BOARD OF TECHNICAL EDUCATION

GOVERNMENT OF KARNATAKA

AERONAUTICAL ENGINEERING
LECTURE NOTES
PROJECT MANAGEMENT SKILLS (20PM01T)
2ND SEMESTER

SUBHADHANURAJA
HOD AERO
HEA POLYTECHNIC
Aeronautical Engineering 20PM01T(Project Management Skills)

My Sincere thanks to

1. Air Commodore Sajjad Rahim, VSM

I feel truly honored by led forward in your guidance. You’re an amazing Director and
Your prerogative guidance is the key to success in our career. Being your subordinate
was the best training I ever had in my career.

Director, Hindustan Academy

Our Director was a University rank holder, IIT Madras graduate, a graduate of Defense
Service Staff College Wellington, Nilgiris, Tamil Nadu and a Flight Engineer. Our
Director has over 50 years of Experience, which include Flying & Maintenance of
various types of Aeroplanes and Helicopters of the Indian Army and Indian Air Force.
Our Director has commanded & held important posts in Air & Command HQ of
the Indian Air Force.

2. Mr. Ramakrishna Reddy

Principal - Hindustan Electronics Academy (Polytechnic)

Thanks for converting our mistakes into lessons, pressure into productivity, and skills
into strengths. You really know how to bring out the best in us.

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SUGGESTED SPECIFICATION TABLE WITH HOURS & MARKS

SUGGESTED LEARNING RESOURCES

*

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UNIT 1
Introduction
Introduction and definition, Features of a Project, Types of Projects, Benefits and Obstacles in
Project Management, Project Management Profession, Role of Project manager, Consultants,
Project and Operation, Project Management Process, Project Scope

1.1 Introduction

 A farmer taking up crop cultivation

 A construction company constructing a bridge
 Indian Railways changing the meter gauge railway track to broad
gauge
 A company hiring fresh graduates
 A student pursuing MBA

What is common to all these?

All these are projects. A project is not merely establishing an industry or
constructing a building. It is just something new, something unique, planned
and executed for good.

Objectives of Project management

There are four major objectives of project management

 Scope: Scope means what are the expectations from you as a project
manager and your team.
 Performance: A project is always expected to have a well defined
performance level. If a project is unable to adhere to the desired
performance of a customer, it is certainly an unsuccessful project.
 Time: A successful project is the one which is completed within the time
limits perceived during the planning. As the cost is dependent on time,
time management becomes a crucial activity of project management.
 Cost: It is dependent on all the above objectives. Mathematically it can
be written as: Cost = f (P, T, S). Therefore, cost is a function of
performance, time and scope. If any of the above increases, it is surely
going to increase the cost of the project.

Another approach in defining the objectives is the SMART approach.

 Specific: Project should target a specific goal
 Measurable: It should be quantifiable
 Attainable: It should be attainable with resources available
 Realistic: It should be realistic in nature
 Time Limit: There should be fixed time limits

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1.2 Meaning of Project

Project is defined as temporary but interrelated tasks undertaken to give a

unique product or service or result. Projects are different from other ongoing
operations in an organization, because unlike operations, projects have a
definite beginning and an end - they have a limited duration. Projects are critical
to the realization of performing organization’s business strategy because
projects are a means by which the strategy of the company is implemented.

A project can be defined as a complex of non-routine activities that must be

completed with a set amount of resources and within a set time limit. The
following figure explains the basic tenets of project management.

Typical examples of projects include: construction of a house, performing a

marriage, overhauling a machine, maintenance of equipment, commissioning of
a factory, conducting national elections, research on developing a new
technology, launching a new weapon system, conducting a war, pre-crisis
planning for preventing a riot, recruitment of a project manager, etc. Each of the
above cases involves investment of resources on a package of inter-related,
time-bound activities, thereby constituting a project.

Projects also involve one or more elements that have not been done in the past,
and are therefore unique. A product or service may be unique even if the
category to which it belongs is large. For example, although several residential
complexes have been built in the past, creation of a new house will be a project
because each facility can have elements such as a unique - location, customized
or adapted design, regionally available resources, and/or discrete owners.

1.3 Definition and No Change Mode

PMBOK (Project Management Body of Knowledge) defines project as a

temporary endeavour undertaken to create a unique product or service.
Temporary means that every project has a definite end, and Unique means that

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the product or service is different from all similar products or services.

Following are the important aspects of a project:

 Starting date
 Specific goals and conditions
 Defined responsibilities
 Budget
 Planning
 Fixed end date
 Parties involved

Project Management

Project management is a methodical approach to planning and guiding project

processes from start to finish. It is the method of planning the plan. It starts
from project definitions and ends with goal achievement.

PMBOK defines project management as the application of knowledge, skill,

tool and techniques to project activities in order to meet stakeholder’s needs and
expectations from a project.

Bridge group defines it as the methods and disciplines used to define goals, plan
and monitor tasks and resources, identify and resolve issues, and control costs
and budgets for a specific project.

1.4 Features of a Project

The various characteristics of the project are

1. Fixed set of objectives: The project starts when the objective(s) is
finalized. The project comes to an end as soon as the objectives are
attained.

2. Tenure: Project is never a continuous activity, it has to come to an end.

Its life span is fixed

3. Team work: It needs a team to accomplish various activities.

4. Unique: All projects are unique in themselves, no two projects are

exactly similar.

5. Life cycle: Like all living organisms, project starts slowly (definition
phase), then starts building up in size (planning phase), then reaches peak

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(implementation phase) before finally getting terminated.

6. Made to order: The customer always decides the objective and informs
the constraints like time and cost.

7. Single entity: Generally, projects are the responsibilities of a single

person/entity but certainly there are many participants in a project, who
are helping the single entity in the accomplishment of project objectives.

8. Multi-skilled staff: The staff needed for a project, including the project
manager needs to have a wide range of skills including technical skills,
human skills, financial skills, negotiation skills, etc.

9. Subcontracting: Subcontracting is practically unavoidable in project

management. As specialized knowledge or workforce is needed for a very
small duration in a project, it is difficult and costly to employ or retain.
Therefore, they are just hired for small duration or specific job from
outside agency.

10. Risk and uncertainty: Projects are risky as the activities involved in
projects are non-retrievable. Thus, risk is unavoidable. However, risk can
be reduced considerably using various forecasting techniques and project
management and control tools.

1.5 Types of Projects

The projects can be classified into various types:

1) Based on Ownership

a) Public Projects: These are the projects which are done by public projects.
E.g. Construction of Roads & Bridges, Education Programmes, etc.

b) Private Projects: These are the projects which are undertaken by private
enterprises. Eg. Any business related projects such as a construction of
houses by real estate builders, software development, marriage contracts, etc.

c) Public Private Partnerships: These projects which are undertaken by

both government and private enterprises together. E.g., Generation of
Electricity by Windmill, Garbage Collection, etc.

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2) Based on Investment

a) Large Scale Project: These projects involve a huge outlay or

investments, say, crores. Eg. Real Estate Projects, Road Construction of
manufacturing facilities, Satellite sending projects of ISRO, Unique
Identification Number project of India, etc.

b) Medium Scale Project: These projects involve medium level investment

and are technology oriented. Example: Computer industry and electronic
industry.

c) Small Scale Project: These projects involve only a lesser investments.

