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Cost Optimization

This document discusses concepts related to project management including crashing and time-cost tradeoffs. It explains that crashing activities on the critical path can reduce total project duration but at increased cost. The relationship between direct costs, indirect costs, and project duration is shown through curves. Methods are described for approximating direct cost curves and calculating cost slopes to determine the optimal schedule that minimizes total project costs.

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meril jose
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126 views18 pages

Cost Optimization

This document discusses concepts related to project management including crashing and time-cost tradeoffs. It explains that crashing activities on the critical path can reduce total project duration but at increased cost. The relationship between direct costs, indirect costs, and project duration is shown through curves. Methods are described for approximating direct cost curves and calculating cost slopes to determine the optimal schedule that minimizes total project costs.

Uploaded by

meril jose
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd
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CIVIL ENGINEERING PROJECT

MANAGEMENT
MODULE 2
2
SYLLABUS
Crashing and time – cost trade off, Resource smoothing and resource
levelling – Construction, equipment, material and labour schedules.
Preparation of job layout.

Codification of the planning system: Codification approach – Work


package and activities identification code – Resource codes – Cost and
Finance accounting codes – Technical document codes.
INTRODUCTION
3  The main objective is to develop an optimum time – cost relationship.
 Critical Path Method (CPM) makes use of the cost estimate along with the
time estimate and provides a schedule for completing the activities at the
minimum total cost.
 The ultimate object of the network techniques is not only to bring
improvement in planning, scheduling and control of project but also to
assess the possibility of arriving at a feasible and desirable time – cost
relationship.
 The policy of every organisation is to reduce the target time so that the time
saved may be utilised for additional production.
 The overall project duration can be reduced by reducing the duration of only the
4 critical activities in the project network.
 Optimum duration gives most economic cost for completion of project.
PROJECT COST
 For any project, the relationship between total cost and overall duration is shown
in figure.
 From figure, it is clear that:
5
a) If a project goes on indefinitely, the cost will increase
b) Similarly, cost will increase if project is expedited, and
c) Cost is minimum at some optimum project duration.
 Our main objective is to find the optimum duration which will keep the total
project cost at a minimum.
 Cost is considered to be a common parameter of the resources expenditure
on a project.
 In other words, the application and use of man, money, machines, materials
and time for the performance of various activities are all related to this
common measure of cost.
 Total project cost is the sum of two separate costs:
6
a) The direct cost for accomplishing work, and

b) The indirect cost related to the control or duration of that work,


financial overhead and lost production.
INDIRECT PROJECT COST
7
 Indirect costs are those expenditures which cannot be clearly allocated to
the individual activities of a project, but are assessed as a whole.

 The indirect costs includes the expenditure related to administrative and


establishment charges, overhead, supervision, expenditure on a central store
organisation, loss of revenue, lost profit, penalty etc.

 Indirect cost rises with increased duration. For any project, the relationship
between indirect cost and project duration is shown in figure (a) considering
only overhead and supervision.
 It would be represented by a straight line, with a slope equal to daily
8
overhead.
 But when there is a loss in profits, due to inability to meet demand or due to
9 some penalty due to delay, a corresponding cost increase must be added to the
cost of overheads, producing the curve as shown in fig(b). Such a loss is called
the outage loss.

The total indirect cost curve


will thus be curved
DIRECT PROJECT COST
10  Direct cost is the cost which is directly dependent on the amount of
resources involved for completion of activities.

 It includes labour cost, material cost, equipment cost etc.

 To get the same work done in less time, we have to increase amount of
labour or equipment or time saving materials that too at extra charges which
simply means increase in direct cost.

 The figure shows a generalised curve between direct cost and project
duration.

 The project has the highest cost corresponding to the crash duration and
normal cost corresponding to the normal duration.
11

GENERALISED DIRECT COST-TIME CURVE


  
 Thus we have two types of costs and two types of times defined below:
12
 Normal time () : Normal time is the standard time that an estimator would
usually allow for an activity.

 Crash time () : Crash time is the minimum possible time in which an


activity can be completed, by employing extra resources. Crash time is that
time, beyond which the activity cannot be shortened by any amount of
increase in resources.

 Normal cost () : This is the direct cost required to complete the activity in
normal time duration.

 Crash cost () : This is the direct cost corresponding to the completion of


the activity within crash time.
SLOPE OF DIRECT COST CURVE
13  The direct cost curve can be approximated by straight line or more than one
straight line, depending upon the flatness of the curve.

DIRECT COST CURVE APPROXIMATION


  
 For example, the flat curve of the above fig (a) can be approximated by a single
14
straight line, while the curve of fig (b) can be approximated by three straight
lines.

 The straight line or segmented approximation of the direct cost curve is helpful
in carrying out the project cost analysis. In such analysis, the cost slope is used.

Cost Slope

 The cost slope is the slope of the direct cost curve, approximated as straight line.
It is defined as follows:

Cost slope =
  
or CS = = ; where CS = cost slope
15 Δ C = increase in cost
Δ t = decrease in time
 If the cost curve is approximated to a single line, it will have one cost slope.
 If, however, the cost curve has segmented approximation, it will have more than
one cost slope.
 The single or multiple cost slopes will depend upon the non-linearity of the
direct cost curve.
 The segmented approximation of cost curve, having multiple cost slopes, is
more accurate but calculations are more involved. Generally single cost slope is
assumed.
CRASHING THE NETWORK FOR COST OPTIMISATION
(Refer the PDF 1)
16
Steps in Crashing

a) Estimate project duration & find the critical path.

b) Find cost slope of all activities.

c) The critical activity having minimum cost slope is crashed in first stage. The next stage crashing will
involve activity having second lower cost slope in critical path.

d) Total cost of project at this stage is calculated.

e) Steps (c) & (d) are repeated till all activities of project are crashed along the critical paths &
corresponding time is crash time of project.

f) It is to be noted that only critical activities should be crashed. (As non- critical activities do not
control the project duration & completing them earlier has no benefit rather it increases project cost.)
(For problems : refer the PDF 1)
TIME - COST TRADE OFF
17
 The Time & Cost are the two most important resources that a project
manager deals with.

 Both these resources have constraints & the job of a project manager is to
have a judicious balance between the two.

 The judicious balance between time & cost is called Time – cost Trade off
and it can be achieved by studying the availability of these two resources and
the demand for these two resources for the given project.

 Every project is unique & the same time – cost trade off rule will not be
applicable to all projects uniformly.
For eg:
18
 The duration for a project as obtained from network calculations might be
longer than the desired duration. Social, environmental or political
constraints may necessitate early completion of the project even at a
higher cost.

 When cost is the only constraint & there is no necessity that the project
should be hurried through, the project time can be extended till the total
cost becomes the minimum.

( For remaining portions refer the PDF 2)

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