Project Management Unit 5

Unit 5 Estimation of Project cost: Preliminary expenses – cost of acquisition of fixed assets, cost on
technical knowhow, acquisition of patents and licenses – documentation charges – preparation of
project report. Organizing systems and procedures: working of systems - design of systems - project
work system’ design - work break down structure - project execution plan - project procedure manual
project control system - planning scheduling and monitoring - monitoring contracts and project diary.

Cost Estimation for Projects:

Good cost estimation is essential for keeping a project under budget. Many costs can appear over
the life cycle of a project, and an accurate estimation method can be the difference between a
successful plan and a failed one. Estimation, however, is easier said than done. Projects bring
risks, and risks bring unexpected costs.

Cost estimation is the process that takes those factors into account, and calculates a budget that
meets the financial commitment necessary for a successful project. Project cost estimation
applies to everything from building a bridge to developing that new killer app. It all costs money,
so the clearer you are on the amount required, the more likely you’ll achieve your objective.

Process for Cost Estimation

The U.S. government has identified a 12-step process that results in reliable and valid cost
estimates. Those twelve steps are outlined below.

1. Define Estimate’s Purpose: Determine the purpose of the estimate, the level of detail
which is required, who receives the estimate and the overall scope of the estimate.

2. Develop Estimating Plan: Assemble a cost-estimating team, and outline their

approach. Develop a timeline, and determine who will do the independent cost estimate.
Finally, create the team’s schedule.

3. Define Characteristics: Create a baseline description of the purpose, system and

performance characteristics. This includes any technology implications, system
configurations, schedules, strategies and relations to existing systems. Don’t forget
support, security, risk items, testing and production, deployment and maintenance, and
any similar legacy systems.

4. Determine Estimating Approach: Define a work breakdown structure (WBS), and

choose an estimating method that is best suited for each element in the WBS. Cross-
check for cost and schedule drivers; then create a checklist.

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5. Identify Rule and Assumptions: Clearly define what is included and excluded from the
estimate, and identify specific assumptions.

6. Obtain Data: Create a data collection plan, and analyze data to find cost drivers.

7. Develop Point Estimate: Develop a cost model by estimating each WBS element.

8. Conduct Sensitivity Analysis: Test sensitivity of costs to changes in estimating input

values and key assumptions, and determine key cost drivers.

9. Conduct Risk and Uncertainty Analysis: Determine the cost, schedule and technical
risks inherent with each item on the WBS and how to manage them.

10. Document the Estimate: Have documentation for each step in the process to keep
everyone on the same page with the cost estimate.

11. Present Estimate to Management: Brief decision-makers on cost estimates to get

approval.

12. Update Estimate: Any changes must be updated and reported on. Also, perform a
postmortem where you can document lessons learned.

Challenges of Cost Estimation

There are many factors that are uncertain when cost estimating. For example, if the project is not
like prior ones, then experience won’t help guide you. That said, the longer the project’s
duration, the less in focus cost estimations will be.

Then there is the team: the level of skill and experience available are going to have a big factor
on overall costs of the project.

Project Cost Estimation Techniques

These entire factors impact project cost estimation, making it difficult to come up with precise
estimates. Luckily, there are techniques that can help with developing a more accurate cost
estimation.

Analogous Estimating

Seek the help of experts who have experience in similar projects, or use your own historical data.
If you have access to relevant historical data, try analogous estimating, which can show
precedents that help define what your future costs will be in the early stages of the project.
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Statistical Modeling

There is statistical modeling, or parametric estimating, which also uses historical data of key cost
drivers and then calculates what those cost would be if the duration or another aspect of the
project is changed.

Bottom-Up Estimating

A more granular approach is bottom-up estimating, which uses estimates of individual tasks and
then adds those up to determine the overall cost of the project.

Three-point Estimate

Another approach is the three-point estimate, which comes up with three scenarios: most likely,
optimistic and pessimistic ranges. These are then put into an equation to develop estimation.

Reserve Analysis

Reserve analysis determines how much contingency reserve must be allocated. This approach
tries to uncertainty.

Cost of Quality

Cost of quality uses money spent during the project to avoid failures and money applied after the
project to address failures. This can help fine-tune your overall project cost estimation. And
comparing bids from vendors can also help figure out costs.

Dynamic Tools

Whenever you’re estimating costs, it helps to use an online software to collect all of your project
information. Project management software that can be used in congress with many of these
techniques to help facilitate the process.