E.g., agricultural projects, manufacturing projects.

3) Based on Research in Academia

a) Major Projects: In academia, the major projects are those projects which
involve more than one year to 3 or 5 years and minimum funding of 3 lakhs
in case of social sciences and 5 lakh in case of sciences.

b) Minor Projects: The minor projects in academia are those projects which
will be completed within a year and have a maximum funding of 1 lakh in
social science and 3 lakh in case of sciences

4) Based on Sector

a) Agricultural Projects: These are the projects which are related to

agricultural sector like irrigation projects, well digging projects, manuring
projects, soil upgrading project, etc.

b) Industrial Projects: These are the projects which are related to the
industrial manufacturing sectors like cement industry, steel industry, textile
industry, etc. For example, technology transfer project, marketing project,
capital issue project like IPO, etc.

c) Service Projects: These are the projects which are related to the services
sectors like education, tourism, health, public utilities, etc. For example,
adult literacy project, medical camp, general health check up camp, etc

5) Based on Objective

a) Commercial Projects: These projects are undertaken for commercial

purpose and return on investment is expected out these projects. For

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example, Toll roads based on BOLT – Build Own Lease Transfer Model or
BOOT – Build Own Operate and Transfer Model, Product Launching
project.

b) Social Projects: These projects are undertaken for social purposes and
welfare of the people is the aim of these projects. These projects are
undertaken either by the Government or Service oriented NonGovernmental
Organizations. For example, Polio immunization Project, Child Welfare
Projects, Adult Literacy Projects, etc.

6) Based on Nature

a) Conventional Projects: These projects are traditional projects which do

not apply any innovative ideas or technology or method. For example,
conventional irrigational projects, handicraft projects, etc.

b) Innovative Projects: These projects involve the use of technology, high

R&D, development of new products and services. These innovative projects
can be further classified into

i) Technology: Depending on the level of technological uncertainty at

the time of initiation of projects, the projects can be classified into:

Low-Tech projects which relay on the existing and well established

base technologies;

Medium-Tech projects which rest mainly on existing base

technologies but incorporate some new technology or feature;

High-Tech projects in which most of the technologies employed are

new, but existent, having been developed prior to the project’s
initiation; and

Super HighTech projects which are based primarily on new, not

entirely existent technologies.

ii) Research: Based on the type of research, projects can be classified

into:

Exploratory research projects which may generate novel idea in the

domain of knowledge; constructive research projects which are mainly
done by many technological corporate to find new or alternative
solutions to any particular crisis or problems, eg., renewable energy

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research or development of the capacity of optical fiber; and

Empirical research projects are very impressive observational type of

research in which testing on real life data or analysis of pattern of
some specific events in order to identify the nature or the class of
trend that specific phenomenon maintains.

iii) New product development: These projects are undertaken in the life
cycle of a product. These projects can be classified into advance
development projects which aim at inventing new science or capturing
new know-how for the organization; breakthrough development
projects which create the first generation of an entirely new product
and involve significant change in the product and process technology;
platform or next generation development projects which provide a
basis for a product and process family and thus establish the basic
architecture for follow-on derivative projects; and derivative
development projects which refine and improve selected performance
dimensions.

7) Based on Time

a) Long term projects: These projects take a very long duration to

complete. These projects are run for many years till the objective is reached.
For example, Eradication of diseases like Polio, Filaria, etc.

b) Medium term projects: These projects take a medium term duration like
3 to 5 years. For example, Modernization projects, computerization of
operations, etc.

c) Short term projects: These projects are executed within a short period,
normally within a year. For example, Pond cleaning project, health camps,
software development, etc.

d) Very short term projects: By very name you can understand that these
projects are completed within a very short period, say, within a day. For
example, product launch project.

8) Based on Functions

Based on the functional area of management, the projects can be classified

into:

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a) Marketing Projects which are taken up in the area of marketing a

product or service of an organization. Marketing road shows, implementing a
marketing strategy, etc.

b) Financial Projects are undertaken to raise finance or restructure capital

structure. For example, IPO Project, share split project, etc.

c) Human Resources Projects are undertaken in the area of human

resources of an organization, e.g., Induction training project, campus
recruitment project, etc.

d) IT and Technology Projects which are undertaken in the area of IT

companies or IT related requirement of any organization, e.g., development
of Human Resources Information System, Marketing Information System,
etc.

e) Production Projects are undertaken in the area of production or

operations. For example, overhauling projects, preventive maintenance
projects, getting an ISO certification, etc.

f) Strategic Projects are taken by the organizations to executive a strategy,

for example, mergers and acquisition projects, Core Banking Solution
project introduced in banks, etc

9) Based on Risk

a) High Risk Projects: These projects involve a very high degree of risk, for
example, nuclear energy project, thermal energy project, satellite projects,
etc. If the project is not handled properly, the effect will be very adverse.
Thus, high precautionary measures are to be taken to commission these
projects.

b) Low Risk Projects: These projects do not involve risk and they are
carried out in the normal course of action. For example, road and bridge
construction, house construction.

10) Based on Investment Decisions

On the basis how the projects influence the investment decision products,
project can be classified into

a) Independent Projects: An independent project is one, where the

acceptance or rejection does not directly eliminate other projects from

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consideration or affect the likelihood of their selection. For example, if

management plans to introduce a new product line, as well as, replace a
machine which is currently producing a different product. These two projects
can be considered independent of each other, if there are sufficient resources
to adopt both, provided, they meet the firm’s investment criteria.

b) Mutually exclusive Projects: The mutually exclusive projects are

projects that cannot be followed at the same time. The acceptance of one
prevents the substitute proposal from accepting. Most of them have ‘either
or’ decisions. You will not be able to follow more than one project at the
same time. The evaluation is done on a separate basis so that one that brings
the highest value to the company is chosen.

c) Contingent Projects: A contingent project is one where the acceptance or

rejection depends on the decision to accept or reject multiple numbers of
other projects. Such projects may be complementary or substitutes. Let us
take the example of bio fuel plant cultivation in a large scale and the decision
to set up a bio fuel manufacturing unit. In this case, the projects are
complementary to each other. The cash flows of the plant cultivation will be
enhanced by the existence of a nearby manufacturing plant. Conversely, the
cash flows of the manufacturing unit will be enhanced by the existence of a
nearby cultivation farm.

11) Based on Output

Based on output, projects are classified into quantifiable and non

quantifiable ones.

a) Quantifiable projects: In these projects, the benefits / goals of which are

amenable for measurement. Quantitative expression of the outcomes is
possible. It is easy to understand and appreciate quantitative projects as it is
easy to communicate them. For instance, enterprises engaged in the
production of various goods and services come under this category.

b) Non-quantifiable projects: In these projects quantification of the

benefits / outcome may not always be possible as the impact of the project is
spread over a longer period. The benefits accrue to the intended beneficiaries
in the long run. Projects concerning health, education, and environment fall
under this category

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12) Based on Financial Institutions

Classification Financial institutions – both central and state level have

classified projects into profit-oriented projects and service-oriented projects.

a) Profit-Oriented Projects: They are classified into a) New Projects; b)

Expansion Projects or Development projects; c) Modernization Projects or
Technology Projects and d) Diversification Projects.

b) Service-Oriented Projects: They are classified into a) Welfare Projects;

b) Service Projects; c) Research and Development Projects and d)
Educational Projects

1.6 Benefits of Project Management

1.7 Obstacles in Project Management

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1.8 Project Management A Profession

1.9 Project Manager and His Role

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1.10 Project Consultants

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1.11 What is Operation?

