PROJECT MANAGEMENT

Introduction of Project Management

Project management is the application of processes, methods, knowledge, skills and experience to
achieve the project objectives.

A project is a unique, transient endeavor, undertaken to achieve planned objectives, which could be
defined in terms of outputs, outcomes or benefits. A project is usually deemed to be a success if it
achieves the objectives according to their acceptance criteria, within an agreed timescale and budget.

A key factor that distinguishes project management from just 'management' is that it has this final
deliverable and a finite time span, unlike management which is an ongoing process. Because of this a
project professional needs a wide range of skills; often technical skills, and certainly people
management skills and good business awareness.

A Project is a temporary, unique and progressive attempt or endeavor made to produce some kind of a
tangible or intangible result (a unique product, service, benefit, competitive advantage, etc.). It usually
includes a series of interrelated tasks that are planned for execution over a fixed period of time and
within certain requirements and limitations such as cost, quality, performance, others.

Characteristics
As follows from the given definition, any project can be characterized by these characteristics:

 Temporary. This key characteristic means that every project has a finite start and a finite end. The
start is the time when the project is initiated and its concept is developed. The end is reached
when all objectives of the project have been met (or unmet if it’s obvious that the project cannot
be completed – then it’s terminated).
 Unique Deliverable(s). Any project aims to produce some deliverable(s) which can be a product,
service, or some another result. Deliverables should address a problem or need analyzed before
project start.
 Progressive Elaboration. With the progress of a project, continuous investigation and
improvement become available, and all this allows producing more accurate and comprehensive
plans. This key characteristic means that the successive iterations of planning processes result in
developing more effective solutions to progress and develop projects.
In addition to the listed characteristics, a conventional project is:
 Purposeful as it has a rational and measurable purchase
 Logical as it has a certain life-cycle
 Structured as it has interdependencies between its tasks and activities
 Conflict as it tries to solve a problem that creates some kind of conflict
 Limited by available resources
 Risk as it involves an element of risk
Some examples of a project are:
 Developing a new product or service
 Constructing a building or facility
 Renovating the kitchen
 Designing a new transportation vehicle
 Acquiring a new or modified data system
 Organizing a meeting
 Implementing a new business process

The key advantages of using project management within a company’s business environment can be
described as:
 Accelerating improvement and strengthening of the company’s management through
implementing the ideas of participatory management. Projects help involve employees in decision
making
 Adopting systems engineering approach that helps deal with risks effectively
 Accomplishing specific changes that are linked to the company’s strategies

The objectives of project management.

The successful development and implementation of all project’s procedures. A project, regardless of
its size, generally involves five distinctive phases of equal importance: Initiation, Planning and Design,
Construction and Execution, Monitoring and Control, Completion. The smooth and uninterrupted
development and execution of all the above phases ensures the success of a project.
 Productive guidance, efficient communication and apt supervision of the project’s team. Always
keep in mind that the success or failure of a project is highly dependent on teamwork, thus, the key to
success is always in collaboration. To this end, the establishment of good communication is of major
importance. On one hand, information needs to be articulated in a clear, unambiguous and complete
way, so everything is comprehended fully by everyone and on the other hand, is the ability to be able
listen and receive constructive feedback.

 The achievement of the project’s main goal within the given constraints. The most important
constraints are, Scope in that the main goal of the project is completed within the
estimated Time, while being of the expected Quality and within the estimated Budget. Staying within
the agreed limitations always feeds back into the measurement of a project’s performance and
success.

 Optimization of the allocated necessary inputs and their application to meeting the project’s pre-
defined objectives, is a matter where is always space for improvement. All processes and procedures
can be reformed and upgraded to enhance the sustainability of a project and to lead the team
through the strategic change process.

 Production of a complete project which follows the client’s exclusive needs and objectives. This
might mean that you need to shape and reform the client’s vision or to negotiate with them as
regards the project’s objectives, to modify them into feasible goals. Once the client’s aims are clearly
defined they usually impact on all decisions made by the project’s stakeholders. Meeting the client’s
expectations and keeping them happy not only leads to a successful collaboration which might help to
eliminate surprises during project execution, but also ensures the sustainability of your professional
status in the future.

TYPES OF PROJECTS IN PROJECT MANAGEMENT

Project scope: This describes the reach and scale of the project. A project scope varies depending on
the amount of people involved and the scale of the impact of its outcomes. Projects can be big or
small depending on the scope.

Timeframe: A project’s timeframe is defined from its initiation or conception until result evaluation. A
project’s timeframe can also be divided into smaller blocks which in themselves have their own
timeframe.
Organisation: The organisation of a project refers to how tasks and activities are organised
and prioritised. The project workflow is calculated in each individual project to reach objectives.
Sinnaps project management and planning tool uses technologies such as PERT and CPM to calculate
the workflow of each project and find its most optimised work path along with various types of
project management tools.

Cost: Projects can be expensive or relatively cheap depending on their overall cost. The Sinnaps app
allows you to plan your costs along with any cost updates input by your team in real-time.

Communication: What are the types of project that require communication? Communication is the
cornerstone of every project. Among different types of projects, communication, its frequency and its
format can vary. However, without effective communication a project will fail. Sinnaps allows for the
optimisation of communication through online real-time chat between team members and project
managers.

Stakeholder Management: Projects can vary depending on the number of stakeholders involved.
Sometimes, the only stakeholders involved in a project is the team and project manager, but more
often than not, there are a wider group of stakeholders involved. The more stakeholders, the more
complex the management of their expectations and communication.

Task assignation: Within the different types of projects in project management, there are many
different tasks and activities. Projects can vary depending on how these tasks are assigned to team
members- whether they will be completed by individual members or groups and
how responsibilities will be defined.

Quality of results: Results of projects vary among the different types of projects. They can vary
depending on each client’s requests.

