NETWORK ANALYSIS

Part 3 - CRITICAL PATH AND COST ANALYSES

Samithamby Senthilnathan
PhD (Business), M.Sc (Management), B.Sc (Business Administration)
Department of Management, FCM
Eastern University, Sri Lanka

Abstract
In completing a project, duration and cost are two main aspects. The
critical path and cost analyses explore which of them (duration or cost)
can be focused in completing the project. Therefore, this paper
illustrates related aspects, trade-off between the duration and cost of
the project and how the project can be completed optimally.

This paper is organized An Introduction to Critical Path and Cost

Analyses, Critical Path of a Project, Estimating Cost of a Project, and The
Relationship between Programme Evaluation and Review Technique
(PERT) and Critical Path Analysis (CPA).

Keywords: PERT, CPA, critical path, cost analysis

JEL code: C00, O22

Note:
This paper is intended to provide additional explanation about the
network analysis in relation to managing duration and cost of a
project. While thanking for the comments made on previous parts,
your valuable further comments are expected to continue this task.
Please send your comments to sennathans@yahoo.com.

47
http://ssrn.com/abstract=2172569
3.1 AN INTRODUCTION TO CRITICAL PATH AND COST ANALYSES
This critical path approach is a technique introduced in network analysis by E I Du Pont de
Nemours & Co in 1957 for its new chemical plant construction. This approach basically
aims to create a compromise between completion duration and cost of a project. Utilising
more resources is, for example, possibly usual while reducing completion durations of
activities in a project. This can affect normal completion duration of a project. Similarly, the
cost of a project can also be increasing, while using more resources for shortening the
completion durations of activities in the project. Thus, the trade-off between project
duration and cost is that the price of cost is the completion duration and the price of
completion duration is the cost, in a project implementation process. In this context, for
optimization, it is important to manage both: duration and cost of a project. Hence, the
critical path and cost analyses are the enhanced approaches for managing them.

In these approaches, the durations of activities are of deterministic task times. To draw the
network of a project, the activity-on-arrow approach is generally and mostly used.
However, it is also possible to use activity-on-node approach to represent project network.
This chapter also uses the activity-on-arrow approach as in previous chapters to have
consistency in applications and illustrations.

3.2 CRITICAL PATH OF A PROJECT

In completing a project, the activities that must be completed in time without delay are
known as critical activities. While indicating them in the order of completion, it forms the
main path for completing the project (as indicated in Chapter 2) and such main path is
known as the critical path (comprising the critical activities in order). In other word,
among the paths of a project, from its start to end with activities concerned, the path that
has maximum completion duration (as shown in Chapter 2) is known as the critical path,
which is indicated by the path’s relative activities in their order of completion (refer to
Figure 2.4, its paths, durations and explanation).

3.3 ESTIMATING COST OF A PROJECT

While completing a project, the objective of cost analysis in network is to determine
respective costs of its various completion durations. The net cost of a project is determined
in consideration of its network diagram, costs of every activity in the network, and other
relevant income and expenses of the project. Costs of activities can be different from each
other in accordance with their completion durations. However, it is important to
understand different aspects of costs in this section, namely Normal Cost, Fixed Cost,
Penalties and Bonuses, Crashed Cost and Cost Slope.

48
http://ssrn.com/abstract=2172569
3.3.1 Normal Cost of Activities
The ordinary duration required to complete a project is known as Normal Duration of the
project. The cost that is incurred while targeting to complete the project at this normal
duration is known as Normal Cost. It is obvious that various costs possibly take place in
relation to use of labour, tools, equipments and other resources during completion of
activities in consideration of normal duration. Since these costs are considered based on
normal completion durations of activities individually in a project, this duration-based
activity cost is known as the activity variable cost. The sum of normal costs of activities can
therefore be referred to the normal cost of the project. However, this activities-based
normal cost of a project can be altered (to increase or decrease) by other possible
expenditures (such as fixed cost, penalties for late completion, etc.) and/or income (like
bonus for early completion).

