Stud Walls deliverable is a sum of all the
related work packages ($3,840 + $1,340 + $2,000 +$10,560 =
$17,740; 24hrs + 8hrs + 24hrs + 32hrs = 88hrs).

Since the WBS provides a natural way to summarize (or “rollup")

The WBS is an outline that shows how the deliverables, sub-deliverables the costs and labor involved for various sub deliverables, it also
and work packages relate to the final project. provides the project team with the information need to determine

96
Figure 6.2 WBS for New Warehouse Project

97
whether some deliverables would be better performed by an Decomposition
outside specialist who could deliver the item or service more
Decomposition is the process used to break the project scope of
cost-effectively. In the example in Figure 6.2, if the project
work into the deliverables, sub-deliverables, and work packages
manager can find a roofing contractor that complete the roof in
involved in completing the project.
less than 15 days (120 hours) and for less than $18,440, then it
would be better to outsource that part of the project. The process of decomposition begins with identifying the highest
level deliverables. These deliverables are then broken into sub-
Note that work packages are independent of each other in a
deliverables. Many layers of sub-deliverables may be needed for
WBS, and do not summarize or include the work from other work
a project. A general rule of thumb is that if the WBS has more
packages. Work packages are the lowest level of the WBS.
than 5 layers of sub-deliverables, the project team should
WBS Numbering reassess and try to simplify the WBS structure (often by changing
the way higher level deliverables are grouped and broken down).
Project managers use the WBS during project execution to track
the status of deliverables and work packages. The items in a Once the lowest level of deliverable has been reached, the next
WBS are numbered so it is easy to understand the deliverable, or step is to break the sub-deliverables into work packages. The
sub-deliverable, to which any particular work package is related. work packages describe the work that needs to be done to create
Notice that in Figure 6.2 the Install Metal Roof item is numbered the sub-deliverable. Remember that work packages typically
3.2.2, so it is easy to see that this work package is related to the contain verbs, and can be assigned to a person, team or
third major deliverable (Roof: 3.), and the second sub-deliverable contractor.
(Roof Cover: 3.2.) and that is it the second work package for
Once the project team has drafted the WBS, they should ask
creation of the roof covering (3.2.2).
themselves: "if all the work packages were completed, and all the
This numbering system allows for easy reference and filtering. For deliverables in this WBS were delivered, would the project be
example, an electrician working on the Warehouse project only complete?" If the answer is no, then pieces of the WBS are still
needs to receive details and updates that are related to work missing. If the answer is yes, then the project team can move on
packages that start with 2.2 (the Electrical sub-deliverable). to creating the WBS dictionary, getting bottom-up estimates on

98
time and resource requirements, and planning how to schedule The WBS and Project Schedule
the work.
One important item to note about the WBS: it doesn’t represent
The WBS Dictionary the order in which the work will actually be performed. The work
packages and related activities will be scheduled when the
The WBS dictionary provides detailed documentation about each
project team creates a network diagram of all the work packages/
work package including;
activities and schedules the resources needed to complete those
• Who is responsible for completing the work package? work packages.

• What resources will be needed to complete the work

package?
• What deliverable(s) is the work package contributing to?
• What deadlines or milestones are associated with this
work package?
• What are the acceptance criteria for this work package?
When the WBS is created, not all of the information about the
work packages is known (for example, the estimates for labor and
material costs). Remember from Chapter One that the planning
process continues throughout the execution of the project. As a
result, the WBS dictionary is a “living document” that will be
augmented, edited and updated as the project moves forward.
Figure 6.3 is an example of a WBS Dictionary entry; note that
several items will be added later in the planning process.

99
Figure 6.3 A WBS Dictionary Template

Project: Warehouse Last Modified: October 1st, 2016

Work Package Name: Prefab Joist Work Package ID: 3.1.1

Description of Work: The joists and struts for the warehouse roof will be prefabricated offsite and then brought to the job site for installation.
Wood 2x6s will be used for creation of the joists.

Milestones Due Dates: TBD: Will be Completed after Resource Estimation

1. Delivery of all raw materials and Scheduling.
2. Complete pre-fabrication of joists
3. Delivery to work site.

Labor Material
ID Activity Resource Total Cost
Hours Rate Total Units Cost Total

TBD: Will be Completed after Resource

Estimation and Scheduling.

Acceptance Criteria: Visual Inspection at Job Site

Technical Information:

Contact Information: Jim Crews, 555-1251

In this example the Due Dates and detailed information about activities and costs will be added to the WBS dictionary later in the project planning process.

100
Chapter 7

Time and
Resource
Estimation
Chapter 7 Overview • Multiple estimators: simple average
Correct estimation of the time and resources required for a • Multiple estimators: Te average
project is vital to understanding the commitment needed to
• Multiple estimators: Delphi technique.
successfully complete a project. Poor estimates can lead to
project failures and can be very costly for an organization. The second section of this chapter explains how three-point
estimates can be used to conduct a Program Evaluation and
The first section in this chapter covers the major types of top- Review Technique (PERT) analysis to determine the probability
down and bottom-up estimation techniques. that an activity or project will be completed within a given time
frame.
Top-down estimates are used to provide rough estimates of the
time and resources required for a project. This allows the
organization to determine the resources and funding that will be
needed if the project goes forward. Top-down estimation Learning Objectives:
methods include: • Understand top-down estimation methods.
• Be able to calculate parametric estimates.
• Analogous Estimating
• Be able to calculate learning curves and apply them.
• Parametric Estimating
• Understand bottom-up estimation methods.
• Learning Curves
• Be able to calculate Te given an activity’s optimistic (a),
• Function Point Analysis
most likely (m), and pessimistic (b) estimates.
• Understand how a PERT analysis is conducted.
Bottom-up estimates provide more detailed and accurate
estimates. These are often generated after a project has been
chartered and the project team is making detailed project plans.
Bottom-up estimation methods include:

• Single point estimates

• Three-point estimates
102
Section 1

Time and Resource Estimation

Project plans are based on estimates of the time and materials required; estimates
are the foundation for a project’s success. Estimates for the time required to
complete various activities are especially critical and hard to accurately determine.
There are several methods for providing quick estimates (top-down or macro
techniques), and for arriving at more precise estimates (bottom-up or micro
techniques). This section discusses some basic principles for creating good
estimates and the most common estimation methods.

103
Making Estimates Video 7.1 Project Estimates
Estimates have a huge influence on a project and are a large
source of project risk. Watch Video 7.1 to learn about how
estimates are used for project planning.

Top-down, or macro, estimation methods are used to determine if

a project is feasible, to calculate funding requirements, and to
determine the resources needed to complete a project. These
methods are not extremely accurate but provide a relatively fast
way to make an estimate of the time and costs required for a
project.

Bottom-up, or micro, estimation methods are used to provide a

detailed, and more accurate, estimate and are usually derived
from the detailed list of work packages or activities found in the
work-breakdown structure.
You can also view this video at: http://pmf.video/video35
As Video 7.1 mentions, all estimates contain risk. If estimates are
too low, then a project will take more time and money to Therefore, it is important to have the most accurate estimates

complete than what was budgeted. Obviously a bad situation. If possible. The project team needs to understand the value of

estimates are too high, then a project will take less time and accurate estimates and avoid the natural human tendency to pad

money that originally estimated. This might seem to be a estimates; in other words no “Scotty Factors” allowed (see

desirable situation, but good project managers will realize that Sidebar 7.1). Once unbiased estimates for a project have been

estimates that are too high will cause an organization to over- generated, the project manager can calculate what time buffers

allocate resources to a project, thereby preventing other projects and budgetary reserves should be added to the project plan to

from being pursued due to organizational resource shortages. deal with uncertainty (see the section on PERT Analysis later in
this chapter).

104
 Accuracy of Estimates
Sidebar 7.1 The Scotty Factor
Prior to project authorization, estimates for project costs need to

The original source for this term was the movie Star Trek III. be given, but these estimates can be rough estimates. As the

Kirk asks "Mr. Scott, have you always multiplied your repair project progresses, more definitive estimates will be needed and

estimates by a factor of four?" To which Scotty replies, can be generated.

