Category: Project Management

Linear programming method is a type of constrained optimization method of project selection. In this method, you look towards reducing the project cost by efficiently reducing the duration of the project. You look for running an activity in its normal time or the crash time. The crash time of the activity enables you to reduce the activity time or the project as a whole.

When you complete only a specific activity for a duration that incurs the smallest cost, you term it as the normal time. You crash an activity by spending more efforts to make sure that the activity takes lesser time to complete. Adding efforts to the activity definitely increases the cost. However, when you include overhead costs, you might realize that running multiple activities at crash level is financially advantageous, if it reduces the overall duration and overhead costs.

However, one of the most important aspects of the project you need to consider is if crashing an activity reduces the overall time of the project. For example, if the activity does not lie in the critical path of the project, then you might not want to consider crashing the activity. Critical path of the project is the sequence of the activities that you need to perform from start to end, considering that you can perform other activities, which can be another sequence of activities, in parallel. The alternate sequence of activities that you perform in parallel is known as an alternate path.

At times, you might realize that crashing activities in the critical path might result in making an alternate path a critical path because the time required to complete such path is now more than the former critical path. In such a case, if you justify the costs involved, you can consider further crashing the activities of the new critical path too.

Crashing an activity means that you reduce the time required to complete the activity by adding additional resources, including man power and machinery. This not only adds efforts and reduces the time required to complete the activity faster, but also increases the cost for completing the activity.

Consider the following table of activities for a simple project that indicates the normal and crash time along with the costs of various activities of a project. The table also indicates the dependencies of various activities:

Activity	Predecessor	Normal		Crash
		Week	Cost	Week	Cost
A	–	2	80	1	150
B	A	3	90	2	120
C	A	4	120	2	180
D	B, C	2	100	2	100
E	D	1	50	1	50
F	E	1.5	200	0.5	300

Consider the activity F. This activity requires four weeks to complete. However, you can crash this activity to two weeks with an additional cost of $ 150. However, there is always proportionality between the time of reduction and additional cost. Therefore, if you want to crash the activity F by two weeks, you can calculate the cost of activity by calculating the slope cost and then the cost of activity as follows:

Slope Cost = (Crash Cost – Normal Cost) / (Normal time - Crash time)

Cost of Activity = Normal Cost + (Slope Cost * Crash time)

Applying the preceding formulas, we can calculate the activity cost of activity F as:

Slope Cost = (300 – 200) / 1
           = 100

Cost of activity = 200 + (100 * 0.5)
                 = 250

You can calculate the cost of activity for each activity and sum all of the costs to arrive at the final cost of project. You can also represent the activities from the table with a network diagram to understand the dependencies of the activities. The following is the network diagram for the sample project:

One of the types methods you use to select a project is Benefit Measurement Methods of Project Selection. In these methods, you calculate or estimate the benefits you expect from the projects and then depending on the highest benefits, you select a project. However, these methods are more suitable to select projects that are simple and easy to calculate benefits from such projects. In big organizations, where projects are of complicated and are of a large scale, these methods might not be appropriate to select a project.

Considering the magnitude of the project, the organization has a lot on stake. Therefore, you cannot take chances to select a project based on just judgments or simple calculation. Such projects need complicated mathematical calculation before you decide on considering a project. For large and complicated projects, you can use constrained optimization methods to select a project.

In a constrained optimization method, you make complex mathematical calculations to select a project. These mathematical calculations are based on various best and worst case scenarios, and probability of the project outcome. Depending on the outcome of these calculations, you compare the candidate projects and the select a project with the best outcome.

You can use any of the following constrained optimization methods to select a project:

• Linear Programming Method of Project Selection: In this method, you look towards reducing the project cost by efficiently reducing the duration of the project. You look for running an activity in its normal time or the crash time. The crash time of the activity enables you to reduce the activity time or the project as a whole. To know more about this project selection method, refer Linear Programming Method of Project Selection.
• Integer Programming Method of Project Selection: In this method, you look towards a decision that works on integer values and not on fractional values. For example, producing a number of cars can never be fractional. To know more about this project selection method, refer Integer Programming Method of Project Selection.
• Dynamic Programming Method of Project Selection: In this method, you break a complex problem into a sequence of simpler problems. This method provides a general framework of analyzing many problem types. In this framework, you use various optimization techniques to solve a specific aspect of the problem. This method requires your creativity before you can decide if the problem needs to use dynamic programming for its solution. To know more about this project selection method, refer Dynamic Programming Method of Project Selection.
• Multi Objective Programming Method of Project Selection: In this method, you make decision for multiple problems with mathematical optimization. In case, in a multi objective programming, a single solution cannot optimize each of the problems, then the problems are said to be in conflict and there is a probability of multiple optimal solutions. A solution is called as non dominated if values of none of the problem can be optimized without degrading values of another problem. To know more about this project selection method, refer Multi Objective Programming Method of Project Selection.