CLASSIFICATION OF PROJECT
According to complexity:
. Easy: A project is classified as easy when the relationships between tasks are basic and detailed
planning or organisation are not required. A small work team and few external stakeholders and
collaborators are common in this case.
 Complicated: The project network is broad and complicated. There are many task
interdependencies. With these projects, simplification where possible is everything. Cloud-
based apps such as Sinnaps will immensely help to simplify complicated projects by
 automatically calculating the project’s best work path and updating any changes introduced
through its use of different types of project management tools.

According to source of capital:

 Public: Financing comes from Governmental institutions.

 Private: Financing comes from businesses or private incentives.
 Mixed: Financing comes from a mixed source of both public and private funding.

According to project content:

 Construction: These are projects that have anything to do with the construction of a civil or
architectural work. Predictive methods are used along with agile techniques which will be
explained later on.
 IT: Any project to do with software development, IT system etc. The types of project
management information systems vary across the board, but in today’s world are very common.
 Business: These projects are involved with the development of a business, management of a
work team, cost management, etc., and usually follow a commercial strategy.
 Service or product production: Projects that involve themselves with the development of an
innovative product or service, design of a new product, etc. They are often used in the R & D
department.

According to those involved:

 Departmental: When a certain department or area of an organisation is involved.
 Internal: When a whole company itself is involved in the project’s development.
 Matriarchal: When there is a combination of departments involved.
 External: When a company outsources external project manager or teams to execute the
project. This is common in digital transformations, process improvements and strategy changes,
for example.

According to its objective:

 Production: Oriented at the production of a product or service taking into consideration a

certain determined objective.
 Social: Oriented at the improvement of the quality of life of people.
Educational: Oriented at the education of others.
 Community: Oriented at people too, however with their involvement.
 Research: Oriented at innovation and the gaining of knowledge.

Qualities & Responsibilities of the Project Manager

1. Effective communication skills.

One of the qualities of a good manager is being a good communicator so that he can connect with
people at all levels. The project manager must clearly explain the project goals as well as each
member’s tasks, responsibilities, expectations and feedback.

2. Strong leadership skills.

Effective project management means having strong leadership qualities such as being able to
motivate his team and drive them to maximum performance so that they can achieve their goals.

3. Good decision maker.

An effective project manager needs to have decision-making skills because there will always be
decisions that need to be acted on.

4. Technical expertise.
Since project management software and other related programs are essential in accomplishing the
project goals, an effective project manager needs to have sound technical knowledge to understand
the issues that are related to the technical aspect. Knowledge of theory as well as the technical side
can greatly help the manager in taking strategic initiatives when needed.

5. Inspires a shared vision.

An effective project manager can articulate the vision to his team members very well. A visionary
person can lead his people to the right direction as well as easily adapt to the changes that come in
the way. They are good at empowering people to experience the vision on their own.

6. Team-building skills.
It is necessary that a team works in unison otherwise the project will undergo various relationship
challenges that might hinder its success. Project managers need to know how to give each of them the
importance they need by focusing on their positive traits. He has to be fair and just in the way he
treats them.
7. Cool under pressure.
As the project goes on, certain incidents could take a toll on the project’s momentum and test the
project manager’s patience. It is essential that a project manager keeps his calm at all times and be
consistently grounded so as not to lose himself and adversely affect his relationship with the team.

8. Good negotiation skills.

One of the qualities needed for effective project management is the ability to negotiate. In times that
conflict arise due to differences in opinion, project managers need sheer negotiating skills to settle
the issue and maintain harmony in the team.

RESPONSIBILITIES
To plan thoroughly all aspects of the project, soliciting the active involvement of all functional areas
involved, in order to obtain and maintain a realistic plan that satisfies their commitment for
performance.

1. To control the organization of manpower needed by the project.

2. To control the basic technical definition of the project, ensuring that "technical" versus "cost" trade-
offs determine the specific areas where optimisation is necessary.
3. To lead the people and organizations assigned to the project at any given point in time. Strong
positive leadership must be exercised in order to keep the many disparate elements moving in the
same direction in a co-operative.
4. To monitor performance, costs and efficiency of all elements of the project and the project as a
whole, exercising judgement and leadership in determining the causes of problems and facilitating
solutions.
5. To complete the project on schedule and within costs, these being the overall standard by which
performance of the project manager is evaluated.

HR ASPECTS OF PROJECT MANAGEMENT

Human Factors -- Gantt charts, PERT, CPM and other scheduling techniques have proven to be
valuable tools in the management of large and complex projects. A wide variety of software packages
is available for project managers, for use on micro- or larger computers, to assist in the handling of
complex network problems. PERT and CPM, however, cannot ever purport to be able to solve all
project scheduling and management problems in service or manufacturing industries. Good
management practices, clear responsibilities for tasks, and accurate and timely reporting systems are
the most essential qualities for successful project completions. The watchword is that useful as these
techniques are, they are only tools to assist the manager in making better, more calculated decisions
in the process of conducting large scale projects.

So far little mention has been made of the human issues involved in the management of projects.
These issues will now be addressed.

Human Factors in Project Management

Dinsmore uses the following definitions for projects and project management:

It is all too easy to form the view that project management and network techniques such as CPM and
PERT are one and the same thing. Because networks are valuable tools for graphically showing
relationships between project activities, pinpointing critical activities and for estimating the
probability of project completion by a certain date, some managers believe that they constitute the
only important management tool in the planning, scheduling and controlling phases of a project. No
project is managed effectively without a good Gantt/CPM/PERT approach but equally there are other
management tools and practices required for effective management of projects.

Market and demand analysis

The first step in project analysis is to estimate the potential size of the market for the product
proposed to be manufactured (or service planned to be offered) and get an idea about the market
share that is likely to be captured.

An in-depth study and assessment of various factors like patterns of consumption growth, income
and price elasticity of demand, composition of market, nature of competition, availability of
substitutes, reach of distribution channels etc are included in it.

