Appendix 5.1: Learning Curves for Estimating

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156 Chapter 5 Estimating Project Times and Costs



she wanted time and cost estimates from those who would do the work or were the

most knowledgeable, if possible. Getting estimates from more than one source was

encouraged. Estimates were due in two weeks.

The compiled estimates were placed in the WBS/OBS. The corresponding cost estimate seemed to be in error. The cost estimate was $1,250,000 over the top-down senior

management estimate; this represented about a 20 percent overrun! Furthermore the

bottom-up time estimate based on the project network was four months longer than

the top management time estimate. Another meeting was scheduled with the significant

stakeholders to check the estimates and to brainstorm for alternative solutions. At this

meeting everyone agreed the bottom-up cost and time estimates appeared to be accurate. Some of the suggestions for the brainstorming session are listed below.

∙ Change scope.

∙ Outsource technology design.

∙ Use the priority matrix (found in Chapter 4) to get top management to clarify their

priorities.

∙ Partner with another organization or build a research consortium to share costs and

to share the newly developed technology and production methods.

∙ Cancel the project.

∙ Commission a break-even study for the laser printer.

Very little in the way of concrete savings was identified, although there was consensus that time could be compressed to the market launch date, but at additional costs.

Lauren met with the marketing (Connor), production (Kim), and design (Gage) managers who yielded some ideas for cutting costs, but nothing significant enough to have a

large impact. Gage remarked, “I wouldn’t want to be the one to deliver the message to top

management that their cost estimate is $1,250,000 off! Good luck, Lauren.”

1. At this point, what would you do if you were the project manager?

2. Was top management acting correctly in developing an estimate?

3. What estimating techniques should be used for a mission critical project such as this?



Case 5.2



Post Graduation Adventure

Josh and Mike met each other as roommates during freshman year at MacAlister College in St. Paul, Minnesota. Despite a rocky start they became best friends. They are

planning on going on a two-week adventure together to celebrate their graduation in

June. Josh has never been to Europe and wants to visit France or Spain. Mike spent a

semester abroad in Aarhus, Denmark, and traveled extensively in northern Europe.

Even though he never went to France or Spain, Mike wants to go to someplace more

exotic like South Africa or Vietnam. For the past week they have been arguing back

and forth over where they should go. Josh argues that it will cost too much to fly to

South Africa or Vietnam, while Mike counters that it will be much cheaper to travel in

Vietnam or South Africa once they are there. Each of them agreed that they can spend

no more than $3,500 each on the trip and could be gone for only two weeks.

One evening when they were arguing with each other over beers with friends,

Sara said, “Why don’t you use what you learned in your project management class



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Chapter 5 Estimating Project Times and Costs 157



to decide what to do?” Josh and Mike looked at each other and agreed that made

perfect sense.

1. Assume you are either Mike or Josh; how would you go about making a decision

using project management methodology?

2. Looking first at only cost, what decision would you make?

3. After cost, what other factors should be considered before making a decision?



Appendix 5.1

LEARNING OBJECTIVES

After reading this appendix you should be able to:

A5-1 Use learning curves to improve task estimates.



Learning Curves for Estimating

LO A5-1

Use learning curves to

improve task estimates.



A forecast estimate of the time required to perform a work package or task is a basic

necessity for scheduling the project. In some cases, the manager simply uses judgment

and past experience to estimate work package time, or may use historical records of

similar tasks.

Most managers and workers intuitively know that improvement in the amount of

time required to perform a task or group of tasks occurs with repetition. A worker can

perform a task better/quicker the second time and each succeeding time she/he performs it (without any technological change). It is this pattern of improvement that is

important to the project manager and project scheduler.

This improvement from repetition generally results in a reduction of labor hours for

the accomplishment of tasks and results in lower project costs. From empirical evidence across all industries, the pattern of this improvement has been quantified in the

learning curve (also known as improvement curve, experience curve, and industrial

progress curve), which is described by the following relationship:

Each time the output quantity doubles, the unit labor hours are reduced at a constant rate.