Preliminary expenses of a project

Preliminary expenses are those expenses which are incurred in business before incorporation and
commencement of business, like statuary fees, company logo, survey report, project report etc
are called preliminary expenses. In case of company we can say that all type of expenses which
spent by promoters of company called preliminary expenses.

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In simple words preliminary expenses has covers all expenses before incorporation of business
,if any expenses has spent after commencement or incorporation of business doesn’t considered
preliminary expenses.

Examples of preliminary expenses:-

1. Expenses to promoters of company.

2. Expenses paid for incorporation of company.

3. Printing expenses of Memorandum of association& Articles of association

4. Payment to survey report, project report.

5. Stamp duty fees paid.

6. Any expenses paid to take the business into existence.

Acquisition cost of fixed assets:

Acquisition cost, also referred to as the cost of acquisition, is the total cost that a company
recognizes on its books for property or equipment after adjusting for discounts,
incentives, closing costs and other necessary expenditures, but before sales taxes. An acquisition
cost may also entail the amount needed to take over another firm or purchase an existing
business unit from another company. Additionally, an acquisition cost can describe the costs
incurred by a business in relation to the efforts involved in acquiring a new customer.

Besides the price paid for the asset itself, additional costs may also be considered part of
acquisition when these costs are directly tied to the acquisition process. For example, if the asset
in question requires legal assistance to complete the transaction, legal and regulatory fees are
also included. Commissions associated with the purchase may also be included, such as those
paid to a real estate agent when dealing with a property transaction, to a staffing company for
placing an employee, to a marketing firm for acquiring customers, or to an investment bank for
brokering a merger.

With regard to manufacturing or production equipment, any costs associated with bringing the
equipment to an operational state may also be included in the cost of acquisition. This includes
the cost of shipping & receiving, general installation, mounting, and calibration.

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Cost on technical knowhow:

Technical Know-how Fee is a lump sum or periodical amount payable to provider of technical
Know-how in the form of design, drawings, training of personnel, or practical knowledge, skills
or experience.

There has been a long-drawn controversy regarding the tax treatment of payment for technical
know-how. Broadly speaking, when an expenditure is incurred in order to bring into existence an
asset or an advantage of enduring benefit, such an expenditure is properly attributable to capital
and not to revenue. But where the payment is made for the purpose of running the business more
profitably and effectively, the payment will be revenue in nature. Various courts have laid down
the guidelines to determine the nature of expense, whether capital or revenue, but the diversity of
facts may be such that the principles laid down by the courts may not be applicable in the
peculiar circumstances of each case.

Acquisition of patents and Licenses

A patent pool is essentially “An agreement between two or more patent owners to aggregate
(pool) their patents and to license them to one another or third parties. Pools usually offer
standard licensing terms to licensees and allocate a portion of the licensing fees (royalties) to
patent owners according to a pre-set formula or procedure.

A patent pool particularly faces intense scrutiny by way of competition/ antitrust law and each
step of structuring of a patent pool has to be done keeping the prevalent norms of antitrust law in
context. This article merely brushes with the antitrust aspect, as a discussion on that topic is
beyond the scope of this particular article. However, suffice is to say that like other aspects of
structuring of a patent pool, patent valuation and licensing fee determination is also subject to
antitrust law concerns.

The terms of the license considerably influence royalty determination. These include, nature of
licensed products, character of license- whether exclusive or non-exclusive, granting clause,
geographic scope of the license, field of use governed by the license, provision of sublicensing,
grant back provisions, future usage governance, non-assertion clauses, reach-through provisions,
termination clause, and licensee’s ability to challenge patents in the pool.

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Included herein too would be the treatment of after-acquired patents, which in turn can be
classified into two types: (1) improvement patents based on a patented technology licensed by
another member of the patent pool; and (2) patents unrelated to patented technologies licensed to
the members of the patent pool.

License governance in context of graduated and progressive licensing would also influence
royalty determination. This would include “provisions for pool members to license their patents
without licensing all the patents in a pool” And the freedom “to license their patents bilaterally,
i.e., outside of the pool structure.”

Methods for Patent Valuation and License Fee Determination

There are three basic methods of valuation: the cost method, the market method, and the income
method. In context of patent valuation, these methods find varied expressions. “A truly accurate
assessment of patent value requires intensive legal and technical evaluation of individual
patents.” The economics literature, however, has also proposed several proxies for patent value
based on objective and readily available information. The transactions influencing licensing fee
determination essentially comprise of valuation of the patent, which in turn is used to set a
royalty rate pertaining to allocation of various fees received by licensing of the pool patents.
Thus, royalty payment is comprised of two components: a royalty rate and a royalty base, upon
which the rate is applied.