As discussed in other tutorials, at any given moment of time, an organization has multiple ideas waiting to be considered as a project. However, it is practically as well as financially not possible to consider each and every idea as a project and work on it. This does not means that the ideas that are not taken up as a project do not have potential of generating any revenue.

Due to limited resources, it is not practical for you to convert each idea into a project and pursue it. As a result you lose on the capitalizing an opportunity to realize the potential revenue from all such ideas. The revenue that you lose by giving up an idea and converting another idea to a project is known as opportunity cost.

Opportunity cost is just a value and not a benefit. Additionally, you do not add opportunity costs of all candidate projects to arrive at a value. Opportunity cost is just a value of the project you lose for not selecting it. When you consider the opportunity cost of a project, it is always the cost of the value of the next best alternative project and not the cumulative value of all candidate projects.

Therefore, you can also define the opportunity cost as the relative cost because it is a cost of one project relative to the other project.

Calculating an Opportunity Cost

Calculating an opportunity cost for a project, you do not need any special or complicated formula. You just need to calculate the net present value of the projects you are considering and compare the values. You select the project that has a higher net present value. The net present value of the project you do not select is the opportunity cost. To know more about calculating net present value, refer Economic Model for Project Selection – Net Present Value.

Consider a scenario where you have two projects IOS Test App and Android Test App. The net present value for the project IOS Test App is calculated as $ 80,000 and the same for the project Android Test App is calculated as $ 102,000. In this scenario you select the Android Test App project. As a result, the opportunity cost for the Android Test App is $ 80,000. This means that the opportunity cost for selecting the Android Test App project is $ 80,000.

Notice that when calling the opportunity cost, you do not refer to the losing project but the one you have selected, though the value is that of the losing. For example, in the preceding scenario, you have selected the Android Test App project. Therefor, you refer to the opportunity cost of $ 80,000 for the Android Test App and not the IOS Test App project.

The name Murder Board method of project selection sounds quite unconventional and somewhat like some anti-social activity group or more so sounds like a title of a thriller movie. However, the name does not have anything to do with any anti-social activity. The name is more of derived from the fact that this method completely works on negative and constructive methodology.

In this method of project selection, you create a murder board. A murder board is also known as a scrub-down. You constitute a murder board, which is a committee that comprises of senior managers and subject matter experts from different areas. The murder board scrutinizes the project to find reasons why the project should not be selected. You must defend the project and counter all the queries of the board members.

The main responsibility of the murder board is to critically review the proposed project. As the name suggests, the members of the board are supposed to review the project aggressively. During this review, there is no scope of pleasantries and is done without any constraints.

The reviews are more like grilling sessions where every possible effort is made to prove that the project is not worth considering. It is the sole responsibility of the proposer to satisfy each and every query of the board members and prove the worth of the project. The murder board meets with a sole objective of killing a well prepared project proposal based on the technical merits. The name of the method itself is derived from the fact that the objective of board members is to murder the whole idea of the project.

The murder board makes sure that every aspect of the project is looked into and reviewed in depth. The review includes the following aspects of the project:

• Problem statement
• Assumptions
• Risks
• Mitigation
• Proposed solution

As a part of its responsibility, the murder board is not supposed to tolerate on holding back even a least suspicion of a problem. The murder board session is supposed to be very aggressive and argumentative mostly because it consists of subject matter experts from various areas. These subject matter experts grill the presentation in their respective areas of expertise.

Notice that as per the nature and goals of the murder board, you can expect that all your skills be tested when you make a presentation. You should be prepared to face new challenges with a very high intensity.

In an organization that has a wide range of project to select from, the murder board plays a vital role. The board reviews each and every project proposal before these are given a final go ahead.