Market and demand analysis, should be carried out in an orderly and systematic manner. The key
steps in such analysis are as follows:

1. Situational analysis and specification of objectives

2. Collection of secondary information
3. Conduct of market survey
4. Characterization of the market
5. Demand forecasting
6. Market planning

STRATEGY & CAPITAL ALLOCATION

What Is Strategic Project Management?
Before we learn about strategic project management, let's first define project management. Project
management is the process of taking a project from start to finish. A project manager is the individual
assigned to oversee and guide the project through its entirety.
Strategic project management looks at the big picture and how the project can benefit the company's
efficiency and competitiveness as a whole. Strategic project management uses business and project
management techniques in order to help the company advance. This happens through brainstorming
and problem solving so that a project will not only be completed successfully, but faster and more
efficiently. Strategic project managers focus on achieving business results. Operationally managed
projects tend focus more on just getting the work completed. By focusing on improving customer
satisfaction, beating the competition and analyzing market data, strategic project managers ensure
long-term success and profitability. Instead of focusing on short-term results, such as meeting
deadlines and operating within the budget, strategic project managers have a long-term perspective.
They ensure that their project’s goals align with the company’s strategic mission and objectives.

Process of Strategic Project Management

Now that we know that the goal of strategic project management is to take a project from start to
finish in ways that are competitive and efficient, let's look at the process. The following are strategies
a project manager, such as Kara, can use to push an ordinary project to an extraordinary project.
Know the Direction of the Project
Before starting the project, Kara fully outlines the project objectives and identifies how the project
will help the company's efficiency and competitiveness as a whole. She determines who has the most
at stake in this project, plans a completion timeline, and develops a reliable budget.
Once Kara has completed these steps, she lets management know what the project will accomplish, in
this case, creation of a new Christmas doughnut. She makes sure everyone understands why the
project is important to the company, namely, to boost holiday sales and test new efficiency
techniques. Then, she lays out the expected timeline and budget to complete the project successfully.

BCG MATRIX
BCG Matrix or otherwise known as Boston Consulting Group growth share matrix is used to
represent the company’s investment portfolio.

Large corporations usually face problems in allocating resources amongst various units and product
lines. To cope with this problem, in 1970, Bruce Hendersondesigned a matrix for the Group called as
BCG matrix. It is based on two factors which are:
  The growth rate of the product-market.
 Market share held by the company in the respective market, in comparison to its competitors.

BCG Matrix helps the corporation in analyzing the product lines or business units, for prioritizing them
and allocating resources. The model aims at identifying the problem of resource deployment, among
different business segments. In this approach, various businesses of a company are classified on a
two-dimensional grid

Advantages and disadvantages

Benefits of the matrix:

 Easy to perform;
 Helps to understand the strategic positions of business portfolio;
 It’s a good starting point for further more thorough analysis.

Growth-share analysis has been heavily criticized for its oversimplification and lack of useful
application. Following are the main limitations of the analysis:

 Business can only be classified to four quadrants. It can be confusing to classify an SBU that
falls right in the middle.
 It does not define what ‘market’ is. Businesses can be classified as cash cows, while they are
actually dogs, or vice versa.
 Does not include other external factors that may change the situation completely.
 Market share and industry growth are not the only factors of profitability. Besides, high market
share does not necessarily mean high profits.
 It denies that synergies between different units exist. Dogs can be as important as cash cows
to businesses if it helps to achieve competitive advantage for the rest of the company.

GE MATRIX

GE matrix, alternately known as General Electric Model is a business planning matrix. The model is
inspired by traffic lights which are used to manage traffic at crossings, wherein green light says go,
yellow says caution and Red say stop.

The matrix comprises of nine cells, with two major dimensions, i.e. business strength and industry
attractiveness. Business strength is influenced by market share, brand image, profit margins,
customer loyalty, technological capability and so on. On the other hand, industry attractiveness is
influenced by drivers such as pricing trends, economies of scale, market size, market growth rate,
segmentation, distribution structure, etc.

The SPACE matrix is a management tool used to analyze a company. It is used to determine what type
of a strategy a company should undertake.

The Strategic Position & ACtion Evaluation matrix or short a SPACE matrix is a strategic management
tool that focuses on strategy formulation especially as related to the competitive position of an
organization.

The SPACE matrix can be used as a basis for other analyses, such as the SWOT analysis, BCG matrix
model, industry analysis, or assessing strategic alternatives (IE matrix).

What is the SPACE matrix strategic management method?

To explain how the SPACE matrix works, it is best to reverse-engineer it. First, let's take a look at what
the outcome of a SPACE matrix analysis can be, take a look at the picture below. The SPACE matrix is
broken down to four quadrants where each quadrant suggests a different type or a nature of a
strategy:

• Aggressive

• Conservative

• Defensive

• Competitive

There are many SPACE matrix factors under the internal strategic dimension. These factors analyze a
business internal strategic position. The financial strength factors often come from company
accounting. These SPACE matrix factors can include for example return on investment, leverage,
turnover, liquidity, working capital, cash flow, and others. Competitive advantage factors include for
example the speed of innovation by the company, market niche position, customer loyalty, product
quality, market share, product life cycle, and others.

Every business is also affected by the environment in which it operates. SPACE matrix factors related
to business external strategic dimension are for example overall economic condition, GDP growth,
inflation, price elasticity, technology, barriers to entry, competitive pressures, industry growth
potential, and others. These factors can be well analyzed using the Michael Porter's Five Forces
model.
How do I construct a SPACE matrix?

The SPACE matrix is constructed by plotting calculated values for the competitive advantage (CA) and
industry strength (IS) dimensions on the X axis. The Y axis is based on the environmental stability (ES)
and financial strength (FS) dimensions. The SPACE matrix can be created using the following seven
steps:

Step 1: Choose a set of variables to be used to gauge the competitive advantage (CA), industry
strength (IS), environmental stability (ES), and financial strength (FS).

