Time-Cost Trade-Off

Sources:

Gray Clifford F., Larson Erik W. , Project management: the
managerial process, McGraw-Hill

Gido Jack, Clements James P. , Successful Project
management, Cengage

Mantel S., Meredith J., Shafer S., Project management core
textbook, Wiley

For academic purpose and private circulation only

1
 Time-Cost Trade-Off

Network Compression :

To reap the benefits of the project and to start recovery

of investment on the project at an earlier date, it is
necessary to ensure that the project is completed As-
Early-As-Possible (ASAP).

It is also more beneficial if the project is completed in

minimum possible cost.

2
 Time-Cost Trade-Off

Once the project network is developed and the critical

path is identified, project duration gets decided by the
length of the critical path.

Hence in order to reduce the project duration

further is possible only by reducing the activity
duration for the activities on the critical path(s).

There are two possible ways to accomplish this namely,

by crunching or by crashing the critical
activities.
3
 Time-Cost Trade-Off

Note:
The processes, methodologies and sequencing adopted
while developing the initial estimates & first schedule are
decided on ‘stand-alone’ basis i.e. each activity
considered individually on its own.

In the initial stage, while working out the estimated

activity duration by estimating resources required to
complete the work in the activity, the normal process,
normal methodologies and normal work
4 practices are assumed.
 Time-Cost Trade-Off

Crunching of Activities
Activity duration is estimated on the basis of the basic
relationship between “Work”, “Resources required”
& Time .
Hence for the given quantum of work, the estimated
duration can be reduced by increasing the
resourced deployed on the job.
e.g. The work of digging a trench for underground pipe
line if carried out manually may be equivalent to 20 man-
days. Hence, a team of 4 workers can finish the job in 5 days.
if we increase the workers to 5, the same work will get done
5
in 4 days.
 Time-Cost Trade-Off
This process of reducing the activity duration by
increasing the resources is known as crunching.
While crunching the activity, the additional resources may either
be hired extra or are obtained by reducing the resource allocation
on some non-critical activity scheduled in parallel to the critical
activity.
The first alternative will reduce the total floats available on
the non-critical activities without changing their estimated
durations by the amount of crunching while the second
alternative will also increase the duration of the non-critical
activity by stretching them.

6
 Time-Cost Trade-Off

It may be generally seen that the stretching is within the

available total float and it does not result in making the
non-critical activity a critical one.

Even if crunching results in creation of additional

critical paths, the basic process still remains the same
except that activities on multiple critical paths have to be
crunched simultaneously.

7
 Time-Cost Trade-Off

Crunching does not change the direct cost of the

activity as the total effort measured in terms of man-
hours or man-days, the worker skill and the total
material required to perform the activity remain the
same after crunching.

e.g. If the workers in the above example were paid Rs.

150 per day, the total cost of digging would be Rs. 3,000
for 20 man-days of work before and after crunching.

8
 Time-Cost Trade-Off

Effect of crunching on project costs

Direct costs:
The direct costs refer to the cost of direct materials and
direct labour utilized in performing the project activities.

These costs are therefore directly related to the

measured work and other direct inputs to the
project and will not change if the project
duration changes.
9
 Time-Cost Trade-Off
Indirect costs
The indirect costs are the overhead costs for the project to be
incurred for labour benefits, site management, indirect supplies,
equipment and building rentals, interest and insurance during
construction period, project management and supervision etc.

The indirect costs are directly related to the project duration.


Longer it takes to complete the project; higher will be the
indirect costs. Therefore, with crunching, reduction in
project duration will effect the reduction in total
indirect costs and thereby reducing the total project
10
costs (as shown in following figure)
 Time-Cost Trade-Off
Effect of crunching on project costs

C Total Costs
O
S Direct
T Costs

Indirect
Costs

PROJECT OR ACTIVITY DURATION

11
 Time-Cost Trade-Off

The crunching however has certain practical and

technical limitations and therefore can not be
performed beyond such limits.

In the previous example, the technical requirements or the

space limitations at the workplace may not allow to increase
the worker strength on the job beyond 6 persons and
therefore the activity can not be crunched to lesser than 3⅓
days.