"Certainly, Sir. How else can I keep my reputation as a

PMI defines the following ranges for estimates:
miracle worker?"
• Rough Order of Magnitude (ROM). ROM estimates are
In Star Trek: The Next Generation, Scotty is horrified to
made at the initiation of the project and can be +/- 50
learn that Geordie has given accurate estimates to the
percent from the actual or final cost.
captain. "How are ye going to get a reputation as a miracle
• Budget Estimate. Budget estimates are used in project
worker?" he asks the somewhat confused Geordie.
planning and can be within a range from -10 to +25
—From http://c2.com/cgi/wiki?ScottyFactor. percent from the actual or final cost.
• Definitive Estimate. Definitive estimates are generated
as the project progresses and the variability of the
While good for science fiction, Scotty factors are extremely poor
for project management. Any and all padding should be estimate is reduced (see Figure 7.1). Definitive estimates
discouraged by project managers and the project team. are within a range from -5 to +10 percent from the actual
or final cost.

105
Figure 7.1 Estimation Variability over Time Top Down (Macro) Estimation Techniques
Top-down, or macro, estimation methods allow for a quick
estimate of project costs based on historical information.

Analogous Estimating
Analogous estimating uses information from a previous project to
estimate the cost of completing a similar project in the future.
This provides a quick estimate, but should be used with caution.
Analogous estimating only works when comparing projects that
are similar in scope and will be completed in similar conditions.

For example, a small IT business developed a website for a local

restaurant for which they charged $4000. Another restaurant
approaches the IT firm and asks for a rough cost estimate for a
Estimates contain a high degree of variability at the inception of a similar site. The IT firm can tell the second restaurant that such
project, and that variability decreases as the project is defined and work will cost approximately $4000. Of course, the caveat is that
moves toward completion.
this second website will have a similar number of pages,
functions, and graffics as the first site.

The advantage of analogous estimating is that it allows for a very

quick estimate to be provided for a customer. If in the example
above, the second restaurant had only budgeted $200 for a
website, they would have quickly determined that they have not
budgeted enough, and the IT firm would be able to quickly
determine that this is not a serious customer. However, if the
second restaurant is okay with this approximate price, the IT firm

106
can work with the restauranteur to develop a detailed cost a complete plan and produce a more accurate project budget,
proposal. using a bottom-up estimation method.

Analogous estimating, is not accurate if:

• The projects differ in scope.

• There is a difference in the conditions under which the
work will be performed.
• There is a difference in the cost of resources (materials,
labor).

Table 7.1 Hospital construction costs

Parametric Estimating
Cost Estimate (Union Labor) Cost per Square Foot
Parametric estimates, also called the ratio method, uses historical
information or industry benchmarks as the basis for making an Labor and Materials $234.09

estimate. Parametric estimates are made by multiplying the size Contractor Fees (GC, Overhead, Profit) $58.52
of a project by an established cost per unit. Architectural Fees $26.34

For example, industry data is available for the per square foot Total Building Cost (per Square foot) $318.95

construction cost for many types of buildings. An architect can

use this information to make a parametric estimate by multiplying Cost Estimate (Open Shop) Cost per Square Foot
the cost per square foot by the size of any new building being Labor and Materials $217.51
considered. If an organization wants to build a new hospital using
Contractor Fees (GC, Overhead, Profit) $54.38
union labor, a rough estimate of the construction cost can be
Architectural Fees $24.47
calculated using the information in Table 7.1: 20,000 ft² clinic X
$318.95/ft² = $6,379,000. The organization can then use this Total Building Cost (per Square foot) $296.36
estimate as an approximate cost and start securing the money for
Data from Reed Construction (http://www.cmdgroup.com/) 2014.
the project. Once the funding is secured, an architect can develop
107
Learning Curves
Table 7.2 Learning curve calculation
Projects that require an activity to be repeated several times
Number of Time to install
throughout the project will benefit from a so-called learning curve. screens installed projector screen
Learning Rate
Learning curves, also known as improvement curves or
1 500
experience curves, are important when labor is one of our main
2 440 88.0%
resources.
3 420
Consider a large construction project for a new highway. The first
4 400 90.9%
hundred feet of highway may be fairly slow to complete. But as
5 390
workers become more experienced, and figure out better ways to
organize their work, the time required to construct the next one 6 380

hundred feet of new highway will be less. 7 370

8 360 90.0%
Learning curves were first observed in aircraft production and are
9 355
also used heavily in operations management. Each time
production doubles, a learning rate can be calculated. See Table 10 350

7.2 for the calculation of a learning curve. When output doubles, 11 345
from the first screen installed to the second, a learning rate is 12 344
calculated. Another learning rate is calculated when the output 13 342
doubles from the second screen installed to the fourth, and so on.
14 340
The average learning curve can then be calculated. Later, if this
15 339
company is contracted to install projector screens as part of a
16 338 93.9%
project, they can use this learning curve in their labor estimates.
Average 90.7%
There is a limit to the improvement of a learning curve. Eventually,
the learning curve will “bottom out” and no more improvement
Each time production is doubled, the learning rate for that doubling is
gains can be achieved. calculated: (screen 2 time/screen1 time), (screen 4 time/screen 2 time),
(screen 8 time/screen 4 time), and (screen 16 time/screen 8 time).

108
However, there are several things that can be done to extend and • Re-engineer the deliverables so they are easier to
improve the slope of a learning curve: produce.
Learning curves usually hold if the work is continuous. If there is a
• Incentivize workers to improve the processes they are
break in the work, gains in productivity when work resumes will
using to complete their tasks. These incentives are “built
not be as great as if the work had continued uninterrupted. For
in” for companies that are employee owned, where
more information on learning curves, consult Learning Curve
employees share in the reward if profits increase.
Analysis at http://pmf.video/link5 .
• Make investments in new technology and equipment.
• Invest in training and education for new workers, so they
are not “learning on the job."
• Give workers the flexibility to make changes to how
materials are sourced, delivered, and organized.

Figure 7.2 Learning

525

470
Time to install

415

360

305

250
2 4 8 16
Doubling

Data from Table 7.1 shown on a graph. Notice that the longer
production occurs, the less improvement from one doubling to the next.

109
Function Point Analysis In the example in Table 7.3, if one assumes that one function
Function point analysis is used to estimate time and labor costs point is an equivalent of eight hours of work in the C++ computer
in very large software projects. Function point analysis is very programming language, then the project will take 640 hours to
similar to parametric estimating. complete (80 function points X 8 Hours = 640 Hours).

A function point is a measure of the functionality that is

programmed into an information system and provide a
Top-Down Summary
measurement of a software project’s size. Function points can be
Watch Video 7.2 for a summary of the top-down estimation
operations such as making a query to a database, designing an
techniques that were just covered.
interface to collect information, or processing information. In a
function point analysis, the number of each type of operation is
collected and the complexity those operations is assessed (See Video 7.2 Summary of top down estimation
Table 7.3). The number of function points in each category is
multiplied by the complexity of those operations, and summed to
arrive at a total number of function points.

Table 7.3 Function Points for a Software Project.

Category Number Complexity Sub-Total

External Inputs 3 3 9

External Outputs 4 7 28

External Queries 2 4 8

Internal Logic Files 5 7 35

TOTAL FUNCTION POINTS 80

You can also view this video at: http://pmf.video/video36

110
Bottom Up (Micro) Estimation Techniques Single point estimate
Single point estimation is an estimate obtained from just one
Bottom up, or micro, estimation techniques are used when the
estimator. This can work well with experienced estimators and
project is approved or is very likely to be approved. Bottom up
work packages that are straight forward. Single point estimates
estimation techniques generate estimates for individual work
are quick to generate and summarize in a project plan. The risk
packages or sub-deliverables, which are then summarized to
with single point estimates is that the estimator will overlook
reflect total costs. Bottom up estimates are more accurate,
some aspect of the work and inadvertently provide an inaccurate
detailed and take more time to generate. Instead of relying on
estimate.
historical information, bottom-up estimates rely on people with
experience who can provide time and cost estimates for a
particular work package or sub-deliverable.
Figure 7.3 Single point estimate
These basic guidelines should be followed when generating
bottom up estimates:

• Have people familiar with the work make the estimate.