Step 2: Rate individual factors using rating system specific to each dimension. Rate competitive
advantage (CA) and environmental stability (ES) using rating scale from -6 (worst) to -1 (best). Rate
industry strength (IS) and financial strength (FS) using rating scale from +1 (worst) to +6 (best).

Step 3: Find the average scores for competitive advantage (CA), industry strength (IS), environmental
stability (ES), and financial strength (FS).

Step 4: Plot values from step 3 for each dimension on the SPACE matrix on the appropriate axis.

Step 5: Add the average score for the competitive advantage (CA) and industry strength (IS)
dimensions. This will be your final point on axis X on the SPACE matrix.

Step 6: Add the average score for the SPACE matrix environmental stability (ES) and financial strength
(FS) dimensions to find your final point on the axis Y.

Step 7: Find intersection of your X and Y points. Draw a line from the center of the SPACE matrix to
your point. This line reveals the type of strategy the company should pursue

Detailed Project Report (DPR)

A DPR is a micro planning tool that typically provides the project rational, summary, user
specifications, engineering designs of main and support infrastructure, as well as technical and
financial aspects including financial sustainability. DPRs need to be developed for every project site.

DPR components
1) Background and context to DPR

 Footfall categorization to provide an idea of the size of the project, plausible demand
characteristics, and whether the project would be able to meet the CAPEX and OMEX
requirements.
 Planning & construction norms and designs: Existing and envisioned norms need to be clearly
stated to ensure that the overall design aspects (units and construction limitations) are clearly
 understood and agreed upon. Some support schemes require scheme-specific rather than
universal standards.
 CAPEX & OMEX template is a checklist of items to be used while preparing cost estimates for
construction or installation (guidelines developed based on best practices in the sector).

2) Detailed Project Report of Individual project site or project packages of project sites

 Project Summary: Abstract to provide a snapshot of the project; often together with an action
plan.
 Project Rationale provides the logic of why the project is important in the overall city wide
context, location specifications, the problems to be addressed, the project’s uniqueness and
quantification of envisioned benefits.
 User Profile provides a snapshot of the target users, their geographical spread, insights on
usage timings and respective user perception survey recommendations. It also summarizes the
analysis of land use around the PT location (demand); results from micro-level user surveys
and focus group discussions on design requirements (e.g. different operational models in
slums and tourist locations).
 Technical Review outlines the physical site condition (detailed engineering design), boundary
conditions and design specifications as well as available infrastructure support.
 Proposed Technical Design provides a detailed analysis of the component units to be
engineered (rehabilitation or new construction), assumptions on the structural designing and
system functionality, detailed engineering designs (plans, elevations, sections as applicable)
and detailed cost estimates that are detailed enough to use in the tender documents.
 Overall Layout provides an understanding of how the project could look (project visualization);
often used for dissemination and discussions.
 Financial Analysis: Project feasibility (IRR & Net Present Values), considering estimated
demand, project cost, O&M costs, concession period, unit rates.
 Demand Assumptions discuss the expected increase in footfall over the design period, issues
pertaining to capacity utilization (rehabilitation) and optimization of structure components.
 Cost Estimates: Detailed item-wise engineering estimates of all project aspects including
support infrastructure.
 Financial Assumptions related to construction of the asset, operation and maintenance, user
charges and their expected increase, existing debt, annual escalations, interest rates, etc.
 Financial Projections verify the project viability against maintenance contracts or BOT
projects, under the given assumptions detailed earlier. The operational and business model
development section of the project structuring provides a more detailed financial analysis,
relevant for the project’s structuring and contract documents.
 Recommendations summarize the project viability (technical & financial)
 The Four Types of Project Organizational Structures

1.Functional

Functional organization is the classical structure of a project. In this hierarchy, each person is
grouped by areas of specialization within the organization, such as accounting, marketing and
manufacturing. Projects in functionally structured organizations are aligned with the prevailing
organization culture, such that information, resources, labor, and equipment is formally requested,
approved, and completed all under the discretion and supervision of the leading authority. Any
borrowed resources for functionally structured projects must satisfy their traditional work
responsibilities before project matters. Project managers have little or no true authority in this
organizational structure.

2.Projectized

Power and management in the projectized organization is the opposite of the aforementioned
structure. Project managers have complete control of the project. Resources are appointed to the
project team and released from all traditional responsibilities until completion of the project. The
autonomy of the project creates a virtual department within the organization that acts as a cohesive
unit. Communications and decision-making authority are self contained within the team.

3.Matrix

Matrix structures are a blend of functional and projectized organizations that maximize the strength
of each structure. There are three types of matrix organizations: weak, strong and balanced. Weak
organizations are characterized by projects that have part-time members, limited control over
authority, budget and decisions and multiple lines of responsibility. Strong matrices have dedicated
resources, internal control of budget, and moderate levels of control over assets, resources and
decision making authority. Balanced matrix organizations represent shared leadership between
functional managers and project managers.

4.Composite

Special, or composite, projects are common occurrences in many organizations. These are
temporary, commissioned teams designed to address critical, specialized or time-sensitive matters
within a company. Resources may be dedicated or temporary, and budgets and authoritative
structures can be appointed at the time the project is appointed or vary depending on the level of
complexity, breadth and width of the assignment. Standard operational practices may be relaxed to
achieve these goals or new policy and process can be established to fill a gap or discrepancy in the
existing organization, or structure

Project Financial Evaluation

A project financial evaluation tells you whether a project will contribute to your company's overall
goals or be a drain on your resources. While complicated analysis techniques and computer programs
can perform high-level calculations and provide you with advanced financial ratios and rates of return,
you can carry out a few simple calculations to determine whether the project makes financial sense.
You can then decide whether to perform a more detailed analysis.

Financing
Although you may be able to pay for the project with funding from your company, the financial
evaluation assumes the project stands on its own and has to finance itself. To get the total financing
costs, you have to take the projected costs of the project as you would incur them and add them to a
theoretical loan at the current interest rate for such financing. As the project adds more costs, add the
interest on the amounts already paid out to the total financing amount. Upon completion of the
project, it has a financing cost equal to the total cost of the project plus the interest charges for the
construction period.