However, it is advisable to reduce the project duration as

much as possible by crunching to a maximum extent
12
possible.
 Time-Cost Trade-Off

Crashing of Activities:
The activity duration is initially estimated on the basis
of application of normal process, normal methodologies
and normal work practices and skill sets that would
complete the activity in the most economical manner.

The crunching process adopted later still considers the

same methods and skill levels and therefore do not alter
the direct cost of the activity.

13
 Time-Cost Trade-Off

Many times there are alternate methods, processes or

skills applicable to perform the same activity in a shorter
time, but will require extra expenditure to be incurred.

The process of reducing the activity duration

by incurring extra expenditure on its direct cost
is known as Crashing of an Activity.

Because of the extra expenditure involved, such

methods are not considered in the initial stages of
14 planning.
 Time-Cost Trade-Off

Crashing may therefore involve:

1. Change in process or methodology of performing the

activity
2. Use of equipment with higher rates of output
3. Use of manpower having higher productivity and
better skill
4. Use of overtime working at wages more than the
normal wage rates to complete the work at an earlier
date
15
 Time-Cost Trade-Off
Effect of Crashing on Project Costs:
e.g. From previous example, the job digging a trench for
underground cable using 20 man-days of manual labour can also
be carried in one day by using a hydraulic excavator.
However, if the excavator hiring charges are Rs. 10,000 per day,
the direct cost of trench digging will now be Rs. 10,000 instead
of Rs. 3,000 for manual digging.
Therefore, a saving in time equivalent to 2⅓ days (i.e. from 3⅓
days after maximum crunching to 1 day) will be at an additional
direct cost of Rs. 7,000. Therefore, saving of one day in activity
duration costs Rs. 3,000 extra than its normal cost.
16
 Time-Cost Trade-Off

Total Cost
P
R
O
J
E Direct Cost
C
T
Minimum Indirect Costs
C Normal
Possible
O Duration
Duration
S Optimum Duration,
T Minimum Cost

PROJECT DURATION
17
 Time-Cost Trade-Off

D Crash Cost Curve

I
R
E
C
T

C Normal
O
S
T

ACTIVITY DURATION
18
 Time-Cost Trade-Off
Relationship between cost and time in Crashing:
The extra direct cost to be incurred per unit time of crashing is
indicated by the slope of the cost curve and is known as cost
slope. The cost slope can be calculated as under:

Cost Slope = Crash Cost – Normal Cost

Normal Duration – Crash Duration

Therefore, the cost slope in the above example would be:

Cost Slope = 10000 – 3000 = 3000
3.33 – 1
19
 Time-Cost Trade-Off
Cost – Time Trade-off in Crashing:
 Since crashing involves extra direct expenditure, it is
not advisable unless the benefits of crashing outweigh
the extra costs.

 Crashing leads to increase in direct costs due to enhanced

direct inputs but decrease in indirect costs due to reduction in
project duration.

 Thus it is to be ascertained that total project duration as well as

total project cost decreases as a result of crashing.
20
 Time-Cost Trade-Off
 If in the previous example, the activity of underground
pipe laying happens to be a critical one and crashing the
same will result in equivalent reduction in the total project
duration.

 If the indirect costs such as site running expenses are Rs.

5,000 per day, one day reduction in total duration will
result in saving Rs. 5,000 in indirect costs.

 Therefore it becomes economical to spend extra for hiring

the excavator as it actually results in a saving in total project
21 costs of Rs. 2,000 per day of reduction in project schedule.
 Time-Cost Trade-Off
Evolving a Minimum Cost / Optimum Duration
Schedule:
It is seen that crashing is beneficial when the cost of crashing is
less than the savings due to reduction in project duration.
When there is a single critical path and cost of crashing for
different critical activities is known, the critical activity that has a
minimum cost slope (and which is less than the indirect costs per
unit time) will get the priority in crashing.
Crashing process can be continued by crashing different critical
activities in ascending order of their individual cost slopes until
either of the two situations ‘a’ and ‘b’ described below
arise.
22
 Time-Cost Trade-Off

(a) Cost slope of the next activity to be crashed is

higher than the indirect cost per unit time

If this situation arises before situation ‘b’, the total cost of

project continues to get reduced successively after each
crashing until situation ‘a’ and any further crashing will again
increase the total cost.

