Optimal Hedging: Managing Time and Cost Uncertainty in the Stochastic Time-Cost-Quality Tradeoff Project Scheduling Problem

Abstract

We consider how uncertainty affects tradeoffs between time, cost, and quality, modeling quality as a continuous function of time and cost. A translation agency example demonstrates that uncertainty can be modeled by making the quality function parameters stochastic. This leads to our Stochastic Time Cost Quality Tradeoff Problem (STCQTP), which determines optimal levels of time, cost, and quality to maximize expected quality. A software development example applies this model to show the considerable impact uncertainty can have on project quality. In addition, multiple probability distributions are considered, and the effect of correlation between time and cost is explored. The STCQTP model provides an approach to determine an optimal hedge against uncertainties that fully takes quality into consideration.