Operations are the ongoing execution of activities and they follow an

organization’s procedures to produce the same result or a repetitive service.
Operations are permanent in nature.
Production, manufacturing, and accounting are examples of operations.
There are many definitions of operations. Some are as follows:

 Operations do not produce new things, but they are necessary to

maintain and sustain the system.
 Operations are used to run regular business models, achieve the goals
of the business, and support the business.
 Operations are different from projects, which are known for their
uniqueness.
 Operations are permanent, and their only constraint is to make a profit
for the organization.
Any manufacturing or production process can be an example of an operation.

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1.12 Difference between Project and Operation

1.13 What is Process in Project Management and Process Groups?

Project process corresponds to the project implementation that is divided into

sub processes. The structure and process are defined in the project
organization considering the attainment of the corporate objectives and
therefore also project objectives.

The components of the project process are: project start, project

preparation, project planning, project implementation and project completion.
The two last components should contain also the project decision. The process
is success due to the following methods as personnel, resources, financial
resources, establishments, techniques and methods, and present results at the
end.

The five PMBOK process groups are:

1. Initiating Process Group: Processes required to launch a new project or

a new project phase.

2. Planning Process Group: Processes related to defining and planning the

extent of the project, as well as planning how it will be executed.

3. Executing Process Group: Processes related to the actual completion of

project activities and tasks.

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4. Monitoring & Controlling Process Group: Processes covering

everything related to tracking, monitoring, reporting on, and controlling
project performance and progress.

5. Closing Process Group: Processes required to finalize and complete a

project or project phase.

1.14 What is Project Scope?

Project scope is a detailed outline of all aspects of a project, including all related
activities, resources, timelines, and deliverables, as well as the project’s
boundaries. A project scope also outlines key stakeholders, processes,
assumptions, and constraints, as well as what the project is about, what is
included, and what isn’t. All of this essential information is documented in a
scope statement.

1.15 Difference between Project Group Objectives and Project Scope

Parameter Objective Scope

Definition The objective of a project The scope of a project includes

determines the achievements the limitations one has to face
one intends by completing a during the project.
project.

Applicability The objective determines the Scope determines the range of

output for a desired applicability. What cannot be
operation. included is out of scope.

Planning phase During the planning phase, During the planning phase, the
objectives are to be known to scope is to be analyzed and
make a plan. according to the scope, the
plan has to be prepared to
achieve the objectives.

Clarity Objectives during a process Scopes can vary even after a

are clear and only if process begins. The scope
objectives are clear, the should be pre-determined but
process is operational. accidental changes are
possible.

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Example The objective of a homeless The scope of this person is the

person is to buy a new home. amount he has to buy the
house.

QUESTION BANK
1. Define Project and Project Management.

2. Discuss the Features of a Project

3. Explain the various types of Project.

4. Write down the Benefits of Project Management.

5. What is the Role of Project Manager?

6. Explain the Necessity & job of Consultants

7. Differentiate Inside and Outside Consultants

8. Differentiate Project and Operations.

9. Differentiate Project Objectives and Project scopes.

10. Mention the Obstacles in Project Management.

*****************************************

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UNIT 2
Project Administration
Project Administration, Project Team, Project Design, Work Breakdown Structure (WBS),
Project Execution Plan (PEP), Systems and Procedure Plan, Project Direction, Communication
and Coordination, Project Success

2.1 Essentials of Project Administration

A project administrator is a professional who organizes the necessary team

members and specializes in facilitating, reporting and analyzing projects under
the supervision of a project manager. This position requires great responsibility
and proper time management because the job entails constant monitoring and
control of all project variables. The project administrator's role is not only to
ensure that the project is finished on time and on budget, but also may involve
acquiring more contracts.

 Schedule regular meetings and record decisions (e.g. assigned tasks and
next steps)
 Break projects into doable tasks and set timeframes and goals
 Create and update workflows
 Conduct risk analyses
 Prepare and provide documentation to internal teams and key
stakeholders
 Order resources, like equipment and software
 Retrieve necessary information (e.g. user/client requirements and relevant
case studies)
 Track expenses and predict future costs
 Monitor project progress and address potential issues
 Coordinate quality controls to ensure deliverables meet requirements

For a company executing projects either regularly or for the first time it would
be necessary for the chief executive to issue what may be called project charter.
It must define the project scope, the project goals, name and authority delegated
project manager, project reviewing authority and request co-operation of all
concerned in the execution of the project. An elaborate effort in this direction
may produce what is known as a project manual.

To demonstrate the project manager's authority in a simplest and quickest way it

is essential to develop a proper organization chart. The different forms of
organization charts that suit to particulars circumstances and nature of job have
been discussed in the earlier lesson.

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There are two system for the management of project and they are: Project work
system and Project control system

Project work system can be designed by developing and preparing the following
tools.

 Work breakdown structure

 Project execution plan
 Project procedure manual etc.

Similarly for effective project control system it is essential to design the tools
such as project planning, project scheduling and project monitoring.

2.2 Project Team

A Project Team is an organized group of people who are involved in
performing shared/individual tasks of the project as well as achieving
shared/individual goals and objectives for the purpose of accomplishing the
project and producing its results. The team consists of the full-time and part-
time human resources supposed to collaboratively work on producing the
deliverables and moving the project towards successful completion.

Project team member duties can be summed up as the following:

 Contribute to overall project objectives

 Complete individual deliverables
 Provide expertise
 Work with users to determine and meet business needs
 Document the process

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Three Conventional Roles

Leader A project team leader is a person who provides leadership and guidance
to the team and takes responsibility for the results of teamwork. The team leader
role involves the development and encouragement of the team through training,
leading, motivation, recognition, rewarding and other activities that stimulate or
force team members to do the required tasks.

Member A project team member is a person who is actually involved in doing

assigned tasks. Team members directly access the project and actively evolve its
processes. They’re subordinated to the team leader.

Contributor A project team contributor is a person or an organization that

participates in teamwork but is not actually involved in performing tasks and
carrying out project team responsibilities. Contributors help improve the project
through giving valued suggestions, expert judgment and consultation. They
aren’t responsible for the project results. Often project team contributors have
an interest or concern in the project, so they facilitate successful completion.

2.3 Project Design

The project design includes everything from who is responsible for completing
the project to a description of the project, its goals, outcomes and objectives. It
describes when these goals, outcomes and objectives will be reached, and the
major deliverables, products or features that will be completed.

