Cost Risk and Schedule Risk

Cost Risk and Schedule Risk

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Assignment Objectives:
Understand the effect of cost and schedule risk on contingency reserves and risk mitigation.
Purpose: As a project manager for a new company you have just joined, you are concerned that previous
projects have only emphasized cost risk when developing their budgets. You feel it is important to begin
integrating schedule risk into all future project budgets.
Assignment Description: Write a minimum 4-5 page paper that explains the difference between cost and
schedule risk and why it’s important to not focus just on cost risk but integrate both cost and schedule risk
when developing project budgets and cost probability distributions.
Fully describes schedule risk and its relationship to overall cost
Fully explains the difference between time-dependent and time-independent resources
Provides examples of both cost and schedule risk and how they might affect an individual project activity
individually
Fully explains the how integrating cost and schedule risk affect overall project costs

Cost Risk and Schedule Risk

Budgeting is a strategic planning process that must expertly be evaluated to
ensure that project implementation is successful. Poor budgeting can easily lead to deficits and
unsuccessful project execution. Project managers should sufficiently evaluate all the possible
cost risks, project risks and schedules that could impact the success of project implementation.
Cost and schedule risk affect both the quality and scope of the project, and this directly affects
the value of performing projects concerning loss and profits (Garvey, Book & Covert, 2016).
The schedule time also impacts the cost of the project and has less tangible effects such as a loss
of reputation due to late delivery. Therefore, it is essential to incorporate all cost risks and
schedule risks within the overall budget cost in order to avoid possible deficiencies, delays and
wrong estimates that can lead to failure of company projects. This paper presents the differences
between cost risks and schedule risks and the implications they have on the overall cost of a
project. Thus, it is essential to integrate both schedule and cost risk when developing project
costs and cost probability distributions.

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Schedule risk is the potential for a project, task or strategy to take more time than
planned. Therefore, a project schedule should include forward-looking estimates that are
inherently uncertain. This shows that there is a risk that estimated assumptions, durations, and
dependencies built into a project schedule will turn out to be incorrect. It is precise to say that
schedule risk can lead to cost risks as long as a project can cost more. It can lead to performance
risks if the projects are completed too late to perform the plan tasks fully. However, a cost risk is
that risk that a given project will cost more than the estimated or budgeted value. Cost risk can
easily amount to performance risks if cost over-runs the amount to deductions in project scope or
quality. A cost risk also amounts to schedule risk if the schedule of the project is extended and
the company lacks sufficient funds to complete the task or project in time (Garvey, Book &
Covert, 2016).

Some differences occur between cost risk and schedule risk. Schedule risk affects
the duration of project completion while cost risk increases the budgeted amount of the project.
The cost is a technique for cost analysis of a complex project is based on the WBS (Work
Breakdown Structure). Besides, apart from the resource allocation and cost estimation used in
(Critical Path Method) CPM, most of the techniques applied in a quantitative analysis of cost risk
are different from the techniques applied in the analysis of schedule risk. Unlike cost risk,
schedule risk used Gantt chart for risk analysis. Thus, analysis of schedule risk is a useful
technique used to connect the risk information of tasks of the project to the baseline schedule for
providing information sensitivity of each activity of the project. This helps to determine the
impacts of uncertainty on the overall cost and duration of a project (Kerzner & Kerzner, 2017).
Cost risk analysis is the most straightforward technique which many organizations
focus on when creating project proposals. Cost risk estimates the scope of work at a high level

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as a line item series in a spreadsheet for easy calculations of overheads, contingency, and profit
as percentages, which produce, project prices (Khodakarami & Abdi, 2014). The various
techniques for determining cost risk include proprietary risk analysis packages through home
grown-macros. For instance, a diverse cost risk solutions use sophisticated algorithms such as
Monte Carlo simulation to enhance accuracy. A cost risk model has many pitfalls such as cost
impact of potential schedule delays are extremely to assess.

Schedule risk analysis is essential to be integrated with cost risk in order to come
up with cost estimation of projects. Analysis of schedule risk not only provides information
concerning expected completion dates but also produces a more realistic assessment of possible
project costs. Schedule risk is substantial as it includes the schedule for project completion.
Schedule risk analysis helps organizations to plan both the cost and resources of project
execution as well as separating planning and costing for organizational projects. Schedule risk
analysis helps organizations to use uncertain data to arrive at cost estimates and helps to avoid
the pitfalls of only discovering a low probability of schedule success after awarding the project
contract (Khodakarami & Abdi, 2014).

