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Project Cost Reduction Strategies

The document discusses various methods for reducing project costs, including identifying activities on the critical path and crashing those with the lowest cost per day reduction, engaging in cost-time tradeoffs by reducing critical activity durations at an additional cost, and reasons for reducing time like time-to-market pressures or incentive contracts. It also explains the differences between project indirect costs that vary with time and direct costs that are assigned to specific activities, and how crashing activities can reduce indirect costs by shortening the project duration while increasing direct costs.

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Kashi Khan
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5 views10 pages

Project Cost Reduction Strategies

The document discusses various methods for reducing project costs, including identifying activities on the critical path and crashing those with the lowest cost per day reduction, engaging in cost-time tradeoffs by reducing critical activity durations at an additional cost, and reasons for reducing time like time-to-market pressures or incentive contracts. It also explains the differences between project indirect costs that vary with time and direct costs that are assigned to specific activities, and how crashing activities can reduce indirect costs by shortening the project duration while increasing direct costs.

Uploaded by

Kashi Khan
Copyright
© Attribution Non-Commercial (BY-NC)
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPT, PDF, TXT or read online on Scribd

REDUCING PROJECT COSTS

– Time Reduction
• Identifying activities on the critical path
• Calculate cost of crash per day for each activity
• Reduce the activity which is lowest crashing cost per
day
– Cost-Time Tradeoffs
• Reducing the time of a critical activity usually incurs
additional direct costs.
• For example, duration can be reduced by half by
incurring 50% additional cost
– Reasons for reducing
• Time-to-market pressures
• Incentive contracts (bonuses for early completion)
• Unforeseen delays
• Pressure to move resources to other projects

2 ISE 491 - Ch. 9 notes


Explanation of project costs
– Project Indirect Costs
– Costs that cannot be associated with any
particular work package or project activity
• Supervision, administration, consultants, and interest
– Costs that vary (increase) with time
• Reducing project time directly reduces indirect costs.
– Direct Costs
– Normal costs that can be assigned directly to a
specific work package or project activity
• Labor, materials, equipment, and subcontractors
– Crashing activities increases direct costs
3 ISE 491 - Ch. 9 notes
Project cost-duration graph

FIGURE 9.1
4 ISE 491 - Ch. 9 notes
Activity graph

FIGURE 9.2

5 ISE 491 - Ch. 9 notes


Time-Cost Relationship
 Crashing costs increase as project duration decreases
 Indirect costs increase as project duration increases
 Reduce project length as long as crashing costs are less than indirect costs

Time-Cost Tradeoff
Min total cost = Total project cost
optimal project time
Indirect cost
cost

Direct cost

darla/smbs/vit
time 6
How to reduce time
• Adding resources
• Outsourcing project work
• Scheduling overtime
– Same resources which were supposed to be
used in normal time would be increased and
used for crash time. There would not change
in technology like transportation through
helicopters instead of trucks.
7 ISE 491 - Ch. 9 notes
What if cost, not time is the issue?
• Commonly used options for cutting
costs
– Increase time for completion
– Work in dull season when prices are low.
– Watch market trend, stop work when
prices go high or labor is short

8 ISE 491 - Ch. 9 notes


Project Crashing
• Crashing
– reducing project time by expending
additional resources
• Crash time
– an amount of time an activity is reduced
• Crash cost
– cost of reducing activity time
• Goal
– reduce project duration at minimum
cost
TIME
IN DAYS COST Rs.
Normal Crashed Normal Crashed
A 7 5 50,000 62,000
B 9 6 80,000 110,000 A
C 10 7 40,000 46,000
D 8 6 30,000 42,000 C
200,000 260,000
INDIRECT COST @ Rs.10,000 per day
Draw Normal & Crash Network?
Find out Critical Path for Normal & Crash?
Reduce time upto crash time by reducing activites
to their crash time. ( The critical path may change )

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