• If possible use several people to make estimates.
• Estimates should be based on normal conditions and a
normal level of resources.
• Estimates should not make allowances for contingencies.
The project manager or team will add buffer times and
contingency funds to the project after estimates are
collected and analyzed.

A single point estimate relies on one expert to provide an

estimate.

111
Three-point estimate completion of this activity). This will be designated in
Instead of asking an estimator for just one estimate, a three- calculations as b.
points estimate asks the estimator to provide three time estimates
These three estimates can be used as inputs to calculate an
for each activity:
estimated time for the activity or work package to be completed,
• An optimistic time estimate (if all goes well, what is the either through a simple average or through a weighted average
shortest time period one could realistically expect for the know as Te.
completion of this activity?). This will be designated in
Simple Average
calculations as a.
The estimate for the optimistic, most likely and pessimistic time
• The most likely time estimate (if all goes normally, what is the
periods can be used to calculate a simple average.
average time one would expect it would take for an activity to
be completed?). This will be designated in calculations as m. a+ m+ b
AveTime =
• A pessimistic time time estimate (if work goes poorly, what is 3
the longest time period one could realistically expect for the
Figure 7.5 Simple Average (Triangular Distribution)

Figure 7.4 Three point estimate

A simple average of these values will provide us with an average time for
Estimators provide us with optimistic (a), most likely (m), and pessimistic completion of 36 days, but this calculation doesn’t properly weight the
(b) estimates for activities. most likely estimate.

112
This simple average gives equal weight to all three time estimates Three point estimates can be further analyzed to assess the
(See Figure 7.4). However, for increased accuracy the most likely variability (risk) in a project’s estimates. The probably of
estimate (m) should receive more weight in these calculations completing the project in the estimated time (Te) can be
since it is closer to the likely completion date. calculated (see the next section on PERT Analysis).

Te Multiple Estimators: Simple Average

Instead of relying on one estimator, the project manager can
Te is a weighted average that weights the most likely estimate
solicit estimates from multiple estimators and then average those
more heavily. The weighted average activity time is computed by
values to arrive at an estimate (See Figure 7.7).
the formula below. This can be adjusted by the project manager
for different circumstances, but this is the generally accepted
formula.

a + 4m + b
Te =
6

Figure 7.6 Te Calculation of expected activity duration. Figure 7.7 Multiple Estimators Simple Average

This formula for calculating activity duration properly weights the most
likely estimate.

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Multiple Estimators: Te Average by the RAND Corporation and involves collecting the estimates
A project manager can also obtain three point estimates from from a number of estimators, along with the reasoning behind
multiple estimators and calculate a weighted average using those their estimates. This information is then circulated anonymously
values as well (see Table 7.4). to all of the estimators. The expert estimators can see how their
colleagues came up with their estimations and determine if there
Multiple Estimators: Delphi technique were any assumptions or information that they had not
Alternatively, a project manager can solicit estimates from considered in their estimations. Estimates are then revised and
multiple estimators and then try to get those estimators to come resubmitted. This process can be done for several rounds until
to a consensus using the Delphi technique. the group has arrived at a consensus or has as least narrowed
the range of estimates.
The Delphi technique is a method used to drive a group of
experts to reach a consensus or at least come to a closer
agreement. This method was originally designed in the late 60s

Table 7.4 Calculating Te from three estimators

Estimator 1 Estimator 2 Estimator 3 AVERAGE

Act (a) (m) (b) (a) (m) (b) (a) (m) (b) (a) (m) (b) Te
A 10 25 32 20 25 58 30 40 32 20.00 30.00 40.67 30.11

B 50 75 100 30 50 87 5 10 22 28.33 45.00 69.67 46.33

C 38 50 72 45 62 80 30 35 40 37.67 49.00 64.00 49.61

D 45 55 90 40 50 105 20 35 50 35.00 46.67 81.67 50.56

E 39 49 69 41 51 71 40 50 70 40.00 50.00 70.00 51.67

F 4 5 10 10 15 30 16 18 24 10.00 12.67 21.33 13.67

G 10 30 60 30 50 80 35 40 90 25.00 40.00 76.67 43.61

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Bottom-Up Summary
Watch Video 7.3 for a summary of the bottom-up estimation
techniques that were just covered.

Video 7.3 Summary of Bottom Up Estimation

You can also view this video at: http://pmf.video/video37

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Section 2

PERT Analysis

Program Evaluation and Review Technique (PERT) was one of the first systems for
diagramming and analyzing project networks. Many of the techniques covered in
this and other project management textbooks originated with PERT. Over the
years, the PERT concepts have been augmented and extended. As a result, many
project managers don’t directly mention PERT, but use a variation of the PERT
system as it was developed in the 1950s.

One PERT technique that is particularly useful is the one for analyzing the
variability in project time estimates. Estimate variability represents a substantial
source of risk for any project. A PERT analysis can help project managers make
better assumptions about the likely completion time for tasks and for the project. A
PERT analysis gives the project manager the information needed to address
estimate variability by adding time buffers and allocating contingency funds.

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Three Point Estimates PERT uses a weighted average to reflect the fact that the most
A PERT analysis starts with a three point time estimate. For each likely estimate (m) should be weighted more heavily than the
activity, estimators provide: others. For PERT, this weighted average is called Te, and is
computed by the formula below. This can be adjusted by the
• An optimistic time estimate (if all goes well, what is the
project manager for different circumstances, but this is the
shortest time period one could realistically expect for the
generally accepted formula.
completion of this activity?). This will be designated in
calculations as a. a + 4m + b
Te =
6
• The most likely time estimate (if all goes normally, what is the
average time one would expect it would take for an activity to
be completed?). This will be designated in calculations as m.

• A pessimistic time time estimate (if work goes poorly, what is

the longest time period one could realistically expect for the
completion of this activity). This will be designated in Figure 7.9 PERT calculation of expected activity duration.
calculations as b.

Figure 7.8 PERT analysis Inputs

Estimators provide us with optimistic (a) most likely (m) and pessimistic This formula for calculating activity duration properly weights the most
(b) estimates for activities. likely estimate.

117
Project management studies have found that Te values follow a For calculations involving PERT, the calculation of the variance for
beta distribution of probable completion dates. As a result, when project activities is as follows:
given the values for a, m , and b for each task on the critical path,

( 6 )
2
the project manager can calculate the probability of the project a−b
σ2 =
being completed within a given time period.

Standard Deviation and Variances Once the variance is calculated, the probability that an activity will
For calculations involving PERT, the calculation for standard
complete within a given time period can be calculated. The
deviation for project activities is as follows:
standard deviations and variances for tasks on a given network
a−b path can also be summed and the probabilities for that entire
σTe = path completing within a certain time period can be calculated.
6
More advanced simulations can use these variances to calculate
probabilities of all network paths in order to produce a robust
(although time consuming) model of a project’s probable
Figure 7.10 Beta Distribution of Activity Completion. completion date, which paths/tasks present the most risk, etc.

The next section walks the reader through a simple PERT analysis
to analyze the variability in a project and calculate the probability
of a project getting done within the time defined by its critical
path.

