PROJECT ENGINEERING

ISHWAR ADHIKARI
 CHAPTER CONTENT
CHAPTER 1: Introduction to Project & Project Mgmt.

• Definition of Project, Characteristics, Example.

• Classification of project.

• Project Objective and Goal.

• Project Life Cycle Phases.

• Project Environment.

• Introduction to Project Management.

CHAPTER 2: PROJECT APPRASIAL &FORMULATION

• Concept of Project Appraisal

• Project Proposal (Technical and Financial)

• Developing Project Proposal

• Techniques of Project Formulation

- Feasibility Study
- Cost Benefit Analysis
- Input Analysis
- Environmental Analysis
CHAPTER 3: PROJECT PLANNING & SCHEDULING
• Project Planning and Its Importance.

• Project Planning Process.

• Work Breakdown Structure (WBS).

• Project scheduling with CPM and PERT.

• Project Scheduling with Limited Resources.

- Resource Leveling

- Resource Smoothing

• Introduction to MS-Project.
CHAPTER 4: PROJECT IMPLEMENTATION
& CONTROLLING

• Introduction to Monitoring and Controlling.

• Project Control Cycle.

• Project Cost Control: Earned Value Analysis

• Project Quality Control.

• PMIS
CHAPTER 5: PROJECT RISK ANALYSIS AND
MANAGEMENT
• Introduction to Project Risk
• Types of Project Risk

• Analysis of Major Sources of Risk

• Risk management
➢ Risk Management Planning
➢ Risk Identification
➢ Qualitative and Quantitative Risk Analysis
➢ Risk Response Planning
➢ Risk Monitoring and Controlling
CHAPTER 6: INTRODUCTION TO PROJECT
FINANCING
• Project Finance

• Capital Structure Planning

• Capital Budgeting Decision

 TEXTBOOK REFERENCE
 A Text Book of Project Engineering (2nd edition)
( Adhikari and Shrestha)
 Project Planning and Control with CPM and PERT (B.C.
Punima & K.K. Khandelwal).
 Fundamental Of PERT/ CPM & Project (S.K.
Bhattacharjee)
 Project Management Body of Knowledge (PMBOK)
“Available in Internet”
 Project Management In Nepal (Dr. Govinda Ram
Agrawal)
 CHAPTER 1
INTRODUCTION
What is a Project?
• A project can be defined as an unique task
(however large or small) with defined goal,
limited in cost and time and giving some benefits
to the users. (S.K. Bhattacharjee)
• A project is defined as a temporary endeavor
undertaken to create a unique products or
services. (Project management Body of
Knowledge)
 A project is a one-shot, time-limited, goal
directed, major undertaking requiring the
commitment of varied skills and resources.”
 Resources of project

Generally Denoted by 5M

 Money
 Manpower
 Material
 Machine
 Minute/ Management
Fig1.1 Building Project
Fig1.2 Hydropower dam
Fig1.3 Communication Project
 Examples of Project
 Construction project (building, road,
hydropower, etc)
 Research and development project
 Introducing new products in market
 Developing new information system
 Running a campaign for political office.
 Producing movie or serial.
 Performing marriage for children
 Writing a book, thesis etc.
 Characteristics of Project
1. A defined goal or objective.
For example, The goal of a construction
project is to build something
2. Limited set of resources (manpower, money,
machine and material)
3. Specific task, not routinely performed
4. Temporary (definite beginning i.e. start date
and definite end i.e. finish date)
5. Unique: No project is absolutely similar to
another . There is only one Taj mahal, Eiffel
Tower, Panama Canal etc.
6. Rapid expenditure (level of expenditure is high
as compared to other permanent program)
7. Participation /Involvement of different peoples
i.e. stakeholders.
Major stake holders in project are:
(a) Client/ Owner
(b) Contractor
(c) Consultant
(d) Project Manager
8. Constraints (all the project have major
constraints i.e. time, cost and performance
(quality)
9. Defined deliverables : it should be clearly defined
what the project will deliver after its completion.
10. Progressive Elaboration
(Progressive means working in step by step and
Elaboration means to develop thoroughly:
working with care and detail)
 Classification of project
According to funding (source of fund)
 Private sector project
➢ These projects are the basis of private investment.
➢ The private sector bodies are responsible for the
development and sponsor of the project.
➢ Example- Civil homes, Kathmandu Mall, Apartments
etc
 Government sector project
➢ These projects are the basis of government
development plans.
➢ Government is the major sponsor of projects in
developing countries.
➢ Example- water supply project, hospitals, schools etc.
 Grant projects
➢ These are those projects where the investment in
project is not repaid by the government to the
donor agencies.
 Loan projects
➢ These are those projects where the investment in
project is repaid by the government to the donor
agencies.
According to the Foreign aided project:
 Joint venture project
This project is funded through collaboration of foreign and local
investors. They involve transferring of capital, technology,
management. They are based on the ownership sharing. Example
– Maruti- Suzuki.