Therefore, analysis of cost risk treats all components of the estimate in isolation.
Although drivers and correlation used to create shared influencing factors, the expected or mean
costs always remains the same if the deviation or range of result changes. However, schedule
risk analysis uses appropriate successor or predecessor logic to produce more realistic forecasts
or predictions based on merge bias and rate changes. Schedule risk increases the overall costs by
increasing the cost of delays, dependencies and wrong estimates. Besides, the impacts of
schedule risks have increased the cost of the overall project, change project scope and the
compromised quality (Kerzner & Kerzner, 2017).

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Time-dependent and Time-independent Resources
Time-dependent resources are sources, which are applicable, based on time and
help to apply the validity condition of resources such as records and contracts. Besides, the
different validity period for different resources applies to make them time-dependent. However,
time-independent resources do not rely on time, and when identified, they remain applicable
even if the condition or resource is expired in the source. Companies can maintain resource types
of time-dependent through supplement conditions, which mean it has a validity of use. The
validity in a time-dependent resource is used to control the condition record (Hulett, 2016).
Time-dependent resource lacks validity, making it extremely hard to maintain during pricing
procedures on calculation schema. Also, a time-dependent resource is maintained in information
or condition record, and time-independent resource is maintained in the calculation schema.

Example of Cost and Schedule Risk Analysis

Suppose a company has a budgeted for a project to cost $1 million. The project will be finished
in 10 months. After a month, the manager has finished 12% of the task at a total cost of
$130,000. The planned completion should have been 18%. We can evaluate the cost and
schedule variance by determining the planned and earned values.
Earned value = actual completion percentage × BAC
= 12% × 1000000
= 120000
Planned value = planned completion % × BAC
= 18% × 1000000

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=180000
We can now compute the schedule and cost variances of the project cost
Schedule variance = Earned value – Planned valued
= 120000- 180000
= -60,000
Cost variance = Earned value – Actual value
= 120,000 – 130,000
= -10,000

The interpretation shows that the cost variance is negative, meaning that the
project is over-budgeted. The schedule variance is negative, meaning the project is behind
schedule. This indicates that the project completion is in jeopardy and corrective strategies
should be adopted to make it back on course.

Integrating Risk and Schedule Risk in the Overall Cost of Projects
Cost estimates always can be disconnected if the project reality schedules slip
causing an increase in overall costs. Integrating cost and schedule risk helps to take into account
activity duration, changes, and estimates (Kerzner & Kerzner, 2017). This is because the cost of
activities depends on assumptions of duration cost risk; cost risk relies on risk in all elements of
the cost equation and includes activities’ durations. Integrating both schedule and cost risks help
to disaggregate sources of risks affecting time and those that impact the burn rate per time unit.
Therefore, it is essential to conduct a schedule risk analysis first and using the results to the cost

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risk analysis in case the estimates are outside the schedule (Hulett, 2016). Thus, in case the
resources are priced and loaded in the project schedule, there results in simultaneous programs of
integration costs and schedule risk analysis. This drives the cost uncertainty by uncertainty of
schedule. Integration helps to avoid project delays, dependencies, and wrong estimates, allowing
companies to achieve their time objectives. Thus, integration of cost and schedule risk analysis
with defined, assigned and priced resources or activities simulate date and cost uncertainties to
allow burn rates and duration to vary simultaneously. Incorporating cost risk analysis and
schedule risk analysis as well as merging with information of burn rate risk in estimating risk
costs is more correct and typical approach. Integration of cost and schedule risk helps to develop
risk response for addressing the cost and type risks selectively as appropriate. Therefore, it helps
to evaluate both time and cost or government contracts and project, especially when modeling
uncertainty.

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References

Garvey, P. R., Book, S. A., & Covert, R. P. (2016). Probability methods for cost uncertainty
analysis: A systems engineering perspective. Chapman and Hall/CRC.
Hulett, D. (2016). Integrated cost-schedule risk analysis. Routledge.
Kerzner, H., & Kerzner, H. R. (2017). Project management: a systems approach to planning,
scheduling, and controlling. John Wiley & Sons.
Khodakarami, V., & Abdi, A. (2014). Project cost risk analysis: A Bayesian networks approach
for modeling dependencies between cost items. International Journal of Project
Management, 32(7), 1233-1245.