Project design is one of the earliest stages in the life of a project (exactly when
it occurs varies by organization). During project design, an outline of the project
is created, including:

 The organization(s) responsible for completing it

 A description of the project
 Goals, outcomes, and objectives, and when they will be completed
 Major deliverables, products, and/or features Success criteria, and/or
monitoring and evaluation guidelines
 Budget estimates
It’s important to involve your team and other key stakeholders in project design.
This will help ensure important details are included, and that your project is
realistic and achievable. Your project design should be carefully documented,
and a variety of visual aids may be incorporated, as well.

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7 Steps to Effective Project Design

 Define Project Goal.

 Determine Outcomes, Objectives, and/or Deliverables.
 Identify Risks, Constraints, and Assumptions.
 Prepare a Visual Aid.
 Ballpark Your Budget.
 Determine Approval and Monitoring Processes.
 Use Proper Project Design Documents.

2.4 Work Breakdown Structure (WBS)

A deliverable oriented hierarchical decomposition of the work to be executed by

the project team to accomplish the project objectives and create the required
deliverables.

Work breakdown structure, as the name suggests, is breaking the project

systematically into successive levels. But work breakdown structure is not
limited to disintegration or breaking down; it also develops linkages between
various tasks or activities. The breakdown can be:
1. Agency-oriented: In this type of breakdown, different agencies or type of
agencies are allocated to a group or individual. For example, dealing with civil
contractors, equipment suppliers, liasoning with government bodies.

2. Function-oriented: Like departmentalisation, the activities are divided on the

basis of type of work. A project can be divided into engineering works,
accounting works, financial works, procurement works, and human resource
works, and so on.

3. Location-oriented: This type of WBS is generally useful when the project is

multi-locational.

4. Cost-orientation: Different cost centres are identified and allocated to various

groups or individuals.

5. Life cycle-oriented: There exists a project life cycle, so work can be divided
on the basis of different phases of life cycle, like identification team, planning
team, implementation team, and so on.

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WBS in an important document and can be tailored to use in a number of

different way.
1) It serves as an effective means of communication to integrate the objectives
and activities of all the internal and external organizations involves in the
project
2) It represent separate sequential and parallel activities assigned to different
groups who will schedule, measure and control their own performance
3) It reflects the procurement strategy during the various stages of the project
life cycle.
4) It may illustrate how each piece of the project contribute to the whole in
terms of performance.

2.5 Project Execution Plan (PEP)

Project execution plan (PEP) refers to that exercise of matching the project
hardware and software with the executing agencies to that a viable work system
emerges.
Project execution plan, in fact, includes four sub-plans. There are:

1. Contracting plan

2. Work packaging plan

3. Organization plan

4. Systems and procedure plan

Project execution plan is a strategic plan - it does not deal with the operational
details of building a project. The operational details are covered in a network
plan which is developed later after the project execution plan is approved by the

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owner's plan for project execution and, therefore, it must from the basis for
development of all operational plans including network plans.
2.6 Contracting plan

This is the first step in the preparation of a project execution plan. Owners
invariably need some agencies with whom they can share responsibilities. In the
interest of developing self- regulation systems it would be necessary to contract
out those areas where the owner's company does not have inherent competence.

Which types of contract to choose, which type of reimbursement to make, what

conditions of contracts to stipulate, and what payment terms to offer, are all
issues that must be examined during this phase of the project. Contract planning
would involve examination of a number of alternatives since there are so many
possible arrangements in teams of sharing of responsibilities, types of
reimbursements and general conditions of contract.

2.7 Work Packaging Plan

Work packing plan will be the next important step in the preparation of the
project execution plan. A work package in a project is the smallest division of
work where it still retains the characteristics of a project. This when a project is
progressively divided into systems and the system into subsystems, a stage is
ultimately reached where further division into components will strip it of its
multi-disciplinary character - the work at that stage can be consideration these
packages, grouping them or keeping them as they are, in order to from viable
contracts.

Work packaging enables better organization and management of projects. A

work package or several work packages may be assigned to one individual who
could serve as a mini project manager. This enables projectization of the entire
project execution effort which, in turn, ensures the closest possible adherence to
time, cost and technical performance targets.

Work packaging can also ensure that all agencies in a project think and
channelise their effort in one direction, i.e. towards the completion of the
packages only. Thus, design engineers, procurement engineers and construction
engineers will then give priority to their work in relation to a work package and
not according to functional convenience. Fulfillment of the requirements of a
work package will alone be considered and achievement and not the mere
volume of work completed. This will lead to a well-coordinated completion of
the project.

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Thus, the contracting plan and work packaging plan together produce a list of
contracts with the scope of work defined in terms of self-contained work
packages.

2.8 Organization plan

Having decided the number of contracts and their scope, the owner is now in a
position to set his own house in order. The owner can deliberate on the form of
organization to be adopted so that the interest of the project is best served.

Several standard organizational arrangements are possible, ranging from pure

functional organization to pure project zed organization and an owner has to
choose his own arrangement depending on the project size, location,
complexity, work packages, type and number of contacts. It should be however,
noted that an organization can become more self- regulation if it is on taskforce
or project zed. The participants in such cases fully identify themselves with the
project objectives and would regulate their behaviors on their own, as the
situation may demand.

2.9 System and procedure plan

The last section of the project execution plan deals with system and procedure.
A heavy emphasis has to be placed on routine system and procedure so that no
intervention is required in the day - to-day operation of a system. There are at
least eight routine sub-system of project management for which appropriate
procedures can be conceived right at the start of the project implementation.

These seven sub-systems are:

1. Contract management
2. Configuration management
3. Time management
4. Cost management
5. Fund management
6. Materials management
7. Communications management

While the routine system and procedure for each company will be different, in
most of the cases the difference may not be very significant. It is quite possible
to examine the system and procedure of one project and adapt it after making
minor modifications.

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2.10 Project Procedure Manual

A project procedure manual is to be prepared in such a way that the interacting

agencies are able to see their roles and manual relationship in pursuance of the
common goal.

Preparation of a project procedure manual should start with each project

management sub system. A system decomposition has to be carried out on each
sub system to identify the need for procedure write- ups. While carrying out
decomposition the question to be asked is what the system must achieve and
what contributes to the effective functioning of each of the element. By asking
this question at successive levels it is possible to develop a company picture
about the system.

The procedure to be developed for making the system self-regulative would not,
however, come out automatically from this analysis. The decision has to be
empirical, and in some cases intuitive.

2.11 Project Diary

In order to ensure effectiveness, project manager or executives have to maintain

a record date wise the point discussed and decision taken which are required to
be followed for implementation. This is known as project diary.

A project manager would be holding a number of meeting in a say-some with

vendors, some with contractors. Some with his own staff and others may be
with various outsiders. Many decision are taken in these meeting and many
commitments are made. Also, a lot of brain-work is during these meetings.
Information derived on these occasions, decision arrived have to be properly
recorded in the project diary. This will go on record to enable their
communication and implementation. Information noted in the diary help to
justify the decisions at later date this record may also be used to defend against
non- admissible claims and litigation this diary help to prepare a follow-up
register also. The follow-up register will contain all pending work with dates
committed against each.

Maintaining diary help the person to get relief from, the burden of carrying
everything in their head. It could boost up one's memory thereby helps to avoid
the problems of unattended work due to lack of memory.