 Bilateral project
This project is funded from the financial resources of a friendly
donor country, generally through grants under an agreement.
Example – JICA, KOIKA etc.

 Multilateral project
This project is funded from the financial resources of
multilateral donors such as World Bank and Asian development
bank.They are generally funded through loans.
According to Techniques:
 Labor intensive project
This project is labor based. Human labors are
extensively used for implementation of the project.

 Capital intensive project

This project is technology based. Technology
represented by machinery, automation, and
computerization is used to implement the project.
According to Functions:
 Disaster prevention projects
 Development projects
 Service sector projects
 Environment friendly projects etc.
According to Scale and Size:
 Mega
It is a big size complex project for 5 to 10 years involving
huge investment and high technology. Upper Karnali
hydropower project is the example of mega project of
Nepal.
 Major
It is smaller in size than mega project. Middle
Marshyangdi hydropower project is the example of
major project in Nepal.
 Medium
It is small in size than major project.
Khimti/Bhotekoshi/Jhimruk hydropower project is an
example.
 Small
It is the smallest project of short duration. Manang
hydropower is the example.
According to Time frame and speed:
 Normal
Normal time allowed for project implementation.
 Crash
Saving in time is achieved by spending extra money
and compromising quality. Overlapping of project
phases is encouraged.
According to Nature of project:
 Simple
 Complex
 Innovative
 Emergency
 Project Cash Flow
Cost

Appraisal Implementation Operation

Time

Commission

Cost Sanction

Investment Return
Setting Project Objective and Goal

 Goals are purpose and mission for initiating a

project which is set at the start of project.
 It is the specification of what is hoped to be
achieved at the end of the project.
 It allows stakeholders to specify the target then
work towards their own objectives.
 Goal should clearly state what the project will
deliver.
 Goal setting takes time, energy and dialogue.
 Objectives are the ends towards which the
activities of a project are directed.
 A project has clearly defined (specific objectives).
It is focused on end result.
 Project exists when the objectives have been
achieved.
 Hence the first step in any project is to define the
objective. We define the project objective in order
to:
1. Make sure that we have identified the right
target.
2. Create team commitment and involve all
interested parties in achieving the successful
project outcome.
Goals are to be SMART
S = Specific (well clear and defined)
M = Measurable (define a method of
measuring project goal)
A = Agreed to Achievable (all the
members need to agree goal and must be
achievable)
R = Realistic (Possible under limited
set of resources)
T = Timeframe (definite start and end
date)
Examples of SMART goal
 Bad example of a SMART goal: “I want to write a
book”.
 Good example of a SMART goal:
“I want to write a work book on “How to add 10
years to your life” that is at least 150 pages in
length and get it completed by June 30th 2022. I
will write at least 4 pages every weekday until I
complete the book.”
 Bad example of a SMART goal: “I want to have a
lot of money”.
 Good example of a SMART goal:
“I want to make one million within 10 years by
starting an internet marketing business selling
personal development products all over the
world and by providing life coaching
consultancy and conducting live seminars.”
 1.3 Project Phases and Life Cycle
 A project depending upon its nature, size and
type, undergoes through different well defined
phases right from its inception to successful
completion project phases are known as project
life cycle.
 The project life cycle refers to a logical sequence
of activities to accomplish the project goal or
objective.
 The breakdown and terminology of these phases
differs depending upon the nature of the project
or organization.
 Five basic phases contribute to develop a project from
an idea to reality:
1. Initiation Phase
Conceptual study:
 Projects are born with creative ideas.
 It includes preliminary evaluation of ideas, such as
project identification, project formulation.
Feasibility study:
 The objective of the feasibility study is to have more
detailed information about the location, nature,
dimensions, raw material needed, equipments, cost-
benefit analysis, and the detail about the users who
will be benefitted from the project.
Market study:
 It includes the study of the marketing prospects
and demand of the product, considering
(a) potential size and composition of the market
(b) present and projected demand of the
product/services.

After the completion of this phase, a go/no-go

decision is made.
2. Planning phase
Work breakdown structure:
 The project is broken down into small elements
so that all the activities to be performed in the
project are included.
Cost and Schedule Planning:
 After breaking down the project, the time and
cost of each activity is determined and overall
time and cost of the project is determined.
Contract terms and condition:
 The contract terms in which the project
activities are to accomplish is determined in this
phase. The contract may be lump-sum, fixed
price, unit rate etc.