Cash Flow
Once in operation, the project generates revenue and pays out its operating costs. For each year of
operation, you have to estimate how much revenue you predict for the project and what you think
the operating costs will be. The difference is the cash flow available for debt servicing. For a complete
financial evaluation, these calculations are required for every year of the expected life of the project,
but you can start your evaluation with the calculations for the first few years.

Evaluation
From the total financing cost, you can get the annual payments required to service the debt. From the
cash flow calculations you have the amounts available for debt servicing. Your overall goals tell you
how to structure the evaluation. If you want immediate profit, you can stretch out debt repayment
and determine how much money is left over in the early years of operation. If you want a steady
income, you can make equal payments on the debt and calculate what the steady profit would be. If
you want high future income, you can use all the cash flow to retire the debt quickly and calculate
how much money you will make a few years down the road. This process lets you tailor your financial
evaluation to your goals and decide whether the project meets your specific requirements.

Components of Cost of Project

There are five types of costs in a typical project:
 Fixed
 Variable
 Direct
 Indirect
 Sunk
Fixed Costs
Fixed costs are those that do not change throughout the life-cycle of a project.
For example, if you are constructing a road, the excavators and bulldozers are fixed costs. For
software development projects, the physical development space and development computers are
fixed costs to the project.

Variable Costs
Variable costs, as the name suggests, are costs that change during the project life-cycle. Construction
projects usually have a long.

Direct Costs
Direct costs are expenses that come out of the project budget directly. For example, if you have
outsourced some of your development work, the developers are expected to put in a specific amount
of time, which is then billed for. The developer salaries are direct costs.

Indirect Costs

Indirect costs are those that are shared across multiple projects. Indirect costs are sometimes also
referred to as Oversight costs. For example, in software development projects, it is common for a
project manager or an architect to be partially allocated across several projects. Hence, the cost of the
project manager or architect will be shared among the projects they are allocated to. Project
managers are usually an indirect cost to the project. This is because their work is to supervise. They
don’t actually do the work! The people who do the work, like developers and designers, are Direct
Costs to the project.

Sunk Costs

Sunk costs are those that have been incurred in a project, but have not produced value towards the
project’s objectives. For example, if you are making a cup of tea and spill the milk that was to be used
in the tea, then the value of the milk is your sunk costs.
Consideration of means of finance in PCF

An act or a promise given by one person in exchange for an act or a promise from the other.The value
s do not have to beequal, and it has been said that one may promise to give a barleycorn in exchange
for the promise to deed a castle,and it willbe sufficient.It is a common misperception that earnest
money is the component that makes a real estate contractenforceable. In reality, the promise to buy,
and the promise to sell, is sufficient consideration. Consideration is an essentialelement for contract e
nforcement.Something with monetary value, voluntarily exchanged for an act, benefit, forbearance,
interest, promise, right, or goods or services. In banking, the loan-amount is a consideration, in
exchange for the borrower's promise to repay the principal and to pay interest and other charges. In
insurance, the insurance company's offer to make a loss good is a consideration in exchange for
payment of premium. Essential element of all enforceable commercial-contracts, it does not have to
be 'adequate' or equal in value to the exchanged item but must be legal (not in violation of any law).
Any commercial contract without a valid (valuable and legal) consideration is invalid and is called
'nudum pactum'.

PROJECT CASH FLOW

Project cash flow is the net cash flow associated with the project for that year. Calculation:

Project Cash Flow = Sources of Cash – Uses of Cash

Project Financial Planning provides a way to indicate the cash flow incidence for the account or
project. The cash flow incidence affects cash flow. Project Financial Planning provides many choices
regarding how an account affects the cash flow, but in some cases, we have made assumptions about
general operating expenses for cash flow purposes; for example, we assume that salary expenses are
a cash outflow in the month that salary is paid….However, for calculating NPV, the project cash flow
must be discounted to get the present value of the cash flow.

When a company is considering a new project or investment, it must have some method to evaluate
whether to proceed. In this lesson, you'll learn how relevant cash flows can help with this decision.

What Are Relevant Cash Flows?

Investing in a new project requires cash, and a company must decide whether the project will be a good use of
its cash. In other words, is the project going to generate enough cash flow over its lifetime to make the
investment worthwhile?

To help with this decision, companies study their relevant cash flows, which are cash flows that will
only occur if the company proceeds with the project or investment. Relevant cash flows occur at some
point in the future and are incremental. Incremental cash flows are changes in cash flows that occur
because a company decided to proceed with an investment. Costs that have already occurred, such as
for research and development, will not be relevant to the decision since they occurred in the past.
These types of costs are known as sunk costs.

Replacement Projects

A replacement project is an undertaking in which the company eliminates a project at the end of its
life and substitutes another investment.

 The cash flow analysis must take all cash flow components into account, such as opportunity
costs and depreciation and maintenance expense.
 The replacement project’s cash flows are the additional inflows and outflows to be provided by
the prospective replacement project.
 The comparison between the replacement and the current project informs the decision
whether to undertake the replacement and, if applicable, at what point replacement should
occur.

Key Terms

 capital budgeting: The budgeting process in which a company plans its capital expenditure (the
spending on assets of long-term value).
 sunk cost: A cost that has already been incurred and which cannot be recovered to any
significant degree.
 Opportunity cost: The cost of an opportunity forgone (and the loss of the benefits that could be
received from that opportunity); the most valuable forgone alternative.

The possibility of replacement projects must be taken into account during the process of capital
budgeting and subsequent project management. A replacement project is an undertaking in which the
company eliminates a project at the end of its life and substitutes another investment. This
replacement project can serve the purpose of replacing an expiring investment with a new, identical
one, or replacing an existing investment that is producing unfavorable results with one that
management believes will perform better.