Advantages

A murder board method of project selection has the following advantages:

• It enables the organization to select best of the ideas and convert the same into projects.
• You must be very well prepared before you present the proposal to the board.
• With expertise from a wide range of fields, chances of committing mistakes are reduced considerably.
• You can take an advantage of the knowledge of the board members to further enhance the project.

Disadvantages

A murder board method of project selection has the following disadvantages:

• The aggressive review can destroy the confidence of the presenter.
• A really good idea with potential of generating good revenue might unnecessarily get shot down.
• There are chances of board members tempted to prove their supremacy and compete to kill the project first.

Peer review is yet another method of project selection. In this method you present the project proposal to the peers in the organization. You select peers from a wide range of project management fields. These peers review the project and then recommend some best practices adopted in other projects. The peers also check for the viability of the project.

Peer review is the method of project selection that you use to validate the project with the help of peers. The peer group in such reviews are experts from various areas of project management, however, unlike the murder board, this group is not as ruthless in reviewing a project. In this method, the main objective is not to kill the project but to check the viability of the project and add value from learning of the peer group.

In your personal capacity, you tend to ignore or get biased about your ideas. As a result, you might not foresee an issue arising later in the project life cycle. To avoid such unpleasant scenario, it is always a good idea to get inputs from the peers at an early stage. The peer review method comes handy in such situations. Peers can help identifying each other’s mistakes quickly and easily, and provide suggestion from their past experience.

You create a peer group of subject matter experts from different areas to perform a peer review. These subject matter experts help in defining a benchmark for the current practices in the organization. Additionally, they help in identifying and recognizing the industry best practices being used in similar projects.

Peer Review Panel

Selecting an appropriate peer review panel is a very important factor for the success of the review and the project as a whole. You must take utmost care when selecting a peer reviewer for the panel. Following are some of the guidelines you can consider for a peer reviewer panel:

• The members of the peer review panel must be subject matter experts in their respective area.
• The members of the peer review panel must the ones who are respected across the organization, including the senior management. This is especially helpful to make sure that their views are considered seriously and can influence senior management to make any changes.
• The peer review panel must make sure that the peer review is conducted to improve the probability of the success of the project. The peer review panel must understand that a peer review is a collaborative effort among the project team, senior management, and peer review panel. The project and senior management teams must believe that the peer reviews are going to help the project and keep an open mind towards the suggestions from the peer review panel.
• You must conduct peer reviews multiple times before and after you have started the project. This makes sure that not only you select an appropriate project but also check the performance of the project and take corrective action, if necessary.

Conducting a Peer Review

An effective peer review is a key to the success of a project. When conducting a peer review, you complete the following procedure:

1. Prepare a questionnaire and get responses from the members of the peer review panel. Make sure that you cover each and every aspect of the project in the questionnaire.
2. Collect the responses and analyze the same. It is important for you to analyze and understand the perspective of members of various teams.
3. Conduct interviews to get detailed information from all levels of the team.
4. Document the findings of the questionnaire and derive a conclusion.
5. Prepare a final report and present it to the senior management.

It is very important for an organization to select an appropriate project that aligns to its business objectives. In a moderate to big organization, you get several ideas waiting to be converted into a project. However, not every idea is worth pursuing as a project because running a project not only needs resources but also financial investments to support it.

In your personal life, you have various options available to make a decision when making a choice among various options available, such as your past experience, advice from your family and friends, and suggestions from some experts. In your personal life, you have the luxury of going wrong and changing your decision.

However, in a professional life, an incorrect decision might be sufficient enough to throw you out of the business. Therefore, you have take utmost care when selecting a project. As a result, you must follow some tried and tested rules to select a project to minimize chances of selecting a wrong project, and select a project that is less risky and ensures maximum returns for the investment.

One of the techniques you can use to select a project is a benefit measurement method of project selection. The main objective of a benefit measurement method is to select a project with an aim to realize benefits against the investment you make in a project. In this method, you collect, consolidate, and analyze data to measure if the project yields the expected benefits.

By using a benefit measurement method, you select a project depending on the present value of the investment and revenue generated by the project. You calculate the cost and benefits of each project and then compare the same to decide on the project that provides highest benefits.