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2.12 Project Execution System

Once these systems and procedures have been developed for the project, it is the
duty of the project administrator to set for smooth take off. It requires proper
project execution systems which should be more concerned about external
intervention for survival than on its internal self-regulating capability.

The external intervention will be of the following forms:

 Project direction
 Project co-ordination
 Project communication
 Project organization
 Project control

These terms are often construed as actions for getting results. Too often the
terms are used interchangeably to mean management. Therefore, for the
successful execution and administration of project requires direction,
organization, co- ordination, communication and control all at the same time but
in varying proportion.

2.13 Project Direction

Project direction refers to the use of authority to channelise the activities of the
project on desired lines. During the initiation of start-up period of the project
this direction shall be provides by the project manager. But once the project
enters the production period direction will be exercised by other members of the
project organization of else the project will stall.

Project initiation/start-up

The need for project direction as mentioned before, is maximum at the time of
start-up of implementation. The project manager during this period needs to
provide directions relating to:

1. Scope of work
2. Specification of results of completed work
3. Basis of work
4. Division of work - imported Vs. indigenous, departmental Vs. contract etc.
5. Schedule of work
6. Budget of work
7. Systems and procedure for work

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8. Co-ordination of work
9. Authority and accountability for work
10. Control of work

The success of a project is heavily dependent on team work. All the items from
1 to 10 are finalized with the involvement of project participants or else the
directives will appear authoritarian, and will unnecessarily invite opposition. If
the directions can be formulated through a participative approach, the some can
be issued formally in the name of a project manual with instructions for strict
adherence to the same. Direction, during the project initiation period, means not
simply giving a push to the project; the direction issued at this stage will, in
fact, shape the destiny of the project.

Direction during production stage

Direction after the initiation period can be considered to be of the administrative

variety. Invariably, after the start-up period, direction is provided of a case-to-
case basis through formal documents or personal contacts. A group meeting
may also be used for this purpose. On-going directions may refer to approval of
work schedules, detailed budgets, specification, purchase orders, work orders,
construction drawings, travels, miscellaneous expenses, changes in baseline etc.

Ongoing direction

Project start-up, design review, purchase order and work orders are on-time
directions. But a project will require only when unforeseen events occur,
directors otherwise will require to be provided when problems occur during
project execution. In either case, a decision has to be made as to what should be
done and the same should be authorizing for implementation. Thus, decision
making and direction are part of everyday function of any manager.

Routine directions involve five steps:

1. Understanding the decision environment

2. Establishing the decision alternatives
3. Evaluation of the alternatives and selection of course of action
4. Communication the decision to the individual or agency who is to implement
the decision
5. Checking up if the decision is working so that the decision could steered by
the consequences. This refers to the feedback system discussed by us earlier.

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2.14 Communication in a Project

For ongoing direction a two-way communications system is essential. For that

matter, the entire process of direction, co-ordination and control in a project
revolves around communication.

It is often concluded that projects are run by communications. In fact, according

to Peter Drucken, 63% of management problems are caused in whole or in part
by faulty management communications

Communication has two dimensions physical and mental, passing a memo,

drawing, data, instruction, information, etc. are the physical aspects of
communication; understanding the same in the light of role expectation,
empathy, preconceived notion, language barriers, listening skills etc., are the
mental aspects of communication. While physical aspects of communication
can be easily achieved, the mental aspects often present barriers to
communication. Prefer communication requires a conscious and determined
effort.

Affective communication in a project would require a communication oriented

action plan. The actions that may be taken in this regard are as below:

1. Organization or work, people and work place with communication

orientation.

2. Selection and installation of appropriate communication devices

3. Project review and co-ordination meeting at predetermined frequency

4. Predetermined document distribution matrix.

5. Establishing healthy attitude towards communication by appropriate

directions.

6. Installing structured reporting systems

7. Implementing routing communication systems and procedures

8. Establishing a control room

9. Using desktop computers for communication.

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Hence, in any action plan, organization of work and people is a basic project
management requirement. It is suggested that this must receive a
communication orientation.

2.15 Project Co-ordination

Co-ordination can be defined as the effort to bring parts into super relation for
harmonious functioning. A well co-ordinated project is as pleasing as a price of
music.

Co-ordination in a project gains its importance because of the need for

simultaneous working of number of activities. Therefore, one cannot proceed
simply with the execution of a project without proper co-ordination. Home, it is
the important task in the effective project execution and administration.

PROJECT CO-ORDINATION PROCEDURE

Co-ordination basically addresses itself to two aspects of work-physical

matching and timing. The physical aspect would refer to what is to be done,
how much is to be done and who to do it; the timing aspect would refer to when
these will be done. A schedule document which deals with all these aspect of
work should be prepared to enable proper co-ordination.

The word breakdown structures provide the basic frame work for both physical
and time co-ordination preparation of work breakdown structure, structuring the
organization, establishing a project procedure manual, housing people under
one roof wherever possible. - sets the stage for effective physical co-ordination.

Similarly development of project schedules coordinated with break down

structure and organization chart sets the stage for the time co-ordination.

Once the stages are so set, the day to day co-ordination in a project is ensured
through.

a) squad check

b) co-ordination meeting and

c) communication

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A project is a group effort and in group there will always be differences of

option. But coordination is not merely smoothing out differences; it is re-
integration of the parts into a whole facing into account the subdivided
functions and their interest.

2.16 Pre-requisites for Successful Project Implementation

Time and cost over-runs of projects are very common in India, particularly in
the public sector. Due to such time and cost over-runs, projects tend to become
uneconomical, resources are not available to support other projects, and
economic development is adversely affected. To minimize time and cost over
runs and thereby improve the prospects of successful completion of projects. A
lot of things can be done to achieve this goal, the more important ones appear to
be as follows:

• Adequate formulation

• Sound project organization

• Proper implementation planning

• Advance action

• Timely availability of funds

• Judicious equipment tendering and procurement

• Better contract management

• Effective Monitoring

Adequate formulation
Often project formulation is deficient because of one or more of the following
shortcomings.

♦ Superficial field investigation

♦ Cursory assessment of input requirements

♦ Slip-shod methods used for estimation costs and benefits

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♦ Omission of project linkages

♦ Flawed judgments because of lack of experience and expertise

♦ Undue hurry to get started

♦ Deliberate over-estimation of benefits and under-estimation of costs

Care must be taken to avoid the above deficiencies so that the appraisal and
formulation of the project is through, adequate and meaningful.

Sound project organization

A sound organization for implementing the project is critical to its success. The
characteristics of such an organization are:

 It is led by a competent leader who is accountable for the project

performance.
 The authority of the project leader and his team is commensurate with their
responsibility.
 Adequate attention is paid to the human side of the project. Systems and
methods are clearly defined
 Rewards and penalties to individuals are related to performance.

Proper implementation planning

Once the investment decision is taken and often even while the formulation and
appraisal are being done. it is necessary to do detailed implementation planning
before commencing the actual implementation. Such planning should inter alia,
seek to:

♦ Develop a comprehensive time plan for various activities like land

acquisition, tender evaluation, recruitment of personnel, construction of
building, erection of plant, arrangement for utilities, trial production run, etc.

♦ Estimate meticulously the resource requirements (manpower, material,

money, etc.) for each period to realize the time plan.