For example, assume that a manufacturer has a new contract for 16 prototype units

and a total of 800 labor hours were required for the first unit. Past experience has indicated that on similar types of units the improvement rate was 80 percent. This relationship of improvement in labor hours is shown below:

Unit

  1

  2

  4

  8

16



800 × .80 =

640 × .80 =

512 × .80 =

410 × .80 =



Labor Hours

800

640

512

410

328



By using Table A5.1 unit values, similar labor hours per unit can be determined.

Looking across the 16 unit level and down the 80 percent column, we find a ratio



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158 Chapter 5 Estimating Project Times and Costs



TABLE A5.1



Learning Curves

Unit Values



Units



60%



65%



70%



75%



80%



85%



90%



95%



1

2

3

4

5

6

7

8

9

10

12

14

16

18

20

22

24

25

30

35

40

45

50

60

70

80

90

100

120

140

160

180

200

250

300

350

400

450

500

600

700

800

900

1,000

1,200

1,400

1,600

1,800

2,000

2,500

3,000



1.0000

.6000

.4450

.3600

.3054

.2670

.2383

.2160

.1980

.1832

.1602

.1430

.1296

.1188

.1099

.1025

.0961

.0933

.0815

.0728

.0660

.0605

.0560

.0489

.0437

.0396

.0363

.0336

.0294

.0262

.0237

.0218

.0201

.0171

.0149

.0133

.0121

.0111

.0103

.0090

.0080

.0073

.0067

.0062

.0054

.0048

.0044

.0040

.0037

.0031

.0027



1.0000

.6500

.5052

.4225

.3678

.3284

.2984

.2746

.2552

.2391

.2135

.1940

.1785

.1659

.1554

.1465

.1387

.1353

.1208

.1097

.1010

.0939

.0879

.0785

.0713

.0657

.0610

.0572

.0510

.0464

.0427

.0397

.0371

.0323

.0289

.0262

.0241

.0224

.0210

.0188

.0171

.0157

.0146

.0137

.0122

.0111

.0102

.0095

.0089

.0077

.0069



1.0000

.7000

.5682

.4900

.4368

.3977

.3674

.3430

.3228

.3058

.2784

.2572

.2401

.2260

.2141

.2038

.1949

.1908

.1737

.1605

.1498

.1410

.1336

.1216

.1123

.1049

.0987

.0935

.0851

.0786

.0734

.0691

.0655

.0584

.0531

.0491

.0458

.0431

.0408

.0372

.0344

.0321

.0302

.0286

.0260

.0240

.0225

.0211

.0200

.0178

.0162



1.0000

.7500

.6338

.5625

.5127

.4754

.4459

.4219

.4017

.3846

.3565

.3344

.3164

.3013

.2884

.2772

.2674

.2629

.2437

.2286

.2163

.2060

.1972

.1828

.1715

.1622

.1545

.1479

.1371

.1287

.1217

.1159

.1109

.1011

.0937

.0879

.0832

.0792

.0758

.0703

.0659

.0624

.0594

.0569

.0527

.0495

.0468

.0446

.0427

.0389

.0360



1.0000

.8000

.7021

.6400

.5956

.5617

.5345

.5120

.4930

.4765

.4493

.4276

.4096

.3944

.3812

.3697

.3595

.3548

.3346

.3184

.3050

.2936

.2838

.2676

.2547

.2440

.2349

.2271

.2141

.2038

.1952

.1879

.1816

.1691

.1594

.1517

.1453

.1399

.1352

.1275

.1214

.1163

.1119

.1082

.1020

.0971

.0930

.0895

.0866

.0606

.0760



1.0000

.8500

.7729

.7225

.6857

.6570

.6337

.6141

.5974

.5828

.5584

.5386

.5220

.5078

.4954

.4844

.4747

.4701

.4505

.4345

.4211

.4096

.3996

.3829

.3693

.3579

.3482

.3397

.3255

.3139

.3042

.2959

.2887

.2740

.2625

.2532

.2454

.2387

.2329

.2232

.2152

.2086

.2029

.1980

.1897

.1830

.1773

.1725

.1683

.1597

.1530



1.0000

.9000

.8462

.8100

.7830

.7616

.7439

.7290