3.3.2 Fixed Cost

The fixed cost refers to the cost as being constant for every unit of duration. This fixed cost
incurs independently in accordance with the project completion duration, beyond the
individual cost of activities in the project. If a project, for example, needs 30 months for its
completion and its fixed cost is Rs. 5,000.00 per month, the total fixed cost of the project for
completion is Rs. 150,000.00 (= 30 x 5,000). Similarly, if the project completion is in 25
months, the fixed cost is Rs. 125,000.00 (= 25 x 5000).

3.3.3 Penalty and Bonuses

There may be two possible circumstances in relation to project completion duration.
Firstly, when a project is completed in more than the expected duration, the project
executor has to make additional payment as a penalty for its late completion. Secondly,
when the project is completed before the expected duration, the executor can enjoy
additional benefit like bonus for early completion of the project. In both cases, it is
important to consider whether appropriate provision of penalty for late completion or
bonus for early completion has been made in the project contract agreement.

3.3.4 Crashed Cost

Attempting to complete a project in shorter than normal duration implies employing more
resources to complete every activity in the project. The cost of employing more resources
to complete an activity can increase its normal cost. While attempting to complete an
activity in a shortest duration, it is inevitable to employ more labourers than usual or to
make extra (overtime) payment for additional use of existing labourers. This makes the
particular activity to account more than normal cost to complete in a shortest time span.

49
http://ssrn.com/abstract=2172569
Therefore, the sum of normal cost plus the additional cost for completing the activity in
a shortest period is known as its crashed cost. When every activity is crashed in the
project, the total crashed cost of the project equals to normal cost plus additional crashed
cost of every activity. The additional explanations on these calculations are given in the
following chapters.

3.3.5 Cost Slope

In relation to an activity, while completing the activity less than its normal duration by
utilising additional resources, it is possible to determine additional cost per unit of
duration saved and this additional cost per unit of saved duration is known as the cost
slope of the activity.

Consider for example, an activity requires normal duration of 20 days and relative normal
cost of Rs. 20, 000 for its completion. Instead, while aiming to complete this activity in 15
days (known as crashed duration), utilizing additional resources is unavoidable. In this
context, consider that the total cost of completing the activity in 15 days is Rs. 30,000. It is
notable that the days saved from normal duration (20) is 5 (= 20 – 15) and the additional
cost (known as crashed cost) for completing it in 15 days (for saving the 5 days) is Rs.
10,000 (= 30,000 – 20,000). Therefore, the cost slope of the activity is Rs. 2,000 (= Rs.
10,000 ÷ 5). Thus, the cost slope of an activity can be determined with its increased
crashed cost and saved duration for crashing. This can be shown as:

Crashed Cost - Normal Cost

Cost Slope 
Normal Duration - Crashed Duration
30,000 - 20,000
Cost Slope   Rs. 2,000
20 - 15

The cost slope of the activity is Rs. 2,000 per day.

The cost slope indicates that there is an additional cost of Rs. 2,000.00 for every day saved
from normal duration by crashing. This is further illustrated with Table 3.1 and Figure 3.1.

Table 3.1: Duration and cost of the activity

Normal duration of the activity 20 days
Normal cost for normal duration Rs. 20,000.00
Crashed duration of the activity 15 days
Crashed cost Rs. 30,000.00

50
http://ssrn.com/abstract=2172569
Figure 3.1: Duration and cost of the activity

Cost in Rs. Crashed duration

and related cost
30,000
Normal cost Rs. 20,000
increases by Rs. 10,000 to Normal duration
Rs. 30,000 as the crashed and normal cost
cost. This is incurred due to 20,000
crashing (saving) duration
from normal duration.

15 20 Duration
in days

Normal duration 20 days is reduced by 5 days (to 15 days).

3.3.6 Associating Durations and Costs of a Project

Normal duration, normal cost, crashed duration and crashed cost of a project are illustrated
above. Hence, it is possible to have various combinations of these durations and costs in
relation to completing the project. In relation to the above said durations and costs of a
project, possible outcomes are:
1. Normal duration and normal cost (normal duration and its associated cost or
normal cost and its associated duration),
2. Minimum duration and its associated cost,
3. Minimum cost and its associated duration, and
4. Opimising the duration or cost.