Documentation charges:

All services rendered by the seller needs compensation. The fee refers to the monetary profit as a
part of the compensation to a seller. The project management fee is always included in the
project budget. It will be used to cover the costs that are associated related to the administration
and management of the project.

There are two main types sellers charge their work and these include per hour or per project
basis. It is important for both the project owner and the seller to arrive at a consensus on what
type of fee should be imposed on the project.

The project management fee should be documented in the contractual agreement and both the
seller and buyer should both come to terms on the best type of fee system to adopt for the
project. Moreover, it is also important to stipulate in the contract the exact amount of fee that

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should be paid to the seller as well as the fee schedule. It is also important to indicate whether the
seller is also entitled to receiving other types of compensations such as incentives upon the
completion of the project. Lastly, deductions on the fee should also be indicated in the contract.

Deciding whether an hourly or fixed rate is good largely depends on the type of project activities
to be undertaken. For instance, long-term projects, as well as those who have hazy timeless,
should be paid on an hourly basis. However, if the project is short-term and will not take too
much of your time, a project-based fee is most beneficial.

It is important for the project owner and seller to agree on the project management fee. This will
put both entities in a win-win situation. Agreeing to the payment terms is also a great way to
achieve good relationship during the entire project lifecycle.

Project Report

A project report for new business conducts a profound road map for effectual business venture. It
discusses whether the business requires finance or not, the challenging risks, several problems en
route, etc. Hence it becomes vital for every new business to prepare a project report, to acquaint
them on forewarning issues.

Project report for New Business

Below is the sequence of standard format which should be followed while preparing new
business project report:

1. Background of the business

2. Customer's profile

3. Long and short term Corporate Objectives

o To perform a viability assessment of the proposed new business ideas in terms of

marketability, technical feasibility, financing and authorities
o To be able to prepare a relevant business plan
o To recognize fundamental startup issues
4. Market Analysis
o Brief discussion on the type of market, chief influencers, players, etc
o Market description
o Reasons for starting business in a particular market
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o Target clients
o Advantages of the services offered by the new business
o Market consumption patterns
o Past and existing supply location
o Production prospects and limitations
o Exports and Imports
o Price structure
o Flexibility of demand
o Client behavior, purposes, intentions, impetus, approaches, inclinations and needs
o Supply network and marketing rules formulated by the government
o Government and technical limitations imposed on the promotion of the product
5. Financial Assessment
o Investment expenditure and value of the entire project
o Methods of investment
o Anticipated productivity
o Money flows of the project report
o Investment value evaluated in context of different points of merit
o Estimated financial ranking
6. Marketing Assessment
o Product
o Price
o Place
o Promotion
7. Operational Plan
o Business models
o Production of goods and services
8. Financial Plan

9. Management Structure

10. Business structure (Ownership, staff, etc)

11. SWOT Analysis

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o Significant Success aspects depending on Strengths, Weaknesses, Opportunities

and Threats to be faced by the firm in future

12. Appendices

o Break-Even Assessment
o Profit and Loss Synopsis
o Fund Flow Summary

Organizing systems and procedures for project management

To be a successful project manager, you need to be able to balance deadlines, a budget, and the
quality of work. This can be very stressful even for the simplest of projects, and this is where
organizational skills come into play. Lack of organization is detrimental to any project, but there
are many ways to ensure you achieve what you set out to do.

1. Set expectations early

From the beginning, you should let your team or employees know what your expectations for the
project are. These should include the quality of work you expect, who is responsible for which
tasks, and how your team should communicate with each other. The sooner you explain to your
team members what’s expected of them, the easier it will be to ensure everyone is working
towards a common goal and will eradicate any confusion and assumptions from the outset.

2. Define scope

As a project manager, the first step in the project planning process is defining its scope. To do
this effectively, you need to understand the project’s:

• Deliverables: What are the expected outputs and outcomes?

• Costs: Is there a set budget?

• Timeframe: How long do you have to complete the project?

• Available resources: What physical, human and financial resources do you have at your
disposal?

• Stakeholders: Who is involved in the project? Who are the influencers, decision makers,
and recipients?

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3. Follow a template

When managing a project, there is no need to reinvent the wheel. If this is your first
project, source document templates that you can use as a solid starting point. It will make your
job much easier, and it means you will have a set of workable templates for future reference. It is
also a good idea to have a log or diary of your work and to keep detailed notes of how you
handled certain problems. If then a similar issue arises, you will have something to reference.