.7161

.7047

.6854

.6696

.6561

.6445

.6342

.6251

.6169

.6131

.5963

.5825

.5708

.5607

.5518

.5367

.5243

.5137

.5046

.4966

.4830

.4718

.4623

.4541

.4469

.4320

.4202

.4105

.4022

.3951

.3888

.3782

.3694

.3620

.3556

.3499

.3404

.3325

.3258

.3200

.3149

.3044

.2961



1.0000

.9500

.9219

.9025

.8877

.8758

.8659

.8574

.8499

.8433

.8320

.8226

.8145

.8074

.8012

.7955

.7904

.7880

.7775

.7687

.7611

.7545

.7486

.7386

.7302

.7231

.7168

.7112

.7017

.6937

.6869

.6809

.6757

.6646

.5557

.6482

.6419

.6363

.6314

.6229

.6158

.6098

.6045

.5998

.5918

.5850

.5793

.5743

.5698

.5605

.5530



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Chapter 5 Estimating Project Times and Costs 159



of .4096. By multiplying this ratio times the labor hours for the first unit, we obtain

the per unit value:

.4096 × 800 = 328 hours or 327.68

That is, the 16th unit should require close to 328 labor hours, assuming an 80 percent

improvement ratio.

Obviously, a project manager may need more than a single unit value for estimating

the time for some work packages. The cumulative values in Table A5.2 provide factors

for computing the cumulative total labor hours of all units. In the previous example, for

the first 16 units, the total labor hours required would be

800 × 8.920 = 7,136 hours

By dividing the total cumulative hours (7,136) by the units, the average unit labor

hours can be obtained:

7,136 labor hours/16 units = 446 average labor hours per unit

Note how the labor hours for the 16th unit (328) differs from the average for all 16

units (446). The project manager, knowing the average labor costs and processing

costs, could estimate the total prototype costs. (The mathematical derivation of factors

found in Tables A5.1 and A5.2 can be found in Jelen, F. C., and J. H. Black, Cost and

Optimization Engineering, 2nd ed. (New York: McGraw-Hill, 1983.)



FOLLOW-ON CONTRACT EXAMPLE

Assume the project manager gets a follow-on order of 74 units; how should she estimate labor hours and cost? Going to the cumulative Table A5.2 we find at the 80 percent ratio and 90 total units intersection—a 30.35 ratio.

800 × 30.35 =

24,280 labor hours for 90 units

Less previous 16 units =

  7,136

Total follow-on order =

17,144 labor hours

17,144/74 equals 232 average labor hours per unit



Labor hours for the 90th unit can be obtained from Table A5.1: .2349 × 800 = 187.9

labor hours. (For ratios between given values, simply estimate.)



Exercise A5.1

Norwegian Satellite Development Company

Cost Estimates

for

World Satellite Telephone Exchange Project

NSDC has a contract to produce eight satellites to support a worldwide telephone system (for Alaska Telecom, Inc.) that allows individuals to use a single, portable telephone in any location on earth to call in and out. NSDC will develop and produce the

eight units. NSDC has estimated that the R&D costs will be NOK (Norwegian Krone)

12,000,000. Material costs are expected to be NOK 6,000,000. They have estimated

the design and production of the first satellite will require 100,000 labor hours and an



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160 Chapter 5 Estimating Project Times and Costs