How to associate duration and cost of a project as given above are illustrated in the
following chapters. In project completing, determining appropriate normal cost for normal
completion duration is known as ‘normal cost and normal duration’. Similarly for
effectiveness, prioritizing minimum completing duration of the project can be viewed as
‘minimum duration and its associated cost’; and prioritizing minimum cost of the project
is known as ‘minimum cost and its associated duration’. However, a firm can prioritize
the optimum project completion duration (or cost) and can decide its associated cost
(or duration). It is notable that a firm’s prioritization of optimum duration or cost on
completion of a project depends on the firm’s capacity and preference.

51
http://ssrn.com/abstract=2172569
3.4 THE RELATIONSHIP BETWEEN PROJECT EVALUATION AND REVIEW TECHNIQUE
(PERT) AND CRITICAL PATH ANALYSIS (CPA)
According to PERT, for every activity in a project, three durations (optimistic [a], most
probable [m] and pessimistic [b] durations) are considered for determining its weighted
average as mean completion duration; and by using these mean durations of all activities,
the mean completion duration of the project as a whole is determined.

On the other hand, durations of activities in a project are basically considered as already
determined and those activity durations are used to determine completion duration of the
project. In this context, it is possible to consider: (1) the average duration of an activity in
PERT can be the deterministic duration of the activity in CPA; and (2) the optimistic
duration [b] of an activity in PERT can be the crashed duration of the activity in CPA. These
are the basic relationships between these two approaches on PERT and CPA.

SELF REVIEW QUESTIONS

1. Explain importance of critical path and cost analyses in a network analysis.
2. What is the difference between normal cost of a particular activity and the fixed
cost?
3. Define crashed cost and cost slope.
4. What is the major difference between CPA and PERT?
5. Explain how to determine the cost slope of an activity, by using its formula.

TERMINOLOGY

Bonus Critical Path

Cost Analyses Fixed cost
Cost Normal cost
Cost of the project Penalty
Cost slope Project overall completion time
Crashed cost Duration (Time)

52
http://ssrn.com/abstract=2172569
Exercises
Draw the network diagrams for the following information and determine critical path of
the project and cost slope of every activity.

(1)
Duration (in days) Cost (in Rs.)
Preceding
Activity Normal Crashed
Activity Normal cost Crashed cost
duration duration
A - 6 4 500.00 620.00
B - 4 2 300.00 390.00
C A 7 6 650.00 680.00
D A 3 2 400.00 450.00
E B, C 5 3 850.00 1000.00

(2)
Duration (in days) Cost (in Rs.)
Preceding
Activity Normal Crashed
Activity Normal cost Crashed cost
duration duration
A - 4 3 2600.00 3200.00
B - 8 5 3000.00 5100.00
C A 5 3 1700.00 2700.00
D A 9 7 2200.00 3000.00
E B, C 5 3 2000.00 3600.00
F D, E 3 3 3000.00 3000.00
G F 2 1 1000.00 1200.00

(3)
Duration (in days) Cost (in Rs.)
Preceding
Activity Normal Crashed
Activity Normal cost Crashed cost
duration duration
A - 8 6 1600.00 1920.00
B - 16 12 2400.00 3360.00
C F, D 6 4 4000.00 4800.00
D B 10 8 3000.00 3600.00
E - 14 10 3600.00 5040.00
F A 32 18 1200.00 2880.00
G B 24 16 1000.00 1800.00
H G 20 16 2800.00 3920.00
I K 10 8 3800.00 4560.00
J E 16 14 5600.00 6720.00
K G, J 22 16 4600.00 7360.00

53
http://ssrn.com/abstract=2172569
Answers
(1)
Network diagram
D
6 6 3 1 1
6 8 8
A 8 1
C
6 7 E
5

0 0 B 1 1
4 3 3
0 0
Critical Path: A  C  E

Cost slope of every activity

Duration (in days) Cost (in Rs.)