♦ Define properly the inter-linkages between various activities of the project.

♦ Specify cost standards

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Advance action
When the project appears prima facie to be viable and desirable, advance action
on the following activities may be initiated: (i) acquisition of land, (ii) securing
essential clearances, (iii) identifying technical collaborators / consultants, (iv)
arranging for infrastructure facilities, (v) preliminary design and engineering,
and (vi) calling of tenders

Timely availability of funds

Once a project is approved, adequate funds must be made available to meet its
requirements as per the plan of implementation - it would be highly desirable if
funds are provided even before the final approval to initiate advance action.
Piecemeal, ad-hoc, and niggardly allocation, with undue rigidities, can impair
the maneuverability of the project team. It is a common observation that firms
which have a comfortable liquidity position are, in general, able to implement
projects expeditiously and economically. Such firms can initiate advance actins
vigorously, negotiate with suppliers and contractors aggressively, organize input
supplies quickly, take advantages of opportunities to effect economies, support.
suppliers in resolving their problems so that they can in turn redound to the
successful completion of projects, and sustain the morale of project-related
personnel at a high level.

Judicious equipment tendering and procurement

To minimize time over-turns, it may appear that a turn key contract has obvious
advantages. Since these contracts are likely to be gagged be foreign suppliers,
when global tenders are floated, a very important question arises. How much
should we rely on foreign suppliers and how much should we depend on
indigenous suppliers? Over-dependence on foreign suppliers, even though
seemingly advantageous from the point of view of time and cost, may mean
considerable outflow of foreign exchange and inadequate incentive for the
development of indigenous technology and capability. Over-reliance on
indigenous suppliers may mean delays and higher uncertainty about the
technical performance of the project. A judicious balance must be sought which
moderates the outflow of foreign exchange and provides reasonable fillip to the
development of indigenous technology.

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Better contract management

Since a substantial portion of a project is typically executed through contracts,
the proper management of contracts should be done:

♦ The competence and capability of all the contractors must be ensured - one
weak link can jeopardize the timely performance of the contract.

♦ Proper discipline must be inculcated among contractors and suppliers by

insisting that they should develop realistic and detailed resource and time
plans which are congruent with the project plan.

♦ Penalties - which may be graduated - must be imposed for failure to meet

contractual obligations. Likewise, incentive nay be offered for good
performance.

♦ Help should be extended to contractors and suppliers when they have

genuine problems - they should be regarded as partners in a common
pursuit.

♦ Project authorities must retain latitude to off-load contracts (partially or

wholly) to other parties well in time where delays are anticipated.

Effective monitoring
In order to keep a tab on the progress of the project, a system of monitoring
must be established. This help in:

• Anticipating deviations from the implementation plan

• Analyzing emerging problems

• Taking corrective action

In developing a system of monitoring, the following points must be borne in

mind:

• It should focus sharply on the critical aspects of projects implementation.

• It must lay more emphasis on physical milestones and not on financial

targets.

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• It must be kept relatively simple. If made over-complicated, it may lead to

redundant paper work and diversion of resources. Even worse, monitoring
may be viewed as an end in itself rather than as a means to implement the
project successfully.

QUESTION BANK
1. What are the essentials of Project Administration?

2. Define Project Team and Project Design.

3. Explain the various steps involved in PEP.

4. Write down the Benefits of Project Diary.

5. What is the Purpose of Project Coordination?

6. Explain the Pre-requisites for Successful Project Implementation

7. Differentiate Project Direction and Project Communication.

8. What is meant by communication in a project?

Case Study I: Residential House – Project Execution Plan

1. Dr. Sunil Kulkarni wants to build a house on his 9000 square feet (90x100)
vacant plot in Bengaluru. His requirements were given below. i) He lives with
his wife, parents and two college going children. ii) He likes open space around
his house and likes to do gardening during free time iii) His wife teaches Yoga
and about 30 middle aged and old people attend the daily sessions. iv) He has a
budget limitation of INR 230,00,000 for this project and wants to present to his
wife on their 20th wedding anniversary which is 18 months away. v) His
parents cannot climb stairs and hence prefer a ground floor room vi) All the
rooms should have attached bathrooms How-ever the Civil contractor who took
the work, overshot the time and money available and hence Dr Sunil was
unhappy with the Architect firm who recommended the Contractor.

Tasks to be Prepared by group of students

• Ask them to prepare 2D drawings with Plan, Elevation, Sections and
perspectives.

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• Prepare the detailed WBS, a Project execution plan and Project

communication plan for contractors

• Estimate the quantities

• Discuss on the possible reasons for delay and methods with which
performance to both time and budget could have been achieved

• Present it in a seminar, with each group getting 5-10 minutes to present their
idea.

****************************************************************

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UNIT 3
Project Lifecycle
Project Life Cycle, Phases - Project Planning, Project Execution, Project Closure, Project Risks,
Project Cost Risk Analysis, Time and Cost overruns

3.1 Introduction
Every programme, project or product has certain phases of development.
The different phase of development in an investment proposal or project is
called life cycle. A clear understanding of these phases permits entrepreneurs,
managers and executives to have better control over existing and potential
resources in the achievement of the desire goals.

Project life cycle divides the sequence of operations of project in to different

phases. Regardless of scope or complexity, any project goes through a series of
stages during its life. Project activities must be grouped into phases to facilitate
project manager and his team to plan and organize various inputs effectively. It
also helps in identifying deviations and thus helps in decision making with
regard to continuation or termination of the project.

3.2 Phases of Project Life Cycle

The project life cycle typically passes through four stages, viz., Initiating,
planning, executing and closing. The following figure shows the Project Life
Cycle.

The starting point begins the moment the project is given the go ahead. Project
efforts starts slowly, build to a peak and then declines to delivery of the project
to the customer. The stages in the project life cycle are:

a) Project Initiation Stage: In this stage, the specifications of the project are
defined along with the clear cut project objectives. Project teams are formed and
their major responsibilities are assigned. More specifically, this stage defines
the goals, specifications, tasks and responsibilities.

b) Project Planning Stage: In this stage, the effort level increases and plans are
developed to determine what the project will entail, when it will be scheduled,
whom it will benefit, what quality level should be maintained and what the
budget will be. More specifically, this stage will include planning schedules,
budgets, resources, risks and staffing.

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c) Project Execution Stage: In this stage, a major portion of the project work
takes place. The physical product is produced (For eg., house, bridge, software
program, report, etc). Time, cost and specification measures are used for
control. More specifically, this stage will take care of status reports, changes,
quality and forecasts.

d) Project Closure stage: This is the final stage which includes two activities,
viz., delivering the outcome of the project to the customer and redeploying the
project resources. Delivery of the project might include customer training and
transferring documents. Redeployment usually involves releasing project
equipment/ materials to other projects and finding new assignments for team
members. More specially, this stage will undertake activities relating to training
the customer, transfer of documents, releasing resources, releasing staff and
learning lessons.

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3.3 Project Management Life Cycle General

The process of project management starts with project identification. An
entrepreneur searching for some investment opportunity is looking everywhere
for a project. There are so many consultancy organizations, seminars and
journals which are helpful in identification of a project. Figure reveals a general
format for the process of project management.