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PERT Analysis Example Table 7.5 Te, Deviation, and Variance for Project Omega
Table 7.5 presents the data for Project Omega. We have been Time estimates!
Expected Stand
given the activity, predecessor information, and three-point
Activity Pred. (a) (m) (b) time (Te) Dev Var
estimates for activity durations from which we have calculated Te,
A - 20 30 58 33 6.33 40.11
standard deviation and variance. Note: Expected time is rounded
to the nearest whole number. B - 30 50 87 53 9.50 90.25

C A 38 50 72 52 5.67 32.11
The next step is to look at which tasks are on the critical path. We
D A 40 50 100 57 10.00 100.00
can calculate this by hand or enter it into project management
E B,C 40 50 70 52 5.00 25.00
software. Either way that we do this, we find that the critical path
is: Activity A ▷ Activity C ▷ Activity E ▷ Activity G. F D 9 12 24 14 2.50 6.25

G E,F 30 50 80 52 8.33 69.44

Since all of the relationships are finish to start, it is easy to
calculate the project duration by adding up the duration of all the
Figure 7.11 Network diagram for Project Omega.
critical path activities (See Figure 7.11 and Table 7.6). So the
question a project manager would want to ask now is: Given the
variances of the critical path activities, what is the probability
that Project Omega will finish in 189 days?

Durations are based on Te. Critical Path is highlighted in red.

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Now we will go back to our list of project activities, but this time Probability of Completion
we want to just look at the critical path activities (see Table 7.6).
In Table 7.7, we have entered the proposed completion date of
To determine the probability of completion, a formula is used that 189 days (the same as our predicted duration) into a spreadsheet
compares proposed schedule completion dates (Ts) with the time that will compute the probability of completion for any proposed
predicted by our critical path (Te). This determines a statistical Z time period. Starting with our critical path time (189 days), Project
value and the probability of meeting the proposed completion Omega has only a fifty percent chance of completing in 189 days
date. The formula for this calculation is: or less (what we would expect given the distribution curve in
Figure 7.10). We can use this same spreadsheet to look at various
Ts − Te completion dates, and assess the probability of completion give
Z=
∑ σTe2 those dates (see Table 7.7). Once we arrive at a probability that

Table 7.7 Probability of meeting critical path date.

This Z value can then be found in a probability table or calculated
using a spreadsheet program like Excel. Time estimates! Expected Stand
Activity Pred. (a) (m) (b) time (Te) Dev Var
A - 20 30 58 33 6.33 40.11
Table 7.6 Deviation and Variance of Critical Path Activities
C A 38 50 72 52 5.67 32.11
Time estimates
! Expected E B,C 40 50 70 52 5.00 25.00
Stand
Activity Pred. (a) (m) (b) time (Te) Dev Var
G E,F 30 50 80 52 8.33 69.44
A - 20 30 58 33 6.33 40.11
SUM 189 25.33 166.67
C A 38 50 72 52 5.67 32.11
Proposed Completion Time 189
E B,C 40 50 70 52 5.00 25.00
Probability of Completion (%) 50.00%
G E,F 30 50 80 52 8.33 69.44
SUM 189 25.33 166.67 There is only a 50 percent chance that our project will complete by 189
days.

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we feel comfortable with, we can then look to add buffer times PERT Summary
and contingency funds to deal with this scheduling risk.
1. A PERT Analysis assesses the risk associated with time
Please note that this is a very basic explanation of PERT, with a estimates
simple example. However, this should provide a good foundation 2. Time buffers and contingency funds can be added to
for understanding the wide variety of analysis that can be the project to mitigate this risk.
conducted using time estimates and how project managers 3. A PERT analysis starts with three point estimates, which
assess the risk that time estimates present in their projects. provide an optimistic (a), most likely (m), and pessimistic
(b) estimate of activity duration.
Table 7.8 Probability of meeting proposed completion 4. The estimated time (Ts) is normally calculated as:
dates.
a + 4m + b
Te =
Time estimates! Expected Stand 6
Activity Pred. (a) (m) (b) time (Te) Dev Var 5. To complete a simple PERT analysis:
A - 20 30 58 33 6.33 40.11 1. Calculate Ts duration values for each task.
C A 38 50 72 52 5.67 32.11 2. Determine critical path.

E B,C 40 50 70 52 5.00 25.00 3. Determine variances for critical path activities.

4. Estimate probabilities that the project will complete
G E,F 30 50 80 52 8.33 69.44
within a given time period.
SUM 189 25.33 166.67

Proposed Completion Time 189

Probability of Completion (%) 50.00%

Proposed Completion Time 200

Probability of Completion (%) 80.29%

Proposed Completion Time 211

Probability of Completion (%) 95.58%

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Chapter 8

Project
Networks
Chapter 8 Overview relationships to start-to-start, finish-to-finish, and start-to-finish
The network diagram provides a visualization of how a project’s relationships changes network calculations.
activities fit together. This can be used to identify the risks and The thir
opportunities that are inherent in a project schedule. The two
sections in this chapter explain how to create networks diagrams
that properly sequence and order project activities according to Learning Objectives:
dependencies and resource constraints. The creation of a • Understand how Activity on Arrow and Activity on Node
network diagram determines the critical path. This process also diagrams represent a project network.
identifies those tasks that can be delayed without delaying the • Understand the concept of the critical path and how to
entire project. Network diagrams are also used to analyze the determine the critical path of a network.
project schedule to find opportunities to compress the schedule
• Understand how to complete a forward and backward
and smooth resource usage (See Chapter 9).
pass through a network.
The first section in this chapter introduces methods for creating
• Explain what ES, EF, LS, LF, and Slack mean.
network diagrams, explains how to create activity on node (AON)
• Understand the four types of relationships between
diagrams using finish-to-start relationships, and explains how to
activities: Finish to Start, Start to Start, Finish to Finish,
calculate these values for each task:
Start to Finish.
• Early Start
• Be able to complete a forward and backward pass
• Late Start
through a network using all four types of relationships.
• Critical Path
• Understand the difference between free and total slack.
• Early Finish
• Define positive and negative slack.
• Late Finish
• Slack
The second section in this chapters shows how changing the
relationships between tasks from simple finish-to-start

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Section 1

Create the Project Network Diagram

The network diagram visualizes how a project’s activities are sequenced and is
useful in uncovering risks and opportunities that are inherent in a project’s
schedule. The activities in the network diagram are derived from the work
packages of the Work Breakdown Structure (WBS). The time durations of tasks
have been calculated by one or more of the bottom-up time estimation techniques
presented in previous chapters. All of the WBS activities must be accounted for in
the network either by summarizing the activities for a deliverable or by individual
activities.

Once a list of activities is constructed, and vetted by subject-matter experts, and

the mandatory and discretionary dependencies worked out, these activities can be
sequenced in a network diagram. There are two main methods for creating
network diagrams: the Arrow Diagramming Method and the Precedence Diagram
Method.

124
Arrow Diagramming Method (also known as Figure 8.1 Arrow Diagramming Method
Activity on Arrow)
The Arrow Diagramming Method (ADM) is a technique that uses
arrows to represent activities (see the figure to the right). “Nodes”
or circles represent an activity’s start and stop time, and also
indicate the relationship between activities. As a result, this
method is also known as the activity-on-arrow (AOA) method.

In the Arrow Diagramming Method, the length of the arrow

proportionally represents the duration of the activity. A major
drawback to ADM is that it only shows finish-to-start relationships
(a task must complete before the next task can begin, which is
often not the case in complex projects). In ADM, a so-called
dummy task is sometimes used to indicate precedence (the order
in which activities are completed) when it can’t easily be
expressed using other methods. These dummy tasks have a
completion time of 0.

With this method, the node on which an activity begins is called a

I-node, and the node on which an activity ends is called an J-
node.

The use of ADM continues to decline, largely due to the

limitations described above and because modern project
management informations systems (MSproject, ProjectLibre,
Fasttrack, etc.) normally create network diagrams using the
precedence diagram method.