Activity

Duration CS = Cost
Normal Crashed saved (DS)  NC  CC  Slope
Normal Crashed  
duration duration = ND – CD  DS  (CS)
cost (NC) cost (CC)
(ND) (CD)
A 6 4 2 500 620 120/2 60
B 4 2 2 300 390 90/2 45
C 7 6 1 650 680 30/1 30
D 3 2 1 400 450 50/1 50
E 5 3 2 850 1000 150/2 75

(2)
Network diagram

A D
C
4 9
5

0 B E F
9 14 17
G 19 19
8 5 3 2

Critical Path: A  C  E  F  G

54
http://ssrn.com/abstract=2172569
Cost slope of every activity
Duration (in days) Cost (in Rs.)
Activity

Duration CS = Cost
Normal Crashed saved (DS)  NC  CC  Slope
Normal Crashed  
duration duration = ND – CD  DS  (CS)
cost (NC) cost (CC)
(ND) (CD)
A 4 3 1 2600.00 3200.00 600/1 600
B 8 5 3 3000.00 5100.00 2100/3 700
C 5 3 2 1700.00 2700.00 1000/2 500
D 9 7 2 2200.00 3000.00 800/2 400
E 5 3 2 2000.00 3600.00 1600/2 800
F 3 3 - 3000.00 3000.00 - -
G 2 1 1 1000.00 1200.00 200/1 200

(3)
Network diagram

F
8 32 40

C
A 6
8 D
10

B G H
0 40 72
16 20 72
16 24
I
10
E
62
14
K
J 22
14
16 40

Critical Path: B  G  K  I

55
http://ssrn.com/abstract=2172569
Cost slope of every activity
Duration (in days) Cost (in Rs.)
Activity

Duration CS = Cost
Normal Crashed saved (DS)  NC  CC  Slope
Normal Crashed  
duration duration = ND – CD  DS  (CS)
cost (NC) cost (CC);
(ND) (CD)
A 8 6 2 1600.00 1920.00 320/2 160
B 16 12 4 2400.00 3360.00 960/4 240
C 6 4 2 4000.00 4800.00 800/2 400
D 10 8 2 3000.00 3600.00 600/2 300
E 14 10 4 3600.00 5040.00 1440/4 360
F 32 18 14 1200.00 2880.00 1680/14 120
G 24 16 8 1000.00 1800.00 800/8 100
H 20 16 4 2800.00 3920.00 1120/4 280
I 10 8 2 3800.00 4560.00 760/2 380
J 16 14 2 5600.00 6720.00 1120/2 560
K 22 16 6 4600.00 7360.00 2760/6 460

56
http://ssrn.com/abstract=2172569
Bibliography
Anderson, D.R., Sweeney, D.J., and William, T.A. (2006), Quantitative Methods for
Business, 10th ed., India: Thomson South Western.
Gupta, P.K., and Hira, D.S. (2007), Operations Research, 20th ed., India: S.Chand &
Company Ltd.
Hillier, F.S., and Hillier, M.S. (2005). Introduction to Management Science – A
modeling and Case Studies Approach with Spreadsheets, 2nd ed., New Delhi:
Tata McGraw-Hill Publishing Company Limited.
Hillier, F.S., and Lieberman, G.J. (1994). Operations Research, 2nd ed., New Delhi:
CBS Publishers and Distributors.
Kalavathy, S. (2002). Operations Research, 2nd ed., Delhi: Vikas Publishing House
Pvt Ltd.
Karunaratna. K. R. M. T. (2005). Quantitative Methods for Management, 3rd ed., Sri
Lanka.
Lawrence, J.A., and Pasternack, B.A. (2002). Applied Management Science, 2nd ed.,
India: John Wiley & Sons, Ins, India
Lucey T. (1988). Quantitative Techniques – An Instructional Manual, 3rd ed.,
London: English Language Book Society/DP Publication.
Pinney, W.E., and McWilliams, D.B. (1987). Management Science: An Introduction to
Quantitative, Analysis for Management, 2nd ed., New York: Harper and Row,
Publishers.
Taha, H.A. (2004).Operations Research: An Introduction, 7th ed., New Delhi:
Prentice-Hall of India Private Ltd.
Tulsian, P.C., and Pandey, V. (2002). Quantitative Techniques – Theory and Problem,
Delhi: Pearson Education (Singapore) Pte.
Wagner, H.M. (2008). Principles of Operations Research, 2nd ed., New Delhi: PHI
Learning Pvt Ltd.

57
http://ssrn.com/abstract=2172569