TABLE A5.2



Learning Curves

Cumulative Values



Units



60%



65%



70%



75%



80%



85%



90%



95%



1

2

3

4

5

6

7

8

9

10

12

14

16

18

20

22

24

25

30

35

40

45

50

60

70

80

90

100

120

140

160

180

200

250

300

350

400

450

500

600

700

800

900

1,000

1,200

1,400

1,600

1,800

2,000

2,500

3,000



1.000

1.600

2.045

2.405

2.710

2.977

3.216

3.432

3.630

3.813

4.144

4.438

4.704

4.946

5.171

5.379

5.574

5.668

6.097

6.478

6.821

7.134

7.422

7.941

8.401

8.814

9.191

9.539

10.16

10.72

11.21

11.67

12.09

13.01

13.81

14.51

15.14

15.72

16.26

17.21

18.06

18.82

19.51

20.15

21.30

22.32

23.23

24.06

24.83

26.53

27.99



1.000

1.650

2.155

2.578

2.946

3.274

3.572

3.847

4.102

4.341

4.780

5.177

5.541

5.879

6.195

6.492

6.773

6.909

7.540

8.109

8.631

9.114

9.565

10.39

11.13

11.82

12.45

13.03

14.16

15.08

15.97

16.79

17.55

19.28

20.81

22.18

23.44

24.60

25.68

27.67

29.45

31.09

32.60

34.01

36.59

38.92

41.04

43.00

44.84

48.97

52.62



1.000

1.700

2.268

2.758

3.195

3.593

3.960

4.303

4.626

4.931

5.501

6.026

6.514

6.972

7.407

7.819

8.213

8.404

9.305

10.13

10.90

11.62

12.31

13.57

14.74

15.82

16.83

17.79

19.57

21.20

22.72

24.14

25.48

28.56

31.34

33.89

36.26

38.48

40.58

44.47

48.04

51.36

54.46

57.40

62.85

67.85

72.49

76.85

80.96

90.39

98.90



1.000

1.750

2.384

2.946

3.459

3.934

4.380

4.802

5.204

5.589

6.315

6.994

7.635

8.245

8.828

9.388

9.928

10.19

11.45

12.72

13.72

14.77

15.78

17.67

19.43

21.09

22.67

24.18

27.02

29.67

32.17

34.54

36.80

42.08

46.94

51.48

55.75

59.80

63.68

70.97

77.77

84.18

90.26

96.07

107.0

117.2

126.8

135.9

144.7

165.0

183.7



1.000

1.800

2.502

3.142

3.738

4.299

4.834

5.346

5.839

6.315

7.227

8.092

8.920

9.716

10.48

11.23

11.95

12.31

14.02

15.64

17.19

18.68

20.12

22.87

25.47

27.96

30.35

32.65

37.05

41.22

45.20

49.03

52.72

61.47

69.66

77.43

84.85

91.97

98.85

112.0

124.4

136.3

147.7

158.7

179.7

199.6

218.6

236.8

254.4

296.1

335.2



1.000

1.850

2.623

3.345

4.031

4.688

5.322

5.936

6.533

7.116

8.244

9.331

10.38

11.41

12.40

13.38

14.33

14.80

17.09

19.29

21.43

23.50

25.51

29.41

33.17

36.80

40.32

43.75

50.39

56.78

62.95

68.95

74.79

88.83

102.2

115.1

127.6

139.7

151.5

174.2

196.1

217.3

237.9

257.9

296.6

333.9

369.9

404.9

438.9

520.8

598.9



1.000

1.900

2.746

3.556

4.339

5.101

5.845

6.574

7.290

7.994

9.374

10.72

12.04

13.33

14.64

15.86

17.10

17.71

20.73

23.67

26.54

29.37

32.14

37.57

42.87

48.05

53.14

58.14

67.93

77.46

86.80

95.96

105.0

126.9

148.2

169.0

189.3

209.2

228.8

267.1

304.5

341.0

376.9

412.2

481.2

548.4

614.2

678.8

742.3

897.0

1047.



1.000

1.950

2.872

3.774

4.662

5.538

6.404

7.261

8.111

8.955

10.62

12.27

13.91

15.52

17.13

18.72

20.31

21.10

25.00

28.86

32.68

36.47

40.22

47.65

54.99

62.25

69.45

76.59

90.71

104.7

118.5

132.1

145.7

179.2

212.2

244.8

277.0

309.0

340.6

403.3

465.3

526.5

587.2

647.4

766.6

884.2

1001.

1116.

1230.

1513.

1791.



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Chapter 5 Estimating Project Times and Costs 161



80 percent improvement curve is expected. Skilled labor cost is NOK 300 per hour.

Desired profit for all projects is 25 percent of total costs.

A. How many labor hours should the eighth satellite require?

B. How many labor hours for the whole project of eight satellites?

C. What price would you ask for the project? Why?

D. Midway through the project your design and production people realize that a

75 percent improvement curve is more appropriate. What impact does this have on

the project?

E. Near the end of the project, Deutsch Telefon AG has requested a cost estimate for

four satellites identical to those you have already produced. What price will you

quote them? Justify your price.



www.downloadslide.net

C H A P T E R



6



S I X



Developing a Project Plan



LEARNING OBJECTIVES



OUTLINE



After reading this chapter you should be able to:



6.1



6-1 Understand the linkage between WBS and the

project network.



6.2 From Work Package to Network



6-2 Diagram a project network using AON methods.