125
Precedence Diagram Method (also known Network Diagrams and the Critical Path
as Activity on Node) Watch the video on project networks to learn more about how
The precedence diagram method uses boxes (called nodes), to network diagrams are created and how the critical path of a
represent activities, and arrows to show dependencies (see the project is determined.
figure below). Once the network is diagrammed, a number of
important pieces of information can be calculated:

• Critical path
• Slack time for non-critical activities.
• Early and late start times
• Early and late finish times Video 8.1 Project Networks

Figure 8.2 Precedence Diagram Method

In this example, each activity is represented by a letter, and the numbers

represent various properties of the activity. You can also view this video at: http://pmf.video/video5

126
Forward and Backward Pass Video 8.2 The forward and backward pass
Once a network diagram has been made and estimated activity
durations have been assigned to each activity, the following
attributes of each activity can be calculated:

• Early start time (ES)

• Late start time (LS)
• Early finish time (EF)
• Late finish time (LF)
• Slack or float (SL or FL)

These activity attributes are calculated using two processes: the

forward pass and the backward pass. Watch Video 8.2 to learn
how to make these calculations.

The forward and backward pass are also used to fully calculate
the critical path(s) in a project. You can also view this video at: http://pmf.video/video6

Note: there can be instances where the start of an activity is on

the critical path, but the finish is not on the critical path. This is
unusual, but can happen depending on the types of relationships
that are involved (see section 2 of this chapter: Advanced
Network Diagrams ).

127
Section 2

Advanced Network Diagrams

Network Diagram can be extremely complex. This section will explore some of the
other relationships tasks can have to each other and how that can alter the
calculations for the forward and backward pass.

128
Task Relationships and Lags Video 8.3 Task Relationships and Lags
In the previous section, just one type of dependency was used
between tasks in the network: Finish to Start. However, there are
four different types of dependency that can be used to link tasks.

• Finish to Start
• Start to Start
• Finish to Finish
• Start to Finish

In addition, there can be lags (delays) introduced in these

dependencies. For example, if a task involves ordering materials
and then using those materials to make something else, the time
it takes to ship the product would need to be accounted for in the
schedule. Another common example is when there are delays due You can also view this video at: http://pmf.video/video7

to the need for paint to dry, concrete to cure, etc.

Lags don’t use up resources and don’t add any direct costs to a
project. However, they do take time, and therefore must be built
into our network. Watch Video 8.3 to learn how these four
types of relationships are used and how project managers
account for lag times in a project network.

129
Activity Float or Slack Figure 8.3 Total vs. Free Slack
By definition, slack (or float) “is the amount of time that a task in a
project network can be delayed without causing a delay to the
project” (from Wikipedia).

Consider the diagram in Figure 8.3. Notice that the critical path
(A-B-D-F) has no slack and a total time of 24 days. The other path
(A-C-E-F) has a total duration of 20 days. Task C and Task E each
have 4 days of slack.

Free slack is the amount of time that a task in a project network

can be delayed without causing a delay to subsequent tasks. In
Figure 8.3, Task C has 0 days of free slack (since any delay in its
finish will delay the start of Task E), and Task E has 4 days of free
slack (since Task F will be waiting for D to finish for 4 days before
be delayed without causing a delay to the project completion
F can start). In the example in Figure 8.3, both Task C and Task E
date. The C-E path in this network can be delayed by a total of 4
have 4 days of free slack. Does that mean that Task C can be
days without affecting the project end time.
delayed 4 days AND Task E can be delayed 4 days without
delaying the project? No. If Task C is delayed 4 days and the This may all seem obvious in simple network diagrams, but it is
forward and backward pass is re-calculated, Task E will now have an important distinction as our network diagrams get more and
no slack and every task in the network will now be on the critical more complex.
path.

While the forward and backward pass calculation show that C

and E have 4 days of slack, C and Task E share that four days of
slack. Between them they have a total of 4 days of slack. Total
slack is the amount of time that a path in a project network can

130
Positive and Negative Slack Forward and Backward Pass Revisited
You might also hear the terms Positive Slack and Negative Slack. As you can imagine, a network diagram with several different
These terms are generally used when referring to the overall types of relationships and lags can get very tricky to understand.
duration of a project, as indicated by the network schedule, and It can be difficult to perform the forward and backward pass
comparing that to the desired completion date for the project. A correctly on such networks. One method that can help is to
project that is not on track to meet the desired completion date, consider the start and finish of an activity to be independently of
would have negative slack (meaning that the project team would each other. That is, the finish of a relationship can have
need to get tasks finished in less time than scheduled to meet the relationships with other tasks that “overrides” the relationship it
deadline; for information on how to do this, see the Chapter on has with the start of the task.
Schedule Compression).
Watch the Video 8.4 (Network 1 w Lags) to see how the forward
On the other hand, if a project is ahead of schedule, people might and backward pass are calculated for the network shown in
say that the project has positive slack. That is, all of the tasks can Figure 8.4.
experience some delay and the project will still meet our desired
completion date. If this happens, it it a sign that the project
manager should evaluate the resource allocations to see if some Video 8.4 Network 1 w Lags
of that positive slack can be used to reduce project costs.

Milestones
Milestone are used to mark a special goal or stage of our project.
They don’t take any time or consume any resources, but maybe
noted with a node on the project network.

For information on how to create and use milestones in MS

Project, watch this video Creating and Using MileStones in MS
Project: http://pmf.video/video34
You can also view this video at: http://pmf.video/video8

131
Figure 8.4 Complete the forward and backward pass on the network while watching Video 8.4

132
Chapter 9

Reducing
Project
Duration
Chapter 9 Overview Learning Objectives:
There are several reasons that a project manager might need to • Understand the options available to project managers
reduce the amount of time that a project takes. The first and who need to reduce project duration.
foremost reason is that the project needs to be done in less time • Understand how to fast-track a project.
than the current network schedule will allow. There might also be
• Describe the advantages and disadvantages of fast-
incentives for finishing the project early (or penalties for finishing
tracking.
late). A project manager whose project has experienced delays
• Understand the concept of laddering
can use the techniques described in this chapter to get the
project back on schedule. • Understand crashing and how to calculate the optimum
time point for a project.
The one and only section in this chapter provides an overview of
the ways to reduce project time and then describes in detail:
• Fast-tracking
• Laddering
• Crashing

134
Section 1

Schedule Compression

This section covers the common schedule compression techniques used by

project managers, when they should be used, and the trade-offs between different
methods.

135
Compressing the Schedule Fast-tracking is used:

There are several ways to reduce the amount of time a project • Before a project is started. Good project managers will
takes without outsourcing, reducing scope/quality, increasing explore all the possibilities for the project network
overtime, or generating rework. Three common techniques can schedule. However, they need to use their expert
be used to compress the network project schedule: Fast judgement to balance the benefits of fast tracking with
Tracking, Laddering, and Crashing. the risks (risks include increased cost and increased
length of the project).
Keep in mind that all project compression techniques involve
• When a project is falling behind and it needs to get back
trade-offs and usually increase the risk of something going wrong
on schedule..
with the project. The decision to reduce the project completion
time should be considered carefully. For a good discussion of the
trade-offs and pitfalls of schedule compression, see Crashing in
Project Management: A Comprehensive Guide by Donald Patti: Video 9.2 Fast Tracking
http://pmf.video/link3

Fast-Tracking
Fast-tracking is a way to compress a project schedule without
increasing direct costs. Watch Video 9.2 for a brief introduction to
the concept of fast tracking.

While the video shows the use of start-to-start relationship to

complete tasks in parallel, finish to finish relationships can also be
used. Either will cause activities to be performed in parallel.

You can also view this video at: http://pmf.video/video9

136
How much can a project be fast tracked? Other ways that fast tracking can increase risk:
Each industry and type of task will have its own guidelines, but
• When there is less time for inspection and customer
usually activities can be fast-tracked by up to 33%. In other
approval defects may not be detected until later in the
words, the second activity can begin after the first activity is 66%
project (when they are more expensive to fix).
complete. This is a good balance between the benefits of a faster
schedule and the increased risk of rework and problems arising • Project Manager has more to keep track of and the

from a more complex project network. potential for an error to occur is increased.
• It is more difficult to make changes to the project. For
How does fast tracking increase risk? example, if a project fast-tracks construction on a new
First of all, a project that is fast tracked is more complex. There building before the design is finalized, it will be very
are more people working on the project at the same time, which difficult (and expensive) to modify the design in major
means that the project manager and work supervisors have more ways.
to monitor and manage. There is also the possibility that work
done simultaneously will result in re-work.