When analyzing a project, and ultimately deciding whether it is a good investment decision or not,
one focuses on the expected cash flows associated with the project. These cash flows form the basis
for the project’s value, usually after implementing a method of discounted cash flow analysis. Most
projects have a finite useful life. Analysis can be undertaken in order to determine when the optimum
point of replacement will be, as well as if replacement is a viable option in the first place. To
accomplish this, one analyzes the cash flows of the current project in relation to the expected cash
flows from the replacement project.

CAPITAL BUDGETING TECHNIQUES CONSIDERING RISK

There are different methods adopted for capital budgeting. The traditional methods or non discount
methods include: Payback period and Accounting rate of return method. The discounted cash flow
method includes the NPV method, profitability index method and IRR.

 Payback period method:

As the name suggests, this method refers to the period in which the proposal will generate cash to
recover the initial investment made. It purely emphasizes on the cash inflows, economic life of the
project and the investment made in the project, with no consideration to time value of money.
Through this method selection of a proposal is based on the earning capacity of the project. With
simple calculations, selection or rejection of the project can be done, with results that will help gauge
the risks involved. However, as the method is based on thumb rule, it does not consider the
importance of time value of money and so the relevant dimensions of profitability.

 Accounting rate of return method (ARR):

This method helps to overcome the disadvantages of the payback period method. The rate of return is
expressed as a percentage of the earnings of the investment in a particular project. It works on the
criteria that any project having ARR higher than the minimum rate established by the management
will be considered and those below the predetermined rate are rejected.
This method takes into account the entire economic life of a project providing a better means of
comparison. It also ensures compensation of expected profitability of projects through the concept of
net earnings. However, this method also ignores time value of money and doesn’t consider the length
of life of the projects. Also it is not consistent with the firm’s objective of maximizing the market value
of shares.
ARR= Average income/Average Investment

 Discounted cash flow method:

The discounted cash flow technique calculates the cash inflow and outflow through the life of an
asset. These are then discounted through a discounting factor. The discounted cash inflows and
outflows are then compared. This technique takes into account the interest factor and the return
after the payback period.

 Net present Value (NPV) Method:

This is one of the widely used methods for evaluating capital investment proposals. In this technique
the cash inflow that is expected at different periods of time is discounted at a particular rate. The
present values of the cash inflow are compared to the original investment. If the difference between
them is positive (+) then it is accepted or otherwise rejected. This method considers the time value of
money and is consistent with the objective of maximizing profits for the owners. However,
understanding the concept of cost of capital is not an easy task.

 Internal Rate of Return (IRR):

This is defined as the rate at which the net present value of the investment is zero. The discounted
cash inflow is equal to the discounted cash outflow. This method also considers time value of money.
It tries to arrive to a rate of interest at which funds invested in the project could be repaid out of the
cash inflows. However, computation of IRR is a tedious task.
It is called internal rate because it depends solely on the outlay and proceeds associated with the
project and not any rate determined outside the investment.

IMPORTANCE OF CAPITAL BUDGETING

1) Long term investments involve risks: Capital expenditures are long term investments which involve
more financial risks. That is why proper planning through capital budgeting is needed.
2) Huge investments and irreversible ones: As the investments are huge but the funds are limited,
proper planning through capital expenditure is a pre-requisite. Also, the capital investment decisions
are irreversible in nature, i.e. once a permanent asset is purchased its disposal shall incur losses.
3) Long run in the business: Capital budgeting reduces the costs as well as brings changes in the
profitability of the company. It helps avoid over or under investments. Proper planning and analysis of
the projects helps in the long run.

SENSITIVITY ANALYSIS
In corporate finance, sensitivity analysis refers to an analysis of how sensitive the result of a capital
budgeting technique is to a variable, say discount rate, while keeping other variables constant.
 Sensitivity analysis is useful because it tells the model user how dependent the output value is on
each input. It gives him an idea of how much room he has for each variable to go adverse. It helps in
assessing risk.
Sensitivity analysis differs from scenario analysis in that scenario analysis is more complex because it
allows us to change more than one variables at once.

Steps in Conducting Sensitivity Analysis

We conduct sensitivity analysis by an approach outlined below:

 Find the base case output (for example the net present value) at the base case value (say V1) of the
input for which we intend to measure sensitivity (such as discount rate). We keep all other inputs in
the model (such as cash flow growth rate, tax rate, depreciation, etc.) constant.
 Find the value of output at a new value of the input (say V2) while keeping other inputs constant.
 Find the percentage change in the output and the percentage change in the input.
 Find sensitivity by dividing the percentage change in output by the percentage change in input.
In second round, we evaluate sensitivity for another input (say cash flows growth rate) while keeping
the rest of inputs constant. We continue this process till we get the sensitivity figure for each of the
inputs. The higher the sensitivity figure, the more sensitive the output is to any change in that input
and vice versa.

Scenario Analysis

Scenario analysis is a what-if analysis in which a model's output is calculated for a number of
scenarios. Scenario analysis is most commonly used in finance to estimate the expected value of an
investment in a number of situations (such as best case scenario, base case scenario and worst case
scenario).
Scenario analysis differs from sensitivity analysis in that it allows for changing more than one variables
at once while sensitivity analysis measures the effect of change in one variable while keeping all other
factors constant. Scenario analysis is quite similar to simulation analysis but less complex because
most often it considers only the two extreme and one base case scenarios.

Steps in Conducting Scenario Analysis in Capital Budgeting

Scenario analysis of an investment would involve the following steps:

 Finding the base case output at the most likely value for each input. For example, when
calculating net present value, use the most likely value for discount rate, cash flows growth, tax rate,
etc.
 Finding the value of the output at the best possible value for each input. In case of calculating net
present value, use the lowest possible discount rate, highest possible growth rate, lowest possible tax
rate, etc. This is the best case scenario.
 Finding the value of the output at the worst possible value for each input. For a net present value
calculation, it would mean the highest possible discount rate, lowest possible cash flow growth rate,
highest possible tax rate, etc. This is the worst case scenario.
This gives us a range for output values. In reality, you need not work with extreme scenarios. You can
easily set some variables at one extreme, others at the other extreme and some intermediate.

