Page 143 - DMGT206_PRODUCTION_AND_OPERATIONS_MANAGEMENT

Production and Operations Management

Notes  Direct costs include labour, materials, equipment and any other costs directly related to
project activities.

 Indirect costs include administration, depreciation, financial costs, and other variable
overheads. Indirect costs can be avoided by reducing total project time. The shorter the
duration of the project, the lower will be the indirect costs.
 Penalty clauses are often part of project contracts if the project extends beyond some
specific date. Sometimes a bonus may be provided for early completion. Some activities
can be expedited to reduce overall project completion time and total project costs.

Time cost Trade-off procedures make use of some special terms. Some of these are explained
here below:

Normal Activity Time-Cost-Point

Is the lowest point on a time-cost graph and represents the absolute minimum cost for
accomplishing the activity in normal time. Normal Time is the shortest time to perform the
activity within the constraint of minimum direct cost.
Feasible Activity Time-Cost Trade-Off Points

Represent the various combinations of minimum direct costs and their corresponding least
timings for one individual activity only. There can be few or several of these points and they can
be best represented on a graph showing cost versus timings:
(i) The project duration is too long.
(ii) The customer wants to know the additional costs for saving part of the project completion
time.
(iii) The company may like to minimize the sum of direct and indict project costs without
disturbing the stipulated duration time.
Because the project indirect costs can be easily determined through existing accounting practices,
Time-Cost Trade-off procedures are mostly used for minimizing direct costs for the given
project duration times only.

The procedure for ‘Feasible Activity Time Cost Trade-off’ consists in collecting first cost data for
the network and rescheduling of all the critical and near critical activities, again collecting
second cost data and rescheduling the new critical or sub-critical activities and so on. A systematic
procedure has been developed by Burgess.
 Starting with the bottom activity, the method makes comparisons between the sums of
squares of daily resource requirements and selects the one with minimum sum.
 The target always being toward reducing the project duration time with minimum increase
Direct Costs.

 The process is continued till a step is reached when increase in Direct Cost is less than the
decrease in Indirect Costs. That means no further decrease in Total Costs is possible.

 This method of choosing the schedule, leads to the least variation in resource requirements.
This is also called ‘crashing’.

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