A decision tree is a project management tool based on a tree-like structure used for effective decision-making and predicting the potential outcomes and consequences when there are several courses of action. These decisions are usually related to costs, resources, and utilities.
Project team members face different consequences related to the management of the project. They sometimes come across several choices and have to evaluate several outcomes associated with these choices. Decision trees are composed of a number of branches that lead toward several results and subsequent outcomes.
The four vital components that constitute a decision tree are:
- Decision Node: This component of the decision tree represents the choice we have to make that would act as an effective solution during the project.
- Branches: They represent the viable choices and establish a connection with nodes.
- Chance Nodes: They stand for non-guaranteed outcomes.
- End Nodes: They usually make the end of the decision tree and stand for the final outcome.
Use of Decision Tree in Project Management
As described earlier, the decision tree can be used for managing decisions and making efforts to improve project management. Following are the steps that describe how to utilize a decision tree in a project:
- First of all, when project stakeholders are facing a decision problem, they need to identify all the available options. Every type of project has a different pathway to success and each choice can have an impact on the objectives of the project.
- Now once the decisions have been identified, the next step would be to assess the potential results and outcomes that would be generated because of these choices. This step usually uses prediction and estimation tools for evaluation.
- After the outcomes have been identified, a detailed study is carried out to analyze these outcomes. This step involves assessing the hazards and benefits involved with each result.
- Once the above-mentioned steps are completed, the decision is taken according to the assessed conditions.
Let us illustrate the decision tree with a suitable example.
In this decision, our main problem is related to the construction project procurement method. In the first phase, the contractor has to assess a number of options available for outsourcing material for the construction of a power plant. These options include outsourcing from the overseas seller or a US-based seller.
Now there are some potential outcomes associated with each option. Both options of US and overseas sellers have their own risks and benefits. The US-based seller would allow the option of personal inspection but it is an expensive option. The overseas seller would be more feasible in terms of costs but it wouldn't facilitate the service of personal inspection due to travel expenses.
Now comes the stage of analyzing the results of each choice. Here, the EV or Expected Value formula can be used to predict the monetary benefit or loss. In the example, a US-based seller would have a success chance of 80% and there would be a profit of almost $100,000 (EV score is equal to 80,000). The overseas seller has a chance of 50% success and would result in a $15,000 loss. Based on the probability of success, the contractor would have to go with the decision of a US-based seller.
Types of Decision Trees
Categorical Variable Decision Tree: In this type of decision tree, varying target decisions are placed into different categories. For example, this category can be a simple 'yes' or 'no' condition. There can be no in-between decision and every decision would belong to predefined categories.
Continuous Variable Decision Tree: This type of decision tree tends to make the decision based on the collected information. For example, in a construction project, the cost of the foundation can be estimated from the drawing and available information.
Applications of Decision Tree
1. The decision tree tool can be used to spot the potential growth opportunities available in the project based on the information collected. This information and data related to the project can be utilized to modify or mold the strategy that would be effective for future projects.
2. Furthermore, as described in the above example, the decision tree can be implemented to aid with the procurement strategies. It can be used to decide if we should choose the local buyers or overseas options. The decision tree can also be used in the matter to decide if the construction manager/project manager should outsource or produce the material.
3. The decision tree is used for the strategic management of the project. These tools can be used to satisfy the constraints of the project like quality, cost, and time.
4. A decision tree can also be used for identifying the hazards and mitigating them. There are some uncertainties which do not affect the overall scope of the project and can be ignored. This tree analysis can be used to identify all the risks that can be ignored and the ones which cannot be ignored.
Advantages of Decision Tree
- Decision trees are easy to illustrate and gather information from as there is no need for expertise to interpret these trees. A clear understanding of options can be developed by a little bit of knowledge and effort.
- The data provided by the decision tree can be used to estimate the costs, probabilities, and various strategies. These strategies would help to raise the quality standard and reduce the cost of production or project.
- It is feasible to prepare and don't follow any rigorous procedure that needs any kind of additional skill.
- The project manager can use it to trace the uncertainties associated with their decisions and prepare strategies to rectify flaws associated with their decisions.
- It helps in the make-or-buy decision that is related to project procurement and helps in contracting procedure by identifying results of different outcomes.
The decision tree is a value management approach and tends to produce a customer-oriented final product. This tool can help in project management for various fields including construction. This management tool is strongly recommended for any kind of decision-making in the construction project.
A decision tree is a management tool, based on a tree-like structure, used for effective decision-making and predicting their potential outcomes and consequences. These decisions are usually related to costs, resources, and utilities.
These four vital components constitute a decision tree:
1. Decision node: This component of the decision tree represents the choice we have to make that would act as an effective solution during the project.
2. Branches: They represent the viable choices and establish a connection with nodes.
3. Chance nodes: They stand for non-guaranteed outcomes.
4. End nodes: They usually make the end of the decision tree and stand for the final outcome.
There are two types of decision trees in management:
1. Categorical variable decision tree
2. Continuous variable decision tree