What Is Financial Structure

Financial structure refers to the mix of debt and equity that a company uses to finance its operations.
This composition directly affects the risk and value of the associated business. The financial managers
of the business have the responsibility of deciding the best mixture of debt and equity for optimizing
the financial structure.
In general, the financial structure of a company can also be referred to as the capital structure. In
some cases, evaluating the financial structure may also include the decision between managing a
private or public business and the capital opportunities that come with each.

Sources of Finance
Sources of finance for business are equity, debt, debentures, retained earnings, term loans, working
capital loans, letter of credit, euro issue, venture funding etc. These sources of funds are used in
different situations. They are classified based on time period, ownership and control, and their source
of generation. It is ideal to evaluate each source of capital before opting for it.

According to Time Period

Sources of financing a business are classified based on the time period for which the money is
required. The time period is commonly classified into the following three:

According to Time Period

Sources of financing a business are classified based on the time period for which the money is
required. The time period is commonly classified into the following three:

MEDIUM TERM SHORT TERM

LONG TERM SOURCES OF SOURCES OF FINANCE / SOURCES OF FINANCE
FINANCE / FUNDS FUNDS / FUNDS
 Preference Capital or
Share Capital or Equity Shares Preference Shares Trade Credit

Preference Capital or Preference

Shares Debenture / Bonds Factoring Services

Retained Earnings or Internal

Accruals Lease Finance Bill Discounting etc.

Advances received from

Debenture / Bonds Hire Purchase Finance customers

Medium Term Loans from

Term Loans from Financial Financial Institutes, Short Term Loans like
Institutes, Government, and Government, and Commercial Working Capital Loans
Commercial Banks Banks from Commercial Banks

Venture Funding Fixed Deposits (<1 Year)

Asset Securitization Receivables and Payables

International Financing by way

of Euro Issue, Foreign Currency
Loans, ADR, GDR etc.

Concept of Optimal Capital Structure:

Every firm should aim at achieving the optimal capital structure and try to maintain it. Optimal capital
structure refers to the combination of debt and equity in total capital that maximizes the value of the
company. An optimal capital structure is designated as one at which the average cost of capital is the
lowest which produces an income that leads to maximization of the market value of the securities at
that income.

Optimal capital structure may be defined as that relationship of debt and equity which maximizes the
value of company’s share in the stock exchange.

FEATURES

a) The relationship of debt and equity in an optimal capital structure is made in such a manner that
the market value per equity share becomes maximum.

b) Optimal capital structure maintains the financial stability of the firm.

c) Under optimal capital structure the finance manager determines the proportion of debt and equity
in such a manner that the financial risk remains low.
 d) The advantage of the leverage offered by corporate taxes is taken into account in achieving the
optimal capital structure.

PROJECTING NETWORKING

Project Network diagram is one of the many ways to represent project schedule. It is the most
powerful way to analyze logical relationships between different activities and milestones. Some of the
other popular methods to represent the project schedule are:
 Bar Charts (popularly known as Gantt Charts)
 Milestone Charts
 Project Calendars

Gantt Charts

A Gantt Chart is a simple technique that can be used to attach a time scale and sequence to a
project.A Gantt Chart is a form of horizontal bar chart and horizontal bars are drawn against a time
scale for each project activity, the length of which represents the time taken to complete. To
construct a Gantt Chart the following steps are necessary:

1) Use the horizontal axis to represent time

2) Use the vertical axis to represent activities
3) Represent each activity by a horizontal bar of appropriate length
4) Take activity procedures into account by starting each activity bar to an appropriate point along
the time axis after its preceding activities. Normally the start point for an activity is the earliest
time that it could start after its preceding activities had finished.

It is possible to enhance the Gantt Chart in several ways. For instance the number of staff required to
do a task can be entered into the bar on the diagram.

Gantt charts, also commonly known as milestone plans, are a low cost means of assisting the project
manager at the initial stages of scheduling. They ensure that:

1. all activities are planned for,

2. the sequence of activities is accounted for,
3. the activity time estimates are recorded; and
4. the overall project time is recorded.
They are therefore a simple, rough and ready means of planning a project and assessing progress and
are sufficient for most simple projects.
However, where projects become complex, it becomes difficult to see relationships between activities
by using a Gantt Chart. For more complex projects Network Analysis techniques are used.

Gantt charts also provide a summary of the project as a whole and can be used as a rough and ready
means of assessing progress at the project control phase. At any date, the project manager can draw a
dateline through the Gantt chart and see which activities are on-time, which are behind schedule and
generally record project status against plan.

Gantt charts, named after Henry L. Gantt, one of the pioneers of scientific management, are a useful
means of representing a schedule of activities comprising a project and enable the operations manager
to know exactly what activities should be performed at a given time and, more importantly, to monitor
daily progress of a project so that corrective action may be taken when necessary.

To construct a Gantt chart, the various activities are listed on a vertical axis and the horizontal axis is
used to represent time. Activity precedencies are taken into account by starting a horizontal bar to
represent the next activity at an appropriate point after its preceding activities, i.e. those activities
which must take place before the next activity can start, have taken place. Normally this would be at
the earliest time that it could start after its preceding activities had finished.
The above chart shows that activities A and B have no preceding activities and so can start right away.
Activity C requires Activity B to have been completed before it can begin. The chart is then completed
using such precedence relationships as listed in the question, with each horizontal bar being
proportional in length to the activity time that it represents.

Looking at the chart it is apparent that the project ends when activity E has been completed.

Working back in time from activity E the "steps" which are crucial or critical in order to ensure that the
project duration does not extend beyond the planned length are: E,C and B. The shortest time in which
the project could be completed from the given information is therefore 16 days. The set of activities B,C
and E which together determine the project duration are referred to as the critical path through the
chart.