Here is a great example of this concept from Joel Kohler from his
paper “Fast Tracking or Back Tracking?”

Let’s look at a practical example: a home improvement

project planned for completion in 10 days. If we fast track
the project and simultaneously paint the walls while laying What is the PMI Definition of Fast Tracking?
the carpet, it looks like we could finish in five days.
Fast tracking: A schedule compression technique in which
So what’s the risk? By simultaneously painting and laying activities or phases normally done in sequence are
carpet, there’s a risk of getting paint on the carpet. Back performed in parallel for at least a portion of their duration.
tracking to clean paint from the carpet lengthens the
-Section 6.6.2.7 , page 181 from the Fifth Edition of the
schedule again. This mess and delay would not have
PMBOK Guide.
occurred if the painting finished before carpet laying began.

137
How much does fast tracking cost?
In theory, there should be no increase in direct project costs. But
if the risks mentioned above do occur, then the costs could be
great. All stakeholders need to be made aware if the project
manager is using fast tracking, there are risks associated with this
technique.

The reader should not infer from this discussion that fast tracking
is a poor idea; they should be aware that it is not a panacea or
magic bullet for compressing a schedule. Every modification to a
project has trade-offs and project managers need to be honest
with themselves and the stakeholders about those trade-offs. Video 9.3 Laddering

Laddering
Another approach related to fast tracking is the concept of
laddering. This is primarily used in situations where a lot of the
project activities repeat, as in road construction, or building a
series of houses in a development, etc. As a result, many project
managers will not use or encounter this concept. Watch the video
on laddering for a quick introduction to this topic.

For more information on laddering, start with: “An Investigation on

the Impact of Laddering Technique in Project plan: a Case of
Road Construction” by Seyed Ali Hosseini, Taravatsadat
Nehzati, Mohammad Amin Okhowat, and Norzima Zulkifli: http://
pmf.video/link4
You can also view this video at: http://pmf.video/video10

138
Crashing a Project
By adding resources to a project, it maybe possible to reduce the
amount of time that our project takes. This might be done to deal
with negative float, but it might also be done to address cost
control or increase profits. Watch Video 9.4 for a brief discussion
and an introductory project crashing exercise.

Crashing Summary
• Crashing always involves adding resources, so the direct
costs of the project will increase when a project is
crashed.
• Crashing may lead to overall savings for the project if
Video 9.4 Crashing a Project
there are incentives for getting the project done on time
(or avoiding penalties). Savings can also be realized by a
reduction in the total indirect costs (which accumulate
with time).
• In order to crash a project, the project managers
evaluated which critical path task(s) can be crashed for
the least amount of money. Depending on the complexity
of the network, multiple tasks may have to be crashed in
order to reduce the project time.
• Crashing can be used to get a project “back on track” or
can be used when planning to calculate the optimum
schedule for the project.
• Resource availability and staffing will have to be
accounted for in a crashed schedule.
You can also view this video at: http://pmf.video/video11

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Additional Methods to Reduce Project Time overworked for long periods, there is a risk of decreasing
morale and reduced overall productivity.
There are several additional ways that to analyze a project
• Have the owner take more responsibility. If the project
schedule in order to reduce the time required to complete a
is being completed for an outside organization, it might
project. Options include:
be possible to shift some of the work to them, freeing up
• Outsource various tasks. Is it better to complete the internal resources to “double up” on other tasks.
work using internal resources or to get experts from • Do it Twice: Fast and Then Correctly. If something must
outside the organization? It maybe possible to hire an be in place by a particular deadline (ribbon cutting with a
outside contractor who has more experience or who dignitary, etc.) it might be possible to complete the
specializes in this type of task. While outsourcing might minimum required to quickly reach a point where the
increase costs, and the project manager might lose some product or service is useful. Then later the task can be
direct supervision of the project/staff, it can often be a fully completed. This is probably the worst option as it
much faster approach. increases cost and time in the long run.
• Reduce scope. The amount of work required to
complete the project can be reduced by decreasing
scope. This might save both time and costs (resources), Reducing Project Duration Summary
but it is likely to also reduce customer satisfaction with
• Fast-tracking involves changing task relationships so
the project.
more tasks can be completed in parallel.
• Reduce quality. This can save cost, resources, and time,
• Fast-tracking and laddering don’t increase project costs
but could also increase the risk of failure or re-work.
but can increase risk.
Reducing quality can also reduce customer satisfaction.
• Crashing always increases the direct costs, but a
• Increase overtime. By increasing the time that people
decrease in indirect costs or incentive funds can make
work, it might be possible to complete key tasks on the crashing profitable.
critical path early. This can increase costs for employees
who are paid overtime. And if the salaried employees are

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Chapter 10

Earned Value
Analysis
Chapter 10 Overview • Percent Complete Index-Budget (PCIB)
Earned Value Analysis (EVA) is one of the best tools for • Percent Complete Index-Cost (PCIC)
summarizing a large project’s progress and forecasting its final
• Estimate to Complete (ETC)
cost. Earned value analysis is not required for all projects, and is
• Estimate cost At Completion (EAC)
not appropriate for all projects, but it is an important tool that
project managers can draw on when needed. • Variance At Completion (VAC)

The first section in this chapter explains the basic inputs and
concepts of earned value. The following inputs are explained:
Learning Objectives:
• Planned Value (PV) • Understand the inputs required for an earned value
• Actual Costs (AC) analysis.
• Earned Value (EV) • Understand a time-phased budget.
• Budgeted At Completion (BAC) • Understand how to calculate and interpret the various
This section also explains various ways to estimate project earned value analysis metrics.
progress.
The second section concentrates on how to make make earned
value calculations using the inputs mentioned above, how to
interpret earn value results, how to forecast where a project is
headed, and what performance will be required in the future to
make sure the project is finished within budget.
The following earned value measures are covered:
• Cost Variance (CV)
• Schedule Variance (SV)
• Cost Performance Index (CPI)
• Schedule Performance Index (SPI)

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Section 1

Earned Value Inputs

Earned value analysis (EVA) is a monitoring and controlling process that compares
project progress to the project baseline (original plan). EVA measures the
performance of a project in terms of cost and schedule. It can tell the project team
if a project is:

• Behind Schedule
• Ahead of Schedule
• Under Budget
• Over Budget
EVA provides hard numbers for making these judgements and can be used to
forecast where a project will end up in terms of time and cost. As a result, EVA
helps the project manager clearly communicate project progress to all
stakeholders, and can focus the attention of the project team on any changes
needed for the project to be completed on time and on budget.

Most project management information systems (PMIS), can calculate earned value
metrics if a baseline is properly set and the earned value inputs are provided.

Project managers who do not conduct an earned value analysis run the risk of
misinterpreting or miscommunicating the meaning of the project information that is
collected during the execution phase.

