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Optimal use of budget reserves to minimize technical and management failure risks during complex project development

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3 Author(s)
Dillon, R.L. ; McDonough Sch. of Bus., Georgetown Univ., Washington, DC, USA ; Paté-Cornell, M.E. ; Guikema, S.D.

Project managers are recognizing that adequate resource reserves are a critical success factor in a project development environment that is complex and uncertain. Yet, justifying the need for project reserves is still a challenge, as is the optimal allocation of any available resources to minimize development uncertainties. This paper presents a multiperiod decision model designed to support the management of reserves considering the risks of failures including technical, managerial, i.e., exceeding budget and schedule, or strategic, i.e., meeting budget, schedule, and technical specifications but not achieving the full strategic value of the project. In this paper, we examine the tradeoffs among these risks and their implications for resource allocation during a project's development phase. This decision support model is referred to as Dynamic Advanced Probabilistic Risk Analysis Model. It provides decision makers with a quantitative tool to allocate reserves (beyond the bare-bone minimum project costs) among project reserves, technical reinforcements of the engineered system, and product enhancements, with the advantage of flexibility over time. The model yields first, coarse estimates of the value of deferring some commitments about the product's design until critical uncertainties are resolved and second, an estimate of the optimal amount to be invested in testing and reviews. We show that the greater the uncertainties at the onset of the development phase, the greater the value of this information.

Published in:

Engineering Management, IEEE Transactions on  (Volume:52 ,  Issue: 3 )