Those activities forming the critical path can be highlighted on the Gantt chart to help the operations
manager to give priority to them if lack of resources mean that such decisions have to be made.

It is important to realize though that activities not on the critical path can become so if they are allowed
to drift too far. How far could activities A and D drift before they affected the duration of the project?

Provided the project is not too complex in its activity relationships or simply too big to be mapped on
reasonably sized graph paper, Gantt charts can be very useful tools for the project manager and are
graphically superior to the network analysis methods of CPM and PERT. They allow the critical activities
to be found, i.e. those activities which must be performed on time if the project duration is not to
increase, and any "slack" or "float" in the sequence of activities can easily be shown.

Network Analysis

Introduction to PERT and CPM

The two most common and widely used project management techniques that can be classified under
the title of Network Analysis are Programme Evaluation and review Technique (PERT) and Critical Path
Method (CPM). Both were developed in the 1950's to help managers schedule, monitor and control
large and complex projects. CPM was first used in 1957 to assist in the development and building of
chemical plants within the DuPont corporation. Independently developed, PERT was introduced in
1958 following research within the Special Projects Office of the US Navy. It was initially used to plan
and control the Polaris missile programme which involved the coordination of thousands of
contractors. The use of PERT in this case was reported to have cut eighteen months off the overall time
to completion.

The PERT/CPM Procedure

There are six stages common to both PERT and CPM:

1. Define the project and specify all activities or tasks.

2. Develop the relationships amongst activities. Decide upon precedences.

3. Draw network to connect all activities.

4. Assign time and/or costs to each activity.

5. Calculate the longest time path through the network: this is the "critical path".

6. Use network to plan, monitor and control the project.

Finding the critical path (step 5) is a major in controlling a project. Activities on the critical path
represent tasks which, if performed behind schedule, will delay the whole project. Managers can
derive flexibility by identifying the non-critical activities and replanning, rescheduling and reallocating
resources such as manpower and finances within identified boundaries.

PERT and CPM differ slightly in their terminology and in network construction. However their
objectives are the same and, furthermore, their project analysis techniques are very similar. The major
difference is that PERT employs three time estimates for each activity. Probabilities are attached to
each of these times which, in turn, is used for computing expected values and potential variations for
activity times. CPM, on the other hand, assumes activity times are known and fixed, so only one time
estimate is given and used for each activity. Given the similarities between PERT and CPM, their
methods will be discussed together. The student will then be able to use either, deciding whether to
employ variable (PERT) or fixed (CPM) time estimates within the network.

PERT and CPM can help to answer the following questions for projects with thousands of activities and
events, both at the beginning of the project and once it is underway:

 When will the project be completed?

 What are the critical activities (i.e.: the tasks which, if delayed, will effect time for overall
completion)?
 Which activities are non-critical and can run late without delaying project completion time?
 What is the probability of the project being completed by a specific date?
 At any particular time, is the project on schedule?
 At any particular time, is the money spent equal to, less than or greater than the budgeted
amount?
 Are there enough resources left to complete the project on time?
 If the project is to be completed in a shorter time, what is the least cost means to accomplish this
and what are the cost consequences?

FLOAT AND SLACK

The terms "slack" and "float" are often used interchangeably. However, the main difference
between float and slack is that slack is typically associated with inactivity, while float is associated
with activity. Slack time allows an activity to start later than originally planned, while float time
allows an activity to take longer than originally planned.

The Critical Path Method

The Critical Path Method depicts a project as a network diagram, in which each node on the
network represents an activity. The nodes are joined together by lines, or arcs, which represent the
events that mark the beginning and end of each activity.
Types of Float

The term free slack, or free float, describes the length of time by which an activity can be delayed
without delaying the early start of any subsequent activity, or activities. The term total slack, or
total float, on the other hand, describes the length of time it can be delayed, beyond it's early start,
without delaying the finish date for the whole project.
The term independent slack, or independent float, describes the length of time by which an activity
can be delayed if all previous activities start as late as possible and all subsequent activities start as
early as possible. Independent float is associated with just one activity, rather than two or more.

CRASHING
Crashing is a schedule compression technique used to reduce or shorten the project schedule.

The PM can various measures to accomplish this goal. Some of the common methods used are

 Adding additional resources to the critical path tasks

This option has various constraints such as the securing of the budget to add the resources, and
the availability of the resources.
 Reduce the project requirements or scope
This can be done only if the sponsor and major stakeholders agree to reduce the scope

Crashing is the technique to use when fast tracking has not saved enough time on the schedule. It is a
technique in which resources are added to the project for the least cost possible. Cost and schedule
tradeoffs are analyzed to determine how to obtain the greatest amount of compression for the least
incremental cost.

Crashing a Project
The initial project plan you construct seldom will be delivered without making modifications to
the project's triple constraint, which are schedule, cost, and scope. Crashing a project is an advanced
project management technique, which means to add the appropriate amount of skilled project
resources to critical path task(s). A skilled project resource is commonly used to compress the project
schedule.
The project schedule compression technique consists of:

1. Fast tracking
2. Crashing a project

In this lesson we will focus on crashing a project.

Crashing your project will directly impact two out of three of your project triple constraints, which are
schedule and cost. Crashing your project will accelerate your project delivery schedule and increase
your project budget; however, it will have no effect to your project scope. Typically, when project
sponsors want you to crash your project, it means they're not concerned about the project costs.
Either they have unrestricted budgets, or they just want you to get the project done as fast as
possible.
Consequently, since crashing your project will increase your project cost, you must identify all critical
path tasks that have the potential to compress your project schedule. If you are unable to add
resources to critical path tasks resulting in shortening your project schedule, don't attempt to
implement project crashing. Also, don't select non-critical path tasks to crash because adding
additional resources to non-critical path tasks will have no effect to your project schedule.