6-3 Calculate early, late, and slack activity times.

6-4 Identify and understand the importance of

managing the critical path.

6-5 Distinguish free slack from total slack.

6-6 Demonstrate understanding and application of

lags in compressing projects or constraining the

start or finish of an activity.



Developing the Project Network



6.3 Constructing a Project Network

6.4 Activity-on-Node (AON) Fundamentals

6.5 Network Computation Process

6.6 Using the Forward and Backward Pass

Information

6.7 Level of Detail for Activities

6.8 Practical Considerations

6.9 Extended Network Techniques to Come Closer

to Reality

Summary



162



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Estimate

5



Project

networks

6



Schedule

resources & costs

8



Reducing

duration

9



Define

project

4



Introduction

1



Strategy

2



Managing

risk

7



Organization

3



Project

manager

10



Teams

11



Monitoring

progress

13



l

iona

rnat

Inte ojects

pr

15



Project

closure

14



16



Agile



PM



Outsourcing

12



I keep six honest serving-men (they taught me all I knew); their names are

What and Why and When and How and Where and Who.

—Rudyard Kipling



6.1 Developing the Project Network

The project network is the tool used for planning, scheduling, and monitoring project

progress. The network is developed from the information collected for the WBS and is

a graphic flow chart of the project job plan. The network depicts the project activities

that must be completed, the logical sequences, the interdependencies of the activities

to be completed, and in most cases the times for the activities to start and finish along

with the longest path(s) through the network—the critical path. The network is the

framework for the project information system that will be used by the project managers

to make decisions concerning project time, cost, and performance.

Developing the project networks takes time for someone or some group to develop;

therefore, they cost money! Are networks really worth the struggle? The answer is

163



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164 Chapter 6 Developing a Project Plan



definitely yes, except in cases where the project is considered trivial or very short in

duration.1 The network is easily understood by others because the network presents a

graphic display of the flow and sequence of work through the project. Once the network is developed, it is very easy to modify or change when unexpected events occur

as the project progresses. For example, if materials for an activity are delayed, the

impact can be quickly assessed and the whole project revised in only a few minutes

with the computer. These revisions can be communicated to all project participants

quickly (for example, via e-mail or project website).

The project network provides other invaluable information and insights. It provides

the basis for scheduling labor and equipment. It enhances communication that melds

all managers and groups together in meeting the time, cost, and performance objectives

of the project. It provides an estimate of project duration rather than picking a project

completion date from a hat or someone’s preferred date. The network gives the times

when activities can start and finish and when they can be delayed. It provides the basis

for budgeting the cash flow of the project. It identifies which activities are “critical”

and, therefore, should not be delayed if the project is to be completed as planned. It

highlights which activities to consider if the project needs to be compressed to meet a

deadline.

There are other reasons project networks are worth their weight in gold. Basically,

project networks minimize surprises by getting the plan out early and allowing corrective feedback. A commonly heard statement from practitioners is that the project network represents three-quarters of the planning process. Perhaps this is an exaggeration,

but it signals the perceived importance of the network to project managers in the field.



6.2 From Work Package to Network

LO 6-1

Understand the linkage

between WBS and the

project network.



Project networks are developed from the WBS. The project network is a visual flow

diagram of the sequence, interrelationships, and dependencies of all the activities that

must be accomplished to complete the project. An activity is an element in the project

that consumes time—for example, work or waiting. Work packages from the WBS are

used to build the activities found in the project network. An activity can include one or

more work packages. The activities are placed in a sequence that provides for orderly

completion of the project. Networks are built using nodes (boxes) and arrows (lines).

Integrating the work packages and the network represents a point where the management process often fails in practice. The primary explanations for this failure are

that (1) different groups (people) are used to define work packages and activities and

(2) the WBS is poorly constructed and not deliverable/output oriented. Integration of

the WBS and project network is crucial to effective project management. The project

manager must be careful to guarantee continuity by having some of the same people

who defined the WBS and work packages develop the network activities.

Networks provide the project schedule by identifying dependencies, sequencing, and

timing of activities, which the WBS is not designed to do. The primary inputs for developing a project network plan are work packages. Remember, a work package is defined

independently of other work packages, has definite start and finish points, requires specific resources, includes technical specifications, and has cost estimates for the package.

