Optimization of Project Time-Cost Trade-Off Problem with Discounted Cash Flows

Abstract

Traditional time-cost trade-off (TCTO) analysis assumes constant value of activities’ cost along the project time span. However, the value of money decreases with time and, therefore, discounted cash flows should be considered when solving TCTO optimization problem. Optimization problems in project management have been traditionally solved by two distinctive approaches: heuristic methods and optimization techniques. Although heuristic methods can handle large-size projects, they do not guarantee optimal solutions. A nonlinear mathematical optimization model for project TCTO problem is developed, which minimizes project direct cost and takes into account discounted cash flows. Costs of activities are assumed to be incurred at their finish times. The model guarantees the optimal solution, in which precise discrete activity time-cost function is used. The model input includes precedence relationship between project activities, discrete utility data for project activities, and discount rate. Details of model formulation are illustrated by an example project. The results show that selected activities’ durations and costs and consequently optimal project duration differ from traditional analysis if discounted cash flow is considered. The new approach provides project practitioners with a way for considering net present value in time-cost decisions so that the best option can be identified.