You can use the following benefit measurement methods to select a project:

• Murder Board Method: In this method, you constitute a murder board. The board comprises of senior managers and subject matter experts. The murder board scrutinizes the project to find reasons why the project should not be selected. You must defend the project and counter all the queries. To know more about this method, refer Murder Board Method of Project Selection.
• Peer Review Method: In this method, you select peers from a wide range of project management fields. These peers review the project and then recommend some best practices adopted in other projects. The peers also check for the viability of the project. To know more about this method, refer Peer Review Method of Project selection.
• Scoring Model: In this method, you create a committee that lists the relevant criteria to select a project. The committee weighs the list according to the importance and priorities of each project under consideration. The committee then adds the weighted values and selects a project with highest score. To know more about this method, refer Scoring Model of Project Selection.
• Economic Models: In this method, you scrutinize the project for its economic returns and viability. To know more about these models, refer An Overview to Economic Model of Project Selection.
• Economic Value Added: In this method, you create a performance metrics for the project that calculates the worth created for the organization. To know more about this method, refer Economic Value Added.
• Opportunity Cost: In this model, you calculate the opportunity you give up by selecting a project over the candidate projects. To know more about this model, refer Opportunity Cost.

Scoring model is yet another method of project selection. In this method, you create a committee that lists the relevant criteria to select a project. The committee weighs the list according to the importance and priorities of each project under consideration. The committee then adds the weighted values and selects a project with highest score.

One of the most common techniques used to select a project is the individual judgment. Such judgments are mostly a result of a guess work and might turn out to be biased in favor or against a project. As a result, the project can result in a failure if it gets biased favor. Similarly, you might drop a really great project if it is unfavorably biased.

To avoid such a situation, you can create a scoring model that can help you to make an appropriate decision to select a project based on the merits and priorities of the project and organization.

Principles

When creating a scoring model for selecting a project, you must consider the following principles of a scoring model:

• Try to limit scoring criteria into approximately three categories of requirements. You can select any of the categories, such as benefits, cost, size, impact, risk, technical feasibility, margin, or any other category that you deem fit to score the project requirements.
• Scoring criteria should comprise of ranges. When deciding on the scoring criteria, you can select any of the following types of ranges:
  • Numeric or Cardinal Priority range: In this type of range, you assign numeric values for scoring. Following are sample values with respective description to understand the values:
    • 0 – The requirement is not applicable to the project and is later removed from the list.
    • 1 – The requirement has a low priority.
    • 3 – The requirement has a medium priority and must be met.
    • 5 – The requirement has the highest priority and is essential for the project.

Depending on the number of choices, you can also consider the 0 – 10 range as a scoring criteria.

• Descriptive or Ordinal Priority range: In this type, you provide a descriptive priority, which you convert to an appropriate numeric value for further calculations. This criteria is more useful in the sense that for the numeric priority type, you must remind the team that 0 is the least favorable value while 5 is the most favorable value to make sure that there is no misinterpretation across the team. However, in this priority type, you use self explanatory values to score. Following are sample values with respective description to understand the values:
  • Not Applicable (0): The requirement does not apply for the project. The requirement is later removed from the list.
  • Nice to Have (1): The requirement is at a low priority. If included in the project, it is considered as an add-on requirement.
  • Important (3): The requirement is important for the project and must be addressed in the product.
  • Essential (5): The requirement is a must for the project and must be addressed in the product.
• You must design scoring to address the business requirements of the organization.
• You must test the scoring model with existing projects to make sure that it produces accurate results.
• You must run the scoring model through cross functional teams capable of making decision to make sure you get unbiased results.

Calculation

After you have taken responses for each requirement, you calculate the score of individual requirement by multiplying the number of responses with the priority. This is the weighted score for the requirement. Now that you have the weighted average for the projects, you can select the one that has the highest score.

The benefit cost ratio is yet another economic model of project selection. In this economic model, you calculate the ratio between the cost of the project and benefits form the project. The benefits include all forms of revenue you generate from the project and not just the profits. A benefit cost ratio greater than one indicates that projects generates more benefits than the cost incurred.

You use the benefit cost ratio method to identify relationship between possible benefits and costs of the project. You use this method to measure qualitative as well as the quantitative factors. This is so, because at times you cannot exclusively measure benefits and costs in financial terms.

You calculate the benefit cost ratio by dividing the total discounted value of the benefits by the total discounted value of the costs. To calculate the discounted value of each, you use the present value formula for the each. To know more about calculating present value, refer Economic Model for Project Selection – Present Value.