However, dependency, sequencing, and timing of each of these factors are not included

in the work package. A network activity can include one or more work packages.

1



This process could be clarified and improved by using a simple responsibility matrix (see Chapter 4).



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Chapter 6 Developing a Project Plan 165



FIGURE 6.1



WBS/Work Packages

to Network



Lowest

element



Circuit

board



O

r

g

a

n

i

z

a

t

i

o

n



Design

cost

account

Production

cost

account



U

n

i

t

s



Design

WP D-1-1 Specifications

WP D-1-2 Documentation

Production

WP P-10-1 Proto 1

WP P-10-2 Final Proto 2



Test

cost

account



Test systems

WP T-13-1 Test



Software

cost

account



Software

WP S-22-1 Software preliminary

WP S-22-2 Software final version



Activity network for circuit board work packages

B

P -10-1



A

D -1-1

D -1-2



D



F



K



P -10-2



S -22-2



T -13-1



C

S -22-1



B

A

Specifications

and documentation

2



Proto 1

5



D



F



K



C



Final

proto 2

4



Final

software

2



Test

3



Software

preliminary

3



Figure 6.1 shows a segment of the WBS example and how the information is used to

develop a project network. The lowest level deliverable in Figure 6.1 is “circuit board.”

The cost accounts (design, production, test, software) denote project work, organization unit responsible, and time-phased budgets for the work packages. Each cost account

represents one or more work packages. For example, the design cost account has two

work packages (D-1-1 and D-1-2)—specifications and documentation. The software

and production accounts also have two work packages. Developing a network requires

sequencing tasks from all work packages that have measurable work.

Figure 6.1 traces how work packages are used to develop a project network. You can

trace the use of work packages by the coding scheme. For example, activity A uses

work packages D-1-1 and D-1-2 (specifications and documentation), while activity C



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166 Chapter 6 Developing a Project Plan



uses work package S-22-1. This methodology of selecting work packages to describe

activities is used to develop the project network, which sequences and times project

activities. Care must be taken to include all work packages. The manager derives activity time estimates from the task times in the work package. For example, activity B

(proto 1) requires five weeks to complete; activity K (test) requires three weeks to

complete. After computing the activity early times and late times, the manager can

schedule resources and time-phase budgets (with dates).



6.3 Constructing a Project Network

LO 6-2

Diagram a project

network using AON

methods.



Terminology

Every field has its jargon that allows colleagues to communicate comfortably with

each other about the techniques they use. Project managers are no exception. Here are

some terms used in building project networks.

Activity. For project managers, an activity is an element of the project that

requires time. It may or may not require resources. Typically an activity consumes

time—either while people work or while people wait. Examples of the latter are

time waiting for contracts to be signed, materials to arrive, drug approval by the

government, budget clearance, etc. Activities usually represent one or more tasks

from a work package. Descriptions of activities should use a verb/noun format: for

example, develop product specifications.

Merge Activity. This is an activity that has more than one activity immediately

preceding it (more than one dependency arrow flowing to it).

Parallel Activities. These are activities that can take place at the same time, if the

manager wishes. However, the manager may choose to have parallel activities not

occur simultaneously.

Path. A sequence of connected, dependent activities.

Critical Path. When this term is used, it means the path(s) with the longest duration through the network; if an activity on the path is delayed, the project is

delayed the same amount of time.

Burst Activity. This activity has more than one activity immediately following it

(more than one dependency arrow flowing from it).



Basic Rules to Follow in Developing Project Networks

The following eight rules apply in general when developing a project network:

1.

2.

3.

4.

5.

6.



Networks flow typically from left to right.

An activity cannot begin until all preceding connected activities have been completed.

Arrows on networks indicate precedence and flow. Arrows can cross over each other.

Each activity should have a unique identification number.

An activity identification number must be larger than that of any activities that precede it.

Looping is not allowed (in other words, recycling through a set of activities cannot

take place).

7. Conditional statements are not allowed (that is, this type of statement should not

appear: If successful, do something; if not, do nothing).

8. Experience suggests that when there are multiple starts, a common start node can be

used to indicate a clear project beginning on the network. Similarly, a single project

end node can be used to indicate a clear ending.