Project identification and prima facie analysis: This step is crucial as 99.2%
projects are dropped during this step. To mention in a positive way, a big
percentage of the projects which cross the hurdle of prima facie study reaches
its destination of implementation. The entrepreneur is afraid during this
particular processes, especially when he is a fresh entrepreneur.

• Performance of existing industries: It is generally observed that we are looking

at the performance of existing industries in the proposed sector. If pesticides
industries are not doing well, the idea of setting up a project of pesticides
company is dropped.
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• Price trend: Increased price levels also reveals increased demand levels and
thus it creates scope for a new project.

• Price difference between international and domestic prices: Commodity with

lower international price as compared to domestic price has always a danger of
imports whereas commodity with higher international prices is lucrative as it
provides opportunity to export.

• Government policies: Any sector which is promoted by government is always

boosted. Current government support to infrastructure has led to the movement
of various industrial groups in the field of infrastructure.

• Location aspects: The entrepreneur also searches the benefit of location with
respect to raw material availability, market proximity, government benefits and
other infrastructure availability like road, power, and water.

• Financial position: The entrepreneur also analyses the approximate cost of the
project during this phase and confirms the availability of funds to proceed to
next step.

Project preparation: The projects which have crossed the hurdle of prima
facie study are studied in depth and a Detailed Project Report (DPR) is
prepared. The various in-depth analyses done in this stage include.

• Technical feasibility: This includes the selection of an appropriate technology,

source for the selected technology (developed or transferred), capacity planning,
location selection, raw material identification etc.

• Market feasibility: During this study, demand supply gap is determined. The
prime competitors and their strengths and weaknesses are analyzed, marketing
channels are determined and planned, and the target market and competitive
strengths are analyzed.

• Financial feasibility: The cost of project and sources of finance are planned.
The financial appraisal is done for the project. This is analyzed using various
ratios and capital budgeting techniques like Break Even Analysis, Return on
Assets, Profit Margins, Net Present Value (NPV), Pay Back Period (PBP),
Internal Rate of Return (IRR), etc.

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• Social cost benefit analysis: During this particular analysis, we try to

determine the cost to the nation due to the proposed project and compare with
the benefits.

Project implementation: During this phase, teams are selected, activities are
identified and are allotted to group members, and schedules of activities are
formed and monitored. This is done with the help of various tools like Gantt
chart, Network Diagrams and monitoring tools.

Project review: The review report is a very important document that describes
the problems faced and the changes made in the original project plan.

3.4 Project Planning

Project planning phase follows the project initiation phase. Countless hours
during the succeeding phases can be saved with proper planning.

The purpose of the project planning phase is to:

 Determine project requirements

 Decide project cost and schedules
 Search for sources of all resources

The basic processes of the project planning phase are:

 Defining the scope: Define the scope of the project and its limitations.
Preparing the work breakdown structure: Divide the whole project into
smaller activities
 Role assignment: Assign jobs to individuals or group of individuals as
predefined activities or tasks.
 Project scheduling: Determine optimum schedule of the project and
show it on a Gantt Chart.
 Fund allocation: Allocation of funds for individual activities

Other subsidiary processes in the planning stage are:

 Risk management planning: It includes identification of possible causes

and effect of the risks and trying to reduce the impact of risk.
 Procurement planning: Decisions regarding all products, services or
resources needed to accomplish the project.

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In the planning stage, various steps are taken which includes:

 Final techno-economic feasibility of the project: This is the last chance

for changing the decision, as after this stage, it proves too closely to shut
down the project or change the project.
 Basic engineering and process design: The process is selected and basic
engineering is done. The documents with respect to equipment
specification are prepared.
 Division of work/responsibilities: Different activities are allocated to
individuals or groups.
 Identify potential vendors and subcontractors: No project is complete
without the help of outside expert agencies called subcontractors. The
potential suppliers of various equipment, civil construction agencies and
similar agencies are identified and negotiated.
 Detailed engineering design: based on the designs of equipment supplier,
detailed engineering is performed. The final layout is prepared and the
work schedule prepared.
 Final estimation of the cost of the project: The above steps leads to
finalizing quite accurate cost of the project. This is essential as the next
step would involve arrangement of funds.
 Decision of capital structure and means of finance: The final decision
with respect to financing the project is needed during the planning phase.
It is a crucial decision generally taken by core strategic group with the
advice of finance managers.
 Final schedule of implementation (next phase): The next phase will be
implementation. A proper schedule of implementation is essential to
avoid confusions. The schedule of implementation tells all the members
of the team when a particular activity should start and end. It will provide
the milestones of every activity. The techniques used are PERT, CPM,
Gantt chart, crashing resource allocation and resource leveling.

3.5 Project Execution

Project execution is characterized by the actual work on the tasks planned and
project control involves the comparison of the actual performance with the
planned performance and taking appropriate corrective action to get the desired

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output. During this phase, project team is responsible for the following
activities:

 The team members perform the tasks allocated in the earlier phase under
the supervision of the project manager and report to him.
 Project manager is responsible for performance measurement, which
includes finding variances with respect to cost, schedule and scope.
 Project manager is responsible for providing project status report to all
key stakeholders. He should specifically inform the deviation from the
plan to the stakeholders. He should also determine the root cause for the
deviations and suggest the alternate actions to encounter the deviation
caused or expected. This helps stakeholders to decide the corrective
action to be taken.
 All project key stakeholders are responsible for the review of the
variances.
 All project key stakeholders are responsible for taking necessary action of
the variances thus determined so as to complete the project within time
and cost.

The basic process of the project execution can be:

 Execution of the project plan

 Handle the changes
 Project control

The subsidiary processes during project execution can be:

 Quality control
 Performance monitoring
 Project administration
 Risk monitoring and control
 Scope and control
 Schedule and cost control
 Management of outside agencies (subcontractors)

The key activities during this phase of execution include:

Award contracts to contractors, vendors, subcontractors: Final selection

of suppliers of various supplies of services (generally termed contractors)
and physical equipment (generally termed vendors).
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Procure equipment and services: After continuously monitoring the

suppliers, the project team has to procure the goods and services.

Erection of equipment: The procured equipment needs to be placed on the

designed place after preparing the required foundation.

Control and monitor project cost, schedule and scope: As majority of

efforts, time and cost are incurred during this phase, it is critical to monitor
the project schedule and cost during this phase. This is generally done using
various tools like Gantt chart and Earned Value Analysis.

Motivation of project team: As this phase consumes maximum energy of

the team members, motivating them during this phase is critical to the
success of the project.

3.6 Project Closure

The last step performed to say good bye to a project is the termination phase.
The termination of a project is inevitable, but how it is terminated and when
may have a profound and long lasting impact on the organization and its
employees.

In the end, all projects, both successful and unsuccessful, will have to be
terminated. During the termination phase, the project’s resources are
redistributed, financial records are closed, and project personnel are reassigned.
The organization’s sensitivity to the concerns of the project team can have a
lasting impact on their commitment and productivity. Lastly, a final report,
which discusses the project’s successes and shortcomings, is prepared for senior
management. This report can significantly influence how the organization
manages projects in the future.