23
 Time-Cost Trade-Off
(b) Additional critical path(s) get created due to
successive reduction of floats available on non-critical
activities:
 Any further reduction in project duration would be possible
only by crashing activities on all the critical paths
simultaneously.
 Cost of crashing would therefore be the total of cost slopes of
all activities to be crashed.
 If this total is less than the indirect cost per unit time, crashing
can be continued till reaching the cost-sum of activities to be
crashed again gets higher than the indirect cost per unit time.
24
 Time-Cost Trade-Off

In either of the cases (a) & (b), the project duration

at which the project cost is at its minimum is
known as the optimum duration for the project.

25
 Time-Cost Trade-Off
Illustration:
The table below gives the activity relationships for a small
project having eight activities.
The estimated activity durations are given under two conditions;
one by using the normal method and the other by using the
alternate method taking shorter time.
The details of direct costs for each activity using both of the
method are also given.
The indirect costs relating to site management etc. are Rs.
3,500/- per day. Based on the information, we have to find the
minimum cost schedule.
26
 Time-Cost Trade-Off

DURATION COST
ACTIVITY PREDECESSORS (Days) COST Rs. SLOPE

NORMAL CRASH NORMALCRASH Rs. / Day

A - 4 2 10000 11000 500
B A 3 2 6000 9000 3000
C A 2 1 4000 6000 2000
D B 5 3 14000 18000 2000
E B,C 1 1 9000 9000 -
F C 3 2 7000 8000 1000
G E,F 4 2 13000 25000 6000

27
H D,E 4 1 12000 18000 2000
 Time-Cost Trade-Off
Adding all the direct costs for activities being performed by
normal method, the total direct cost (Normal) is Rs. 75,000.
To find the indirect cost, we have to find the normal duration
for the project.
In the above network, different paths can be traced with their
normal and crash durations:
 P1 - A – B – D – H = 16 / 8
 P2 - A – B – E – H = 12 / 6
 P3 - A – B – E – G = 12 / 7
 P4 - A – C – E – H = 11 / 5
 P5 - A – C – E – G = 11 / 6
28
 P6 - A – C – F – G = 13 / 7
 Time-Cost Trade-Off
Therefore, Path P1 is the Critical Path and the Project Duration
is 16 days by using normal processes.
The total indirect cost @ Rs. 3,500 per day for 16 days will be
Rs. 56,000.
Therefore the total project cost will be Rs. 75,000 + Rs. 56,000
= Rs. 131,000
Even after crashing activities, the minimum duration would be 8
days. However, we have to find out if reducing duration to 8 days
will be economical.
Hence crashing is carried out for the critical activities
in order of their respective cost slopes one by one and
29
effect of crashing on total cost is calculated.
 Time-Cost Trade-Off

SR. CRASH BY P1 P2 P3 P4 P5 P6 Direct Indirect Total

ACTIVITY DAYS Cost Cost Cost

1 - - 16 12 12 11 11 13 75000 56000 131000

Initial Position of the Problem

30
 Time-Cost Trade-Off
STEP CRASH BY P1 P2 P3 P4 P5 P6 DIRECT INDIRECT TOTAL
ACTIVITY DAYS COST COST COST

1 - - 16 12 12 11 11 13 75000 56000 131000

2 A 2 14 10 10 9 9 11 76000 49000 125000

3 D 2 12 10 10 9 9 11 80000 42000 122000

4 H 1 11 9 10 8 9 11 82000 38500 120500

5 H&F 1 10 8 10 7 9 10 85000 35000 120000

6 B&C 1 9 7 9 6 8 9 90000 31500 121500

31
Various Steps in crashing
 Time-Cost Trade-Off

After performing crashing for the said problem,

final solution is:

 Optimum duration for the project is 10 days that

enables the project to be completed in a minimum
cost of Rs120,000.

32
 Time-Cost Trade-Off

Thank You

33