Time/Cost Tradeoffs: The Importance of Scope, Drag, Drag Cost and TCW

There is currently a very interesting LinkedIn discussion thread that was started by Prasad Velaga, PhD about the importance of teaching and understanding the concept of Time/Cost Tradeoffs. Those leading the discussion include Prasad, Stephen Richards , Mario Vanhoucke , Alex Lyaschenko , Alexander Apostolov , and Jan van den Berg . And if you're interested in scheduling and you aren’t following these people, I urge you to!

The discussion arose in response to Prasad’s question about making decisions about whether to add more cost in order to reduce a task’s duration. This led to an age-old PM topic regarding what is called the Time/Cost Tradeoff decision. It’s an important topic--I’d be stupid to argue otherwise!

But I’d like to extend it! And to point out that it’s actually a bit more complex than is often recognized.

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My first question is why just those two parameters? Why not the third ?variable of the Triangle? Why does Scope continue to be the neglected stepchild of project management? It is, after all, the raison d'être of every project. It’s also the primary item that determines both schedule and cost! Nowadays we have the computing power to deal with all three variables in integration. (Indeed, that is what the “total” in the “Total Project Control (TPC)” methodology means!)

?But, more to the point, when Kelley and Walker raised the topic of Time/Cost Tradeoffs almost 70 years ago, they didn’t include three crucial metrics:

1. Critical path drag

2. Drag cost

3. True cost of work (TCW), which is the sum of the drag cost plus the resource costs.

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Time/Cost tradeoffs can be quite complicated—but we can illustrate the issue with an easily understood example:

ACTIVITY X has a duration of 25D and a budget of $50,000. Analysis shows that we can compress its duration to 15D if we double the budget. (In TPC terms, we’d be using the doubled resource estimated duration, or DRED.)

There are three questions we should ask:

#1. What is the value of shortening Activity X’s duration to 15D? (We’ll assume the cost is $50,000, although Stephen Richards correctly points out that shortening a project often can decrease its indirect costs, like overhead. If that’s a possibility, we should analyze it and take that into account.)

#2. What risk might such a change introduce?

#3. What impact would such a change on THIS activity have on the PROJECT’S schedule?

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The answer to #1 is related to the value of the scope of the specific project. We need to estimate how much would its value be increased by whatever amount of acceleration we can “buy”. How much more revenue or savings generated, or human deaths prevented, do we estimate will come about from each unit of time saved? Failure to quantify the value/cost of time on completion of the project scope is, in my opinion, one of the great shortcomings of project management theory and (most!) project management software.

I included #2 because I know if I didn’t, someone would yell at me! If by shortening an activity, we thereby increase the risk of actually decreasing the final product’s value (perhaps because of a decline in quality, due to the added resources not being as experienced, or they’re working longer hours, or whatever), that risk should be analyzed, quantified, mitigated if possible. It should also be used to modify the value of the scope and, perhaps, the value of project acceleration.

Both of the above are important.

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But it’s really Question #3 that is crucial (critical?)—and it’s a concept that Kelley and Walker didn’t have! It’s related to what I believe is THE most “critical” metric in critical path analysis:

What is Activity X’s critical path drag?

If Activity X is NOT on the critical path, its drag = 0, because it’s not adding any time to the project duration! You can shorten X from now until doomsday, the project’s finish will not be accelerated. So why should you pay an extra $50,000 to shorten it? The only reason I can think of for shortening an activity OFF the CP is if the value its adding is less than its cost (which of course takes us back to question of the scope’s value with or without this non-critical path activity). If this is the case, eliminate the entire activity, along with its duration and budget!

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If Activity X is on the critical path, how much time would the project duration be reduced by shortening that activity? And that is Activity X’s drag—the amount by which its duration is delaying project completion.

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Let us assume that every day by which the project is accelerated is worth $20,000.

If Activity X has critical path drag of 2 days, then shortening its duration from 25 days to 15 days only shortens the project by 2 days. The remaining 8 days gained will just be an accumulation of total float on Activity X (which may decrease risk—but that’s a whole other discussion!). In that case, Activity X used to have $40,000 of drag cost. And implementing the Time/Cost tradeoff would spend $50,000 to eliminate that $40,000! Do we really want to do that?

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If Activity X has critical path drag of 9 days, then shortening its duration from 25 days to 15 days shortens the project by 9 days. Activity X used to have $180,000 of drag cost. And implementing the Time/Cost tradeoff would spend $50,000 to eliminate that $180,000 of drag cost! The project scope, delivered 9 days earlier, would be expected to generate $130,000 more in “project profit”. Doesn’t that seem like a good idea?

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Finally, an important additional concept is the True Cost of Work (TCW). No finance department that I have ever run across seems to understand this. But the TCW of an activity ON the critical path is the sum of its drag cost plus its resource costs.

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In the original situation, where Activity X was OFF the critical path, both its drag and drag cost were zero and so its TCW was its $50,000 budget.

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If Activity X had 2 days of drag, its drag cost would have been $40,000 and its TCW = $40,000 + $50,000 = $90,000. Add $50,000 of resources to compress it and remove its drag and drag cost, and its TCW is just its budget: but that’s now $100,000, or $10,000 more! ???

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If Activity X had 9 days of drag, its drag cost would have been $180,000 and its TCW = $180,000 + $50,000 = $230,000. Add $50,000 of resources to compress it and remove its drag and drag cost, and its TCW is its budget: again, just $100,000, or $130,000 LESS than by implementing the Time/Cost Tradeoff! ???

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The above is what the Total Project Control methodology is all about: maximizing the project’s value (ROI) above cost.

These decisions should really be not just Time/Cost decisions, but Scope/Time/Cost decisions (where the value breakdown structure (VBS) is the primary TPC technique for estimating and managing the value of scope items). ?

The VBS should be supported by PM software, and developed as part of scope planning.

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But honestly: 25 years after the 1st Edition of my Total Project Control book was published, shouldn’t every PM software package (and not just Spider Project and Asta Powerproject) be computing drag? And drag cost? And shouldn’t every project manager and scheduler be using them?

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Steve the Bajan

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