According to Meredith and Mantel (1995), there are three ways to terminate a
project: extinction, inclusion, or integration. Termination by extinction means
the project is completed. For example, the new project has been developed and
given to the client, the building has been completed and accepted by the
purchaser, or the software has been installed and is running.

By contrast, termination by inclusion is a very different process. The complete

project team and its equipment are transferred to a new division. As one might
expect, this type of change places significant additional stress on the day-to-day

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operations of the organization. Project managers and team members must be

sensitive to these stresses until the organization is able to settle into a new and
more stable routine.

The most common, but also the most complex, method of termination is by
integration. The project’s resources, personnel, and functions are absorbed as a
part of the original organization. The major problem associated with this
termination process is the ability of the organization to blend technological
differences between the project and the organization. Past experience appears to
play a key role in successfully integrating terminated projects.

3.7 Project Risks

Risk management is the process by which risks to the project are formally
identified, quantified and managed. A project risk may be identified at any stage
of the project by completing a risk form and recording the relevant risk details
within the risk register.

3.8 Types of Risks: Illustrations

There are various sources of risk. Any change in economy of a nation or globe,
any change in price levels of inputs or outputs may lead to risk. Let us
enumerate the various sources of risk.

Operational risk: Any decrease in operational efficiency may lead to reduced

profitability or even at times can lead to loss for the project. In some projects,
the effects of decreased operational efficiency may be high or may not be high.
Similarly, the possibility of variation of efficiency may vary from project to
project. The breakdown of machines, demand and supply of the resources and
products, shortfall of the goods and services, lack of efficient logistic and
inventory may lead to inefficiency of production. Operational leverage is a
measure of operational efficiency.

Market risk: Although every project undergoes market potential analysis and
demand forecasting, there are chances of variations due to various foreseen or
unforeseen reasons, which may adversely affect market potential or sales of
product or services to be rendered by the planned project. This is user
acceptance risk.

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Economic risk: Global or national economy is always in different phases and

no project can shield itself from ongoing economic changes. All projects are
prone to risk of economy. Recession in economy reduces the purchasing power
of the customers and thus can affect the sales or revenues of the project. It can
also lead to reduce demand as well as selling price. Inflation rate varies with
changes in economic situation which also affects prospects of any project.

Financial risk: Any change in interest rates or cost of capital will affect the
prospects of a project. A project which is feasible at the expected return of 12%
may become infeasible if the expected return increases to 15%. The expected
returns directly vary with interest rates. The degree of financial risk for different
projects varies with its debt equity ratio and can be measured by the financial
leverage.

Technological risk: The failure of the selected technology is one of the biggest
risks to any project. Moreover, a project may face the problem of up gradation
of technology. Many projects have failed due to inability to cope up with
technological innovations. This particular source of risk is vital in the present
world scenario as technology is changing very fast.

Commercial risk: There is always the risk of a customer or debtor becoming

insolvent. Although the company does manage and keeps provision for such bad
debts, at times when the customer is a major one and the amount outstanding
with him is large, it may affect the working of the project.

Quality risk: Today’s world is quality conscious and any degraded quality
product may lead to rejections and the brand may lose its value in the long run if
it is not able to maintain quality norms as per the customer’s requirement.

Legal or regulatory risk: Political environment of a country may lead to

changes in legal or regulatory changes and may cause risk due to new taxes
being imposed or barriers to imports or exports being introduced.

International risk: If international prices with addition of transaction cost

(transportation cost and duties) becomes less than domestic prices, there is an
import threat. Any change in foreign exchange rates also affects projects with
international exposure. A devaluated Indian currency may adversely affect a
project which is dependent on imports of goods or services. Similarly,
devaluation of foreign exchange may adversely affect project which are export

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oriented. Risk of war, imposition of export or import bans and change in

political scenario of a country can also lead to risk in project involving
international business.

3.9 Risk Assessment Techniques with Illustrations

The various steps in managing risk are as follows:

Identification of risk: There are various methods used for risk identification.
They are:

 Objective related risk identification: The activities of the project are not
in coherence with the objectives of the project.
 Source based risk identification: The sources or the stakeholders of the
project are not as per expectations.
 Industry based risk identifications: The overall sector of industry may not
be in a good shape.
 Economy related risk identification: The project is not fulfilling the
desired performance due to poor economic conditions in aggregate.
 Time based risk identification: The project is running far behind the
desired schedule.
 Financial ratio based risk identification: This is one of the most common
methods of risk identification. Various financial ratios reveal the project
getting riskier.

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Mapping out causes of risk and constraints involved: Identify the

cause/causes of the risk. There can either be one cause or more than one
possible causes for the risk involved. The project owner should search as
many possible causes as possible. There can be financial, economic,
marketing, production or technology constraints. The cause identified may
be varied in the boundaries of constraints. For example, there is a high
deviation in the cost of production; the cause can be poor efficiency of the
organization.

Quantifying the risk: Various methods are used for quantifying the risk.

Develop the alternatives: There can be various methods of reducing the risk,
although it is not possible to eliminate it totally. There are various methods
of risk management which are as follows:

 Mitigation: It is the process of reducing either the probability or

consequence of an event which can cause threat to the project. This
includes financial, marketing or other measures.
 Sharing: if a project is expected to have a higher risk, it can be shared
with some other firm using joint ventures to reduce the risk.
 Outsourcing: This is a very common methodology used in recent years
to reduce the risk. The riskier component is outsourced. Outsourcing
can also be very helpful in the situation where huge capital investment
is the cause of risk.
 Diversification: Diversification is a very common methodology
suggested since ages to reduce the risk. Diversification to a product or
project with high negative correlation can reduce the risk of both the
projects and products to a great extent.
 Abandonment: If a project is exposed to risk which is not manageable
then, the project should be abandoned before its useful life. This is
possible when exit is possible.
 Retention: Risk retention is a viable strategy for small risks. All risks
that are not reduced or transferred are retained by default. In this
situation, the firm should always be in a position to sustain itself in the
occurrence of threatening event.

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 Contingency funding: Contingencies are reserved for additional cost

due to inflation or non-predicted costs. This eliminates sudden funding
requirement during project implementation.
 Time buffers: Managers tend to start the activities at the latest start
times as a human practice. A too much crashing leads to problem in
practical applications. Thus, some time buffers are kept for certain
activities.

Selection of best alternative: After developing various alternatives, the

next step for risk management is to select the best alternative, which is
cheap and easily manageable.

Creation of risk management plan: The selected risk management

strategy should always be implemented properly to obtain the result. The
project manger should plan the strategy and share with all the
stakeholders. Individuals should be assigned responsibilities. In the event
of risk retention strategy, guidance should be provided to top
management and the operations management team to implement the
measures in the situation of occurrence of threatening event. The top
management should be well aware of the action plan and the risk
involved.

Implementation: The project manager should lead the team to implement

the plan. Constraints should always be identified and quantified before
the implementation of risk reduction plans. Coordination between the
project manager and his team is crucial in the success of the plan.

Review: This is the phase, many a time, avoided by managers. But this is
a very important activity as review may help in further improvement
(reduction of risk to a greater extent). Moreover, if the desired results are
not obtained, then some more steps may be required which are identified
during the review phase.

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