System Dynamics Modeling for Project Management

John D. Sterman
Director, System Dynamics Group, E53-351
Sloan School of Management
Massachusetts Institute of Technology
Cambridge, MA 02142

617/253-1951( voice)
617/258-7579 (fax)

Copyright © 1992 John D. Sterman


Project management is at once one of the most important and most poorly understood areas of management. Delays and cost overruns are the rule rather than the exception in construction, defense, power generation, aerospace, product development, software, and other areas. Project management suffers from numerous problems of costing and scheduling. Cost overruns of 100 to 200% are common. Projects are often delayed to the point where the market conditions for which they were designed have changed. Many projects suffer from the "90% syndrome" in which a project is thought to be 90% complete for half the total time required. Project management is often counterintuitive. For example, software development often suffers from Brooks' Law, which states "adding resources to a late project makes it even later". Customer design changes are frequent, generating costly ripple effects which create delay and disruption throughout an entire organization. Projects often appear to be going smoothly until near the end, when errors made earlier are discovered, necessitating costly rework, expediting, overtime, hiring, schedule slippage, or reductions in project scope or quality. The consequences of these difficulties include poor profitability, loss of market share and reputation, increased turnover of management and work force, lower productivity, higher costs, and, all too frequently, divisive and costly litigation between customers and contractors over responsibility for overruns and delays.

This paper describes in brief the use of system dynamics modeling for management of large scale projects, including large scale engineering and construction projects. System dynamics has repeatedly been demonstrated to be an effective analytical tool in a wide variety of situations, both academic and practical, and is currently being used by a number of corporations, including Fortune 500 firms, both in the United States and worldwide. Many of the applications of system dynamics, in both academic research and consulting, involve the quantitative assessment of the costs and benefits of various programs, both retrospectively and prospectively. System dynamics models are widely used in project management, including large scale projects in shipbuilding, defense, aerospace, civil construction, and power plants.1 System dynamics models are widely used as well in management of software development.2 The models have been used to manage projects more effectively and to assess the magnitude and sources of cost and schedule overruns in the context of litigation. In addition to project management, system dynamics models are widely used in business strategy and policy assessment. For example, the US. Department of Energy has used system dynamics models of the domestic and international energy system to produce detailed forecasts and policy analysis of energy policies since 1978. Many electric utilities use system dynamics models to analyze policy options for capacity expansion, conservation, pricing, and regulatory changes.3 The following sections highlight the major issues regarding modeling of project dynamics and provide selected references to the academic and professional literature.

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