143
For example, assume that the direct costs of a project are organization, and the impact of an earlier completion date
budgeted at $100,000, and the project is scheduled to take 12 should be evaluated.
months. If it is three months into the project and $25,000 has
Before attempting the calculations involved in an earned value
been spent, a naive project manager might assume that the
analysis of a project, it is important to understand the three basic
project is 25% done and is on track to finish within the project
inputs for EVA calculations. The three basic inputs are Planned
timeline and budget.
Value (PV), Actual Costs (AC), and Earned Value (EV).
In this example, the project is certainly 25% done as far as the
time allowed for the project, and 25% done with the budget, but Planned Value (PV)
what is not known is which activities have been worked on and if Planned Value—also known as Budgeted Cost of the Work
those activities are complete or still in progress. If only 10% of the Scheduled (BCWS)—reflects the amount of money that the
scheduled work has actually been completed, then the project project is expected to spend on project activities. For each
may be in trouble. Alternatively if 50% of the scheduled work has activity there is a total Planned Value (cost). More importantly, the
been completed, then the project may end up being done much amount that was going to be spent on each activity over time is
earlier and with much less expense than planned. Either situation also know.
requires action:

• If a project is going to be over-budget and/or take more time,

PV is ”the authorized budget planned for the work to
the project manager needs to figure out if what can be done
to correct the situation. Should they try to get more be accomplished for an activity or work breakdown
resources and time, or should they re-evaluate the project structure component, not including management
entirely (see section on Sunk Costs). reserve. This budget is allocated by phase over the life
of the project, but at a given moment, planned value
• If a project is going to be done in significantly less time and/
defines the physical work that should have been
or with significantly less cost, then the project manager
accomplished” by this time.
should see if some of the resources allocated for the project
can be released to other projects and priorities in the —PMI PMBOK

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Consider the information presented on Project Tweet in Table Budgeted At Completion (BAC)
10.1. The amount that the project team thinks an activity will cost
The sum of the planned value for all of the activities is also known
is called the planned value for that activity.
as Budgeted At Completion (BAC) and is what should be
budgeted for the cost of the project activities. This is referred to
as the direct costs of the project; contingencies, indirect costs,
management reserves, etc., are not included in this total. In the
example in Table 10.1, the BAC is $4,134.00.

Table 10.1 Project Tweet Time-Phased Budget

Activity
ID Task PV become much more valuable as part of a time-phased budget:
Budget (PV)
a table that shows PV values for each task during a given week or
1 Design prototype board $468
day. Table 10.2 show the time-phased budget for Project Tweet.
2 Order sensors $156
For example, by looking at Table 10.2 it is possible to know the
3 BreadBoard sensors and connections $546
following about what the status of Project Tweet should be the
4 Outline programming requirements $390
end of week one.
5 Draft preliminary program $1,092
6 Load program and test $156
• While the total PV of Activity 1 (Design prototype board) is
$468, only $78 was planned to be spent on this activity
7 Set up "real" twitter account $39
by the end of week one. Likewise, $78 is planned to be
8 Develop final test criteria $78
spent on Outline programming requirements, and the Test
9 Test $780 activities.
10 Put into case $39 • While the total PV for Activity 10 (Put into Case) is $39, no
11 Complete perm install $156 money was planned to be used on this activity by the end
12 Write up details and post $234 of week one. In other words, no work was to be done on
Total $4,134 this activity by the end of week one.

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Table 10.2 Time-phased budget for Project Tweet

Activity
ID Task Week 1 Week 2 Week 3 Week 4 Week 5 Week 6
Budget (PV)

1 Design prototype board $468 $78 $390

2 Order Sensors $156 $156

3 BreadBoard Sensors and connections $546 $234 $312

4 Outline programming requirements $390 $78 $312

5 Draft Preliminary Program $1,092 $78 $390 $390 $234

6 Load program and test $156 $156

7 Setup "Real" Twitter Account $39 $39

8 Develop Final Test Criteria $78 $78

9 Test $780 $78 $390 $312

10 Put into Case $39 $39

11 Complete Perm Install $156 $78 $78

12 Write up Details and Post $234 $234

Week Total $234 $1,326 $1,014 $702 $546 $312

Cumulative $234 $1,560 $2,574 $3,276 $3,822 $4,134

This view shows the amount of money that will be spent on project activities each week. This is important for managing cash flow, but,
more importantly, it provides a time-phased budget that can be compared to the progress of the project as it is underway.

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 • While the total PV for all Activities (BAC) Project Tweet is Earned Value (EV)
$4,134, only $234 is planned to be spend on project work
Earned Value—also know as budgeted cost of work
by the end of week one.
performed(BCWP)—is simply the percentage completed on a task
The time-phased budget shows how much is planned to be spent multiplied by the total planned value for that task.
on the project for each time period. This can then be used as a
EV = PV for the Activity × Percentage Complete
baseline by which work progress can be measured.

One thing to watch out for is that the calculation of EV is not time
Actual Costs (AC)
dependent; it uses the total PV for an activity, not the value for PV
The Actual Costs—also know as Actual Cost of the Work at a certain point in time as found on a time-phased budget. For
Performed (ACWP)—is the easiest of the inputs to understand. example, if Activity 1 is 100% complete at the end of week one,
AC is simply the actual cost of the activity at a given time. then EV = $468 X 100%, or EV = $468

Actual costs don’t reflect what was planned to be spent, but On the other hand, if no progress has been made on this activity
rather what was spent. This information is obtained from the (0% complete), then $468 X 0%, or EV = $0.00
accounting department and the data is based on invoices,
paychecks and receipts related to the activity. While the project
manager may have been planning to spend $78 on Activity 1 by
the end of week one, the accounting department may inform him
or her that the actual cost (AC) at the end of week one for Activity
1 is $400 !!

However, the project manager still doesn’t know if spending $400

on Activity 1 by the end of week one is good or bad, since he or
she doesn’t yet know how much work has been performed on
Activity 1. The next basic input, earned value, will tell the project
manager what percentage of the activity is completed and they
will then know how well the project is progressing.
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Earning Rules 50/50 Rule

When calculating EV, project managers may have to make some Percent complete is calculated at fifty percent when activity
trade-offs. They have to consider how much time and resources starts. Remaining 50% is added when activity is complete.
to devote to measuring the progress on an activity. In some
cases, a project manager will use a professional estimator
determine the percentage completed on activities. This is usually
done for those activities that cost a lot of money or take a lot of
time (say 80-90 days or more).
25/75 Rule
For most activities, however, it doesn’t make sense to spend that
Percent complete calculated at twenty-five percent when activity
much effort estimating the percentage completed. As a result,
starts. Remaining 75% is calculated when activity is complete.
project managers have developed some guidelines, or rules, for
quickly assessing the percent complete for an activity. These
simple earning rules work well for small or simple projects
because generally each activity tends to be fairly short in
duration. Project Managers will use one of these rules to estimate
the percent complete for most of their activities or work 20/80 Rule
packages.
Percent complete calculated at twenty percent when activity
0/100 Rule starts. Remaining 80% is calculated when activity is complete.

No earned value is counted for an activity until it is 100%

complete.

Earning rules such as a 25/75 rule or 20/80 rule are gaining favor
because they assign more weight to finishing work than for

148
starting it, but still also motivate the project team to identify when
an element of work is started.

Earned Value Inputs Summary

These simple inputs can be very powerful tools when we
compare our project progress with our original project plans. In
the next section, we’ll use these inputs to determine how our
project is progressing and where it is headed.

Table 10.3 Earned Value Inputs Summary

Earned Value Basic Inputs

Term Description Calculation

Planned Value (Also known as BCWS – Budgeted Cost of PV = Planned value of the work that is scheduled in our
PV the Work Scheduled) current baseline.

BAC Budgeted cost at completion. BAC=TOTAL PV for Project

Actual Costs (Also know as ACWP – Actual cost of the work

AC performed)
AC= Actual Costs (Total of all invoices, labor, parts, etc).

Earned Value (Also know as BCWP – Budgeted cost of the EV= (Total Planned Value of Activity or Project) X (Percent
EV work performed) Complete).

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Section 2

Earned Value Analysis

Once the EV, AC and PV for a project’s activities have been calculated. additional
metrics can be calculated about the project’s progress. An earned value analysis
can provide information about variances in the project schedule and budget,
provide an indication of overall performance on the project through various
performance indices, and forecast final project costs.

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Cost Variance (CV) Video 10.1 Calculating and Understanding Cost Variance
CV is the first of two basic variances that can be calculated once
EV, PV and AC have been determined for an activity or project.
CV is simply the Earned Value minus the Actual Costs.

CV = EV − AC

If CV is negative, that means that the project work is costing more

than planned. If CV is positive, then the project work is costing
less than planned.