4. Review progress against a project plan

A project plan is essentially the roadmap for your project and should contain detailed
information about the project’s approved scope, cost, and schedule. To review your progress, ask
these questions:

• Are tasks being completed effectively?

• Are the original deadlines still realistic compared to how fast work is progressing? If not,
are there tasks that should have more focus put on them?

• Do you still have the right resources necessary to complete the project?

5. Set time limits

There is no better way to make sure something gets done on time than setting achievable
timeframes against specific project tasks. A MIT study showed that students will actually work
more efficiently when a large piece of work is broken up into smaller tasks with set milestones.
You need to make sure that whoever you assign each task to has the skill set and capacity to
complete it on time. Setting unrealistic time limits may place undue stress on project resources,
resulting in poor quality of work and team member burnout.

6. Meet frequently

As a project manager, it is critical to meet with your team on a regular basis to touch base and
communicate project updates, including successes and issues.

7. Develop an effective filing system

Managing a project can mean a mountain of paperwork, with several documents created and
amended. This can become a nightmare to keep track of and you can waste precious time
searching for the latest version of a document.

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8. Efficiently delegate tasks

Being able to delegate tasks is one of the most important skills you can have as a project
manager. There is an art to effective delegation, but once you have mastered it, you will take the
pressure off yourself and give your team members a sense of responsibility and achievement.
Instead of giving each person a large chunk of work to be completed, break everything into
smaller tasks.

9. Anticipate issues

We all hope that issues don’t arise, particularly when there are strict timelines to adhere to.

Unfortunately, this is rarely the case in project land. Developing and keeping risk and issues
registers up to date along with addressing issues as soon as possible will help in preventing your
project plan from going awry. If there is a major issue threatening to stop your project in its
tracks, a predetermined process will reduce anxiety and make it much easier to approach the
problem objectively and find an appropriate solution. Regular two-way communication with key
stakeholders is also vital to ensuring there are no surprises along the way.

Project Management working of systems

People from every industry today rely on online solutions for client satisfaction and better
results. There are multiple uses of a project management tool, but keeping it precise, the three
main reasons are:

1. Visibility: View progress across all your projects, identify projects at risk, monitor
timelines, and share project status in real-time.

2. Accountability: Timely project updates to people at all levels, summary view of all
projects, overdue tasks, avoid missing deadlines, and no more version confusion.

3. Organization: Keep workflows tools in one place, have a central location for details &
updates, store project file in a secured location, and get the template to stay consistent.

Project work system’ design:-

Systems design is the process of defining elements of a system like modules, architecture,
components and their interfaces and data for a system based on the specified requirements. It is

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the process of defining, developing and designing systems which satisfies the specific needs and
requirements of a business or organization.

Description: A systemic approach is required for a coherent and well-running system. Bottom-
Up or Top-Down approach is required to take into account all related variables of the system. A
designer uses the modelling languages to express the information and knowledge in a structure of
system that is defined by a consistent set of rules and definitions. The designs can be defined in
graphical or textual modelling languages.

Some of the examples of graphical modelling languages are

a. Unified Modelling Language (UML): To describe software both structurally and behaviourally
with graphical notation.
b. Flowchart : A schematic or stepwise representation of an algorithm.
c. Business Process Modelling Notation (BPMN): Used for Process Modelling language.
d. Systems Modelling Language (SysML): Used for systems engineering.

Design methods:
1) Architectural design: To describes the views, models, behaviour, and structure of the system.
2) Logical design: To represent the data flow, inputs and outputs of the system. Example: ER
Diagrams (Entity Relationship Diagrams).
3) Physical design: Defined as

a) How users add information to the system and how the system represents information back to
the user.

b) How the data is modelled and stored within the system.

c) How data moves through the system, how data is validated, secured and/or transformed as it
flows through and out of the system.

Work Breakdown Structure

A Work Breakdown Structure (WBS) is a deliverable-oriented hierarchical decomposition of the

work to be executed by the project team to accomplish the project objectives and create the
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required deliverables. A WBS is the cornerstone of effective project planning, execution,

controlling, monitoring, and reporting. All the work contained within the WBS is to be
identified, estimated, scheduled, and budgeted.

Work Breakdown Structure Diagram

The Work Breakdown Structure (WBS) is developed to establish a common understanding of

project scope. It is a hierarchical description of the work that must be done to complete the
deliverables of a project. Each descending level in the WBS represents an increasingly detailed
description of the project deliverables.