The following table interprets the value of the benefit cost ratio:

Benefit Cost Ratio	Interpretation
> 1	Benefit cost ratio of more than one indicates that the present value of the benefits is better than the present value of the costs. If the benefit cost ratio is significantly greater than one, then you can consider taking up the project.
= 1	Benefit cost ratio equal to one indicates that the present value of benefits is equal to the present value of costs. For a project with benefit cost ratio equal to one, you can expect that the project would neither generate any profit nor would run under any losses.
< 1	Benefit cost ratio of less than one indicates that the present value of benefits is less than the present value of costs. You should never consider a project that has benefit cost ratio less than one because it is almost sure that the project will incur losses.

For example, you need to invest $ 10,000 in a project that is expected to generate revenues worth $ 5,000 for each year in next three years starting the third year of the project. To decide if you should consider this project, you need to calculate the benefit cost ratio, considering that the prevailing rate of interest is 10%.

To calculate the benefit cost ratio, you first need to calculate the present value of benefits as well as costs.

Present value of costs = $ 10,000 (You make an outright investment at the beginning of the project.)

Present value of benefits = 5,000 / (1.1)³ + 5,000 / (1.1)⁴ +5,000 / (1.1)⁵

= 3,756 + 3,415 + 3,104

= 10,275

Benefit cost ratio = Present value of benefits / present value of costs

= 10,275 / 10,000

= 1.0275

Notice that the benefit cost ratio for the project is marginally more than one. Therefore, you can expect very low amount of profits from this project. If any of the candidate projects has a better benefit cost ratio, you should not consider this project.

You can use this method to compare the benefit cost ratio of the candidate projects and select the one that has a benefit cost ratio better than other projects, and is significantly greater than one. Additionally, you can use this method to make other decisions when making an investment. For example, if you need to consider outright purchase of the equipment with respect to leasing the same for the project, you can use the benefit cost ratio to analyze which investment option is better to select.

Payback period is yet another economic model for project selection. Payback period refers to the number of time periods that a project requires to recover your investment. When you have recovered the project investment, it is known as the break even point. At this point, the project is neither at profit nor at loss. After you have recovered the investment, the revenue generated from the project contributes to the profits from the project.

Payback period is usually calculated in years. For example, if you have invested $ 5,000 in a project and the project generates revenue of $ 2,000 in the second year and $ 3,000 in the third year, then the payback period of the project is three years.

Practically, it is not always that a project generates revenue adds exactly equal to the investments made. The amount of revenue that project generates over the year usually varies. In such a case, you calculate the payback period of the project as the year when the difference between the cumulative revenue and investment is a positive value.

For example, consider a project in which you have invested $ 10,000 in a project and the project generates revenue of $ 1,000 in the first year, $ 3,000 in the second year, $ 3,000 in the third year, $ 4,000 in the fourth year, and $5,000 in the fifth year. In this project, notice that project starts returning positive value after four years (1,000 + 3,000 + 3,000 + 4,000 – 10,000). Therefore, the payback period for the project is four years.

It is easier to calculate the payback period when you already know the revenue returns. However, you need to calculate payback period even before you have selected the project. Based on the payback period, you evaluate if the project is even worth considering. Therefore, to calculate the payback period, you consider the estimated values for annual revenue generation from the project and use the following formula:

Payback period = 1 + n_y – n/p

Here:

• n is the value of the cumulative revenue generated when the last negative value is expected.
• n_y is the number of years after the initial investment when the last negative value is expected.
• p is the value of revenue when the first positive value of the cumulative revenue is expected.

The payback period method provides you a bird’s eye view of the risk analysis about the time period for which the initial investment is at risk. You use this method to identify and select a project that provides you rapid returns with respect to the initial investment. Even though this is one of the simplest economic methods you can use to select a project, it has its share of disadvantages, such as:

• It does not consider a possibility of additional investment at a later stage, which might be required in the project life span.
• It is more concerned about the payback period and not about the overall profitability of the project.
• It does not consider the time value money concept where revenue generated at a later stage is worth less than the revenue earned in the current time period.
• The denominator of the formula is based on average revenue from the project over multiple years. If the estimated revenue is generated at a later part of the project life cycle, the calculation incorrectly indicates an early payback period.