COST OPTIMISATION

‘CRASHING’

©Sheila Belayutham

LEARNING OUTCOME

Students will be able to:Understand the technique to obtain

the optimal duration at the lowest cost.

©Sheila Belayutham

COST OPTIMISATION

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Cost optimization is studied to consider the options available in balancing out the time savings against the cost of speeding up the work.

Client and contractor could assess the effect on direct and indirect costs of reducing the overall project period.

INTRODUCTION

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Important Terms

Direct Cost Indirect CostTotal Project CostOptimum Project Duration

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Direct Cost

Types of direct cost:– Labor– Plant– Materials– Overhead

Activity accelerated, direct cost increase. “Non linear” with time. Reason being, you need more worker, more

material (formwork), more supervisors, etc.

©Sheila Belayutham

Indirect cost

Time related cost, where it changes as the project duration changes.

Cost and time are ‘constant’. Examples:

– Project supervision– Site accommodation– Temporary services for site office– Site transportation

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When activity accelerated, indirect cost will decrease.

Reason being that contractor will be on site for a shorter period, therefore will be reduction in the site administration costs.

Indirect cost

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What will happen when a project is to be shorten?

Work overtimeWork following shiftAdditional equipment, machinery

required, which will increase the cost of mobilization and demobilization.

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When do we need to shorten the duration of project?

Over purchasing of material Political pressure Weather condition Having other new project in hand.

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Material being brought in bit by bit, therefore increase transportation cost and material cost because buying in bulk is cheaper.

Less worker, less productivity, affect the morale of workers.

What will happen when a project is to be lengthen?

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When do we need to lengthen the duration of project?

Happen that shortage of resources in the midst of progression.

Negative cash flow.Planning too fast.

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Total Project Cost

Summation of direct cost and Indirect Cost.

Optimum Project Duration

Optimum project duration occurs where the most beneficial least cost situation occurs, taking into consideration both direct and indirect costs.

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Relationship between direct cost, indirect cost and project duration.

Direct cost rises as project duration decreases.

Indirect costs rises as project duration increases.

There is a minimum duration for any project beyond which further reduction is not feasible.

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DETERMINING OPTIMUM PROJECT COST

Prepare a table of activities on the critical path showing normal activity duration and cost, and minimum (crash) activity duration and cost.

Calculate the cost slope of each activity in the table. List the activities in order of minimum cost slope. Omit activities which cannot be compressed (and those fully

crashed from previous compressions) Compress the activity (or activities if two are being

compressed) with the least cost slope, the maximum amount possible, or until some other activity becomes critical.

Calculate the new project duration and direct cost. When minimum duration is reached, calculate indirect costs for

each project duration. Add indirect costs to direct costs and calculate total costs for

each project duration. Determine optimum project cost.

©Sheila Belayutham

Network for Construction of a Bridge

000

153

4139 7

1610

374 4

85 11116 20

20816167 23

2312 242413

112011

10102

4151

4

10

1

2

3

11

53 4

1

3 1

3 4

3

©Sheila Belayutham

Activity reference

Normal Crash

Duration Cost Duration Cost0-1 4 3000 3 33000-2 10 9000 5 97500-3 1 100 1 1001-7 1 120 1 1202-6 1 100 1 1003-4 2 1500 2 15003-9 3 500 2 6004-5 1 500 1 5005-6 3 450 2 5256-7 5 1500 3 25007-8 4 1200 3 14008-12 3 750 3 7509-10 3 350 3 35010-11 4 550 3 60011-12 3 800 2 110012-13 1 500 1 500

©Sheila Belayutham

Given also:

Indirect costs are RM400.00 per week

Project duration is 24 weeks and the cost is RM20920

Determine optimum project cost

©Sheila Belayutham

Network for Construction of a Bridge

000

153

4139 7

1610

374 4

85 11116 20

20816167 23

2312 242413

112011

10102

4151

4

10

1

2

3

11

53 41

3 1

3 4

3

©Sheila Belayutham

Activity reference

Normal Crash

Duration Cost Duration Cost0-1 4 3000 3 33000-2 10 9000 5 97500-3 1 100 1 1001-7 1 120 1 1202-6 1 100 1 1003-4 2 1500 2 15003-9 3 500 2 6004-5 1 500 1 5005-6 3 450 2 5256-7 5 1500 3 25007-8 4 1200 3 14008-12 3 750 3 7509-10 3 350 3 35010-11 4 550 3 60011-12 3 800 2 110012-13 1 500 1 500