The first two levels of the WBS (the root node and Level 2) define a set of planned outcomes
that collectively and exclusively represent 100% of the project scope. At each subsequent level,
the children of a parent node collectively and exclusively represent 100% of the scope of their
parent node. Here is a Work Breakdown Structure example:

Project Execution Plan

The project execution plan (PEP) is the governing document that establishes the means to
execute, monitor, and control projects. The plan serves as the main communication vehicle to
ensure that everyone is aware and knowledgeable of project objectives and how they will be

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accomplished. The plan is the primary agreement between Headquarters and the federal project
director and a preliminary plan should be developed and approved at Critical Decision-1. Project
objectives are derived from the mission needs statement, and an integrated project team assists in
development of the PEP. The plan is a living document and should be updated to describe
current and future processes and procedures, such as integrating safety into the design process.
Updates are common as a project moves through Critical Decision stages.

The major elements of a project execution plan are:

• Scope definition

• Goal statements

• Quality and technical specifications

• Resource allocation

• Project scheduling

• Organizational considerations

Scope Definition

Scope definition entails defining what the project intends to achieve in specific terms. For
instance, if the aim of the project is to “upgrade the information technology infrastructure in the
organization” the scope definition in the project execution plan example translates this broad and
vague objective into a specific scope based on output, as “to provide a new computer on every
desk, with all appropriate software installed and ready to operate, and each computer linked
through a network.”

Statement of Goals

The statement of goals lists out specific project requirements such as key project deliverables,
milestones, and the project life cycle.

Quality and Technical Specifications

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While the project scope and statement of goals make clear the output of the project, one
important element that needs inclusion in the project execution plan is quality or technical
specifications of the work processes and output. The achievement of such stipulated standards
determine the successful execution of the project.

Allocation of Resources

The elements of scope, goals, and quality define in clear terms what the project hopes to achieve.
The next element of a project execution plan is the allocation of resources to achieve the stated
goals and quality standards.

Project Scheduling

Scheduling the project is a very important element in a project execution plan. The best approach
is to divide the project into small units or chunks and set time bound milestones of achievements,
mutually acceptable to all stakeholders. The best examples of preparing a project schedule are
Gantt Charts that list what will happen and when. Of the various project scheduling techniques,
the Critical Path Method (CPM) and PERT charts are two of the best techniques.

Organizational Considerations

One important but often overlooked element of the project execution plan is organizational
considerations.

Planning scheduling and monitoring –

cheduling in project management is the listing of activities, deliverables, and milestones within a
project. A schedule also usually includes the planned start and finish date, duration, and
resources assigned to each activity. Effective project scheduling is a critical component of
successful time management.

In fact, when people discuss the processes for building a schedule, they are usually referring to
the first six processes of time management:

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1. Plan schedule management.

2. Define project activities.
3. Sequence activities.
4. Estimate resources.
5. Estimate durations.
6. Develop the project schedule.

There are three main types of schedules:

1. Master project schedule. A master schedule tends to be a simplified list of tasks with a
timeline or project calendar.
2. Milestone schedule or summary schedule. This type of schedule tracks major milestones
and key deliverables, but not every task required to complete the project.
3. A detailed project schedule. This is the most thorough project schedule, as it identifies
and tracks every project activity. If you have a complex, large, or lengthy project, it’s
important to have a detailed project schedule to help track everything.

Project procedure manual

According to the project procedures manual, for projects that involve scholarships or the
procurement of equipment and supplies only, that percentage was 5 per cent, while for other
projects, including those containing multiple components such as equipment and supplies, it was
fixed at 12 per cent.

A project procedure manual has been developed which provides clear operational procedures
and internal project control mechanisms for the team to effectively control and manage project
costs and schedule;

The project procedure manual was applied only to projects funded specifically by donors; the
manual, however, could also be adjusted to apply to other projects as well.

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Project Diaries

Keeping project records, including the preparation, assembly, and preservation of such records is
considered one of the most important duties and responsibilities that the Engineer delegates to
the Inspector.

Diaries are kept to provide a complete narrative picture of the project, covering both the normal
work processes and anything unusual that might have occurred on the project. The diary is used
to document work progress, site conditions, labor and equipment usage, and the contractor’s
ability (or inability) to perform his/her work, and can provide valuable information necessary to
accurately reconstruct the events of the project in preparation of a claim. It is a collection point
for many of the project’s pertinent facts arrange in any chronological order. It may show: how
questions were answered, how problems were solved, and unusual conditions pertaining to
working days charged. In maintaining these reports, project personnel must be consistent in
recording the events and activities on the job, particularly those relating to claims or potential
claims. Daily diaries are the key to claims avoidance and mitigating damages. It is also available
for reference long after the work is complete.

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