CV can be calculated for each activity, for segments of a project

(for example a deliverable or sub-deliverable) or for the entire
project. Watch Video 10.1 for an explanation of how to calculate
and interpret CV.
You can also view this video at: http://pmf.video/video12

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Schedule Variance (SV) Video 10.2 Calculating and understanding Schedule
Variance
SV is the second of two basic variances that can be calculated
once EV, PV and AC have been determined for an activity or
project. SV is simply the Earned Value minus the Planned Value.

SV = EV − PV
If SV is negative, that means that less work has been performed
than what was planned.. If SV is positive, then more work has
been done than planned.

Like CV, SV can be calculated for each activity, for segments of a

project (for example a deliverable or sub-deliverable) or for the
entire project. Watch Video 10.2 for an explanation of how to
calculate and interpret SV. You can also view this video at: http://pmf.video/video13

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Using Money to Measure Time Video 10.3 Why measuring time with money can be
problematic.
Earned Value Analysis can be a great way to measure the
efficiency of a project’s schedule while the project is being
executed. However, project managers need to be cautious when
considering schedule metrics (SV, and SPI which will be covered
shortly), as they are only a measure of how efficiently the project
is using money to complete the schedule, and are only effective
prior to a task’s completion.

Watch Video 10.3 for an explanation of the problems with using

money to measure time.

You can also view this video at: http://pmf.video/video14

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Cost Performance Index (CPI) Video 10.4 Cost Performance Index
While CV provides a dollar amount that reflects how much over or
under the project is at a particular point in time, The Cost
Performance Index (CPI) provides an indicator of the overall cost
performance to date and a good idea of how the project work is
trending with regard to cost performance. CPI is calculated as
follows:

EV
CPI =
AC

• A CPI that is < 1 means that the cost of completing the

work is higher than planned.
• A CPI that is = 1 means that the cost of completing the
work is right on plan. You can also view this video at: http://pmf.video/video15
• A CPI that is > 1 means that the cost of completing the
work is less than planned.

Watch Video 10.4 on “Cost Performance Index” for a basic

walkthrough of CPI calculations and the interpretation of the
results.

154
Schedule Performance Index (SPI) Video 10.5 Schedule Performance Index
While SV provided a dollar amount that reflected well the project
is doing at turning dollars into completed activities on schedule,
Schedule Performance Index (SPI) provides an indicator of the
overall schedule performance to date.

Remember that there are some limitations on using money to

measure time. Those limitations apply to SPI as well. To know
whether a project is really behind or ahead of schedule, a project
manager will also look at the planned start and finish dates,
milestones, etc.

SPI is calculated as follows:

EV
SPI =
PV
You can also view this video at: http://pmf.video/video16

• An SPI that is < 1 means that the project is behind

schedule.
• An SPI that is = 1 means that the project is on schedule.
• An SPI that is > 1 means that the project is ahead of
schedule.

Watch Video 10.5 on “Schedule Performance Index” for a basic

introduction to SPI calculations and the interpretation of the
results.

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Percent Complete (PBIC and PCIC) Percent Complete Index—Cost (PCIC)

When reviewing the CV, SV, CPI, and SPI, it is important to know PCIC percentage of work that is complete based on the actual
the percent of the project that is complete. If CPI is .75, but the costs, which uses a revised estimate of the project costs (EACre).
project is only 2% complete, it might not be cause for alarm. If This index is used if the project manager has had to revise the
CPI is .75 and the project is 50% completed, then it might be baseline due to changes in scope, or if rolling wave planning is
time for serious re-evaluation of the baseline, and the project used, or if there some other reason why the project manager
itself. doesn’t trust the project baseline costs.

There are two measures for calculating the percentage of the AC

project that is complete. PCIC =
EACre
Percent Complete Index—Budget (PCIB)
In this case, EACre is obtained from an estimator or some other
PCIB is percentage of work that is complete based on baseline
estimation process.
budget. This is the percent complete index that is used when the
project manager trusts their initial project baseline. The basic
earned value inputs are used to calculate PCIB:

EV
PCIB =
BAC

Please note that in this equation EV is the sum of EV for all

activities.

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Table 10.4 Earned Value Calculations Summary

Term Description Calculation Interpretations

Cost Variance (compares budgeted costs Negative number = over budget.

CV to the actual amount spent). Positive number = under budget.

Negative number = work scheduled to be complete at

Schedule Variance (Compares the work
this time is not done.
SV that should have been done at this time,
(Note: PV at this point in Positive number = work NOT yet scheduled to be
to the amount actually completed).
time, not total PV for activity.) complete at this time has been done

Cost Performance Index. Provides a A CPI that is < 1 means that the cost of completing the
measure of the efficiency of our project in work is higher than planned.
terms of budget. A CPI that is = 1 means that the cost of completing the
CPI work is right on plan.
A CPI that is > 1 means that the cost of completing the
work is less than planned.

Schedule Performance Index. Provides a A SPI that is < 1 means that the project is behind
measure of the efficiency of our project in schedule.
SPI terms of budget. A SPI that is = 1 means that the project is on schedule.
(Note: PV at this point in SPI that is > 1 means that the project is ahead of
time, not total PV for activity.) schedule

The percentage of work that is complete

PCIB based on baseline budget.

The percentage of work that is complete

PCIC based on our actual costs, which uses a
revised estimate of the project costs.

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To Complete Performance Index (TCPI) A Trick for Remembering the Formulas.
As we have seen, CPI provides an indicator of overall project If there is a C in the value that you are trying to calculate, then
cost performance to date. In order to know what the CPI will you will be using AC (which also has a C in it !)
need to be in order for the CPI to be 1 when the project is
complete, the project manager will want to find the value of the For example, CV is the difference between EV and AC. And CPI
To Complete Performance Index (TCPI). TCPI is calculated as is EV divided by AC.
follows:
If there is not a C in the product that you are trying to produce
(BAC − EV) with your equation, then you use PV.
TCPI =
(BAC − AC)
Video 10.6 Your reaction to figuring out that CPI and CV
• A TCPI that is < 1 means that there is more budget compares EV with AC. And that the Cs connect everything
remaining than work to be done. If the CPI is above 1, together in the universe. And anything without a C uses
PV.
the TCPI will be below 1.
• A TCPI that is = 1 means that the project has the right
amount of budget for the remaining work.
• A TCPI that is > 1 means that there is more work than
budget left. If the CPI is below 1, then TCPI will be
above 1.

You can also view this video at: http://pmf.video/video17

158
Forecasting Costs (ETC, EAC, VAC) Since the denominator of the equation, EV divided by AC, is equal
to CPI, then ETC can also be expressed as:
There are several additional values that can be calculated to
answer some questions about the future of a project, such as:
(BAC − EV)
ETC =
• If things continue as they have been, how much will it
(CPI)
cost to complete the remaining work?
• If things continue as they have been, what will be the final
Estimate At Completion (EAC)
project cost?
• How much will the projected final project cost vary from Now that the ETC has been generated, it can be added to the
our current project budget? actual costs of the project to date to provide an estimate of what
the total cost will be when the project is complete:

Estimate to Complete (ETC) EAC = AC + ETC

It is fairly simple to calculate the cost to complete the remaining
Variance At Completion
work on a project (assuming the performance on the rest of the
project will be the same is the project has experienced thus far). Variance at Completion is just the difference between what we
In other words, what the remaining work will cost if the current had budgeted (the BAC) and the current estimate at completion
CPI holds. This is known as the Estimate to Complete (ETC) and it (EAC).
is calculated as follows:
VAC = BAC − EAC
(BAC − EV)
ETC =
( AC )
Watch Video 11.7 for an overview and example of how these
EV
forecasting tools are used.

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Video 10.7 Forecasting Costs (ETC, EAC, VAC)

You can also view this video at: http://pmf.video/video18

Table 10.5 EVA Forecasting metrics

Term Description Calculation

Estimate to Complete. What it will cost to complete the

remaining work if things keeps going as they have up to
ETC this point.

Estimate At Completion. What our project will cost if

EAC things keeps going as they have up to this point.

Variance At Completion
Variance at Completion is just the difference between
VAC what we had budgeted (the BAC) and the current
estimate at completion (EAC).

160