©Sheila Belayutham

Activity Maximum Compression

Cost per week

0-2 5 150

6-7 2 500

7-8 1 200

©Sheila Belayutham

Network for Construction of a Bridge

000

153

4139 7

1610

374 4

85 11116 20

20816167 23

2312 242413

112011

10102

4151

4

10

1

2

3

11

53 41

3 1

3 4

3

©Sheila Belayutham

Revised Network 1

000

113

499 7

1210

334 4

45 776 16

16812127 19

1912 202013

111611

662

4111

4

6

1

2

3

11

53 41

3 1

3 4

3

©Sheila Belayutham

First Compression: Project duration is now 20weeks and activities 0-3, 3-

4, 4-5 and 5-6 is also critical now

Activity Maximum Compression

Cost per week

0-2 5 150

Direct cost after first compression:RM20920 + (RM150 x 4) = RM21520

©Sheila Belayutham

Activity reference

Normal Crash

Duration Cost Duration Cost0-1 4 3000 3 33000-2 10 9000 5 97500-3 1 100 1 1001-7 1 120 1 1202-6 1 100 1 1003-4 2 1500 2 15003-9 3 500 2 6004-5 1 500 1 5005-6 3 450 2 5256-7 5 1500 3 25007-8 4 1200 3 14008-12 3 750 3 7509-10 3 350 3 35010-11 4 550 3 60011-12 3 800 2 110012-13 1 500 1 500

©Sheila Belayutham

Activity Maximum Compression

Cost per week

0-2 5 150

5-6 1 75

6-7 2 500

7-8 1 200

©Sheila Belayutham

Revised Network 1

000

113

499 7

1210

334 4

45 776 16

16812127 19

1912 202013

111611

662

4111

4

6

1

2

3

11

53 41

3 1

3 4

3

©Sheila Belayutham

Second Compression: To compress activity 5-6, you need to compress

activity 0-2 as well for the project time to be reduced 1week

It will cost RM75 + RM150 = RM225 Thus, it is cheaper to compress activity 7-8 at RM200 Project duration is now 19weeks

Direct cost after second compression:RM21520 + RM200 = RM21745

©Sheila Belayutham

Revised Network 2

000

113

489 7

1110

334 4

45 776 15

15812127 18

1812 191913

111511

662

4111

4

6

1

2

3

11

53 31

3 1

3 4

3

©Sheila Belayutham

Activity Maximum Compression

Cost per week

0-2 5 150

5-6 1 75

6-7 2 500

7-8 1 200

©Sheila Belayutham

Revised Network 3

000

113

479 7

1010

334 4

45 666 14

14811117 17

1712 18.1813

111411

552

4101

4

5

1

2

3

11

52 31

3 1

3 4

3

©Sheila Belayutham

Third Compression: Project duration is now 18weeks

Activity Maximum Compression

Cost per week

0-2 5 150

5-6 1 75

Direct cost after third compression:RM21720 + RM225 = RM21945

©Sheila Belayutham

Activity Maximum Compression

Cost per week

0-2 5 150

5-6 1 75

6-7 2 500

7-8 1 200

©Sheila Belayutham

Revised Network 4

000

113

459 7

810

334 4

45 666 12

128997 15

1512 161613

111211

552

481

4

5

1

2

3

11

32 31

3 1

3 4

3

©Sheila Belayutham

Fourth Compression: Project duration is now 16weeks

Activity Maximum Compression

Cost per week

6-7 2 500

Direct cost after third compression:RM21945 + (RM500 x 2) = RM22945

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To determine optimum cost, indirect cost must be added in.

Project Duration 16 18 19 20 24

Direct Cost 22945 21945 21720 21520 20920

Indirect Cost 6400 7200 7600 8000 9600Total Cost 29345 29145 29320 29520 30520

So, the optimum cost is RM29145 at a duration of 18weeks

©Sheila Belayutham

THE END…

©Sheila Belayutham