After the end of this phase time and cost

estimate of the project is made and major
contracts are let
3. Engineering and Design
Preliminary engineering and design
 It stresses architectural concepts, evaluation of
technological process alternatives, size and
capacity decisions, and comparative economic
studies.
Detailed engineering and design
 It involves the process of successively breaking
down, analyzing and designing the structure
and its elements.
 This detailed phase include architects, interior
designers, landscape architects, and several
engineering disciplines including chemical,
civil, electrical, mechanical etc.
4. Implementation and Controlling Phase
 Application of the paper work physically in the
real field.
 Manufacturing, installation of machines and
testing and civil works.
 Controlling is performed to check project
performance at any point of time during
implementation.
 The facility is substantially completed at this
phase.
5. Divestment/ Phase out/ Termination
 This phase is the end of project and project is
brought to its completion.
 The final testing and maintenance of the project
is done and handed over to the customer and
resources are released to other projects.
 The basic tasks in this phase are evaluation and
handover of the project output to the
beneficiaries.
 Project life cycle in terms of
resources/risk and time
Resources /Risk
Resources

Risk

Start End
Initiation Planning Engineering and Implementati Termination
design on
 Cost and staffing levels are low at the start,
higher towards the end, and drop rapidly as
project draws to a conclusion as shown in fig:
 The probability of successfully completing the
project is lowest, and hence risk and
uncertainties are higher at the start. The
probability of successful completion gets
progressively higher as the project continues.
 PROJECT ENVIRONMENT
 The project management performance largely
depends on the environment which differs from
country to country.
 In order to achieve the goal, it must continually
adapt to its environment, which is constantly
changing.
 Failure to adequately adapt to the environment is a
major cause due to which project fails.
 The environment consists of forces that influence the
project and its ability to achieve the mission.
 Projects are becoming increasingly complex with
their technical, economic, social and political
influences raising new project management issues.
 Project Environment can be analyzed at different
levels as follows.

1. External Environment
2. Operating Environment
3. Internal Environment
 Economic Environment

EXTERNAL ENVIRONMENT
Consultants
OPERATING ENVIRONMENT
Technological Suppliers
INTERNAL Political Legal
Environment Governm
Media ENVIRONMENT Environment
ent
• Objective
Contractors • Resources
• Structure Competit
Customers • Constraints ors

Financial
Institutions

Socio Cultural
Environment
EXTERNAL ENVIRONMENT
 It consists of all those forces outside a project that are
relevant to its operation.
 It implies all the conditions circumstances and
influences surrounding and affecting the total project
or any part of it.
 It includes all the factors, which are external and
beyond the control of an individual project and its
management.
 It provides the framework within which a project has to
operate.
 It is classified into four categories:
Economic Environment
 Includes the economics system, national income,
distribution of income, market factors, product market,
infrastructure facilities, inflation, fiscal policies, etc.
 It affects the cost of inputs and demand of project
products.
Political legal Environment
 Includes constitution, political parties, political stability,
national and international government, administrative law
etc.
 These components either restrains or facilitates the
functioning of the project.
Socio cultural Environment
 It consists of population trends, caste structure,
education system, social values, life style etc.
 It can have major influence on project and its
functioning.
Technological Environment
 It consists of stare of technology, rate of technological
change etc.
 Project manager should be concerned with the
components of technological environment, i.e. Process
of innovation (Research and Development) and Process
of Technology Transfer ( taking technology from
laboratory to the project )
Operating Environment
 It consists of media, customers, consultants,
competitors, financial institutions, suppliers,
contractors and government.
 They are called stakeholders and influence the
project in direct or indirect manner.
 It is not within the control of project but directly
influence the performance of the project.
Internal Environment
 It is located within the project and can be
controlled by it
 It consists of the following:
 Objective, Resources, Structure, constraints,
 Project Management
 Projectmanagement is the application of
Knowledge, skills, tools and techniques to
project activities to meet the project
requirements.

 Project management is accomplished through

the use of planning, executing, controlling and
closing processes.
Basically nine managerial functions are involved in
managing the project.

1.Project Integration Management (plan

development)
2. Project Scope Management
3. Project Time Management
4. Project Cost Management
5. Project Risk Management
6. Project Human Resource Management
7. Project Quality Management
8. Project Communication Management
9. Project Procurement Management
 Project Management Concept
 All work is a process and processes combine to
create a phase
 Various phases with well defined milestone
make up a project.
 Uncertainty is inevitable in each phase.
 Inability to measure and manage uncertainty is
worst enemy.
 By using specific tools and systematic
application, project can be effectively managed.
ISHWAR ADHIKARI
Associate Professor
 Concept of Project Appraisal


➢ Appraisal is the evaluation of the ability of the
project to succeed.
➢ This is an evaluation report of proposed project that
is prepared before signing the agreement or
memorandum of understanding (MOU).
➢ The objective of the appraisal is to study and
compare the possible feasible project and select the
best one.
➢ Appraisal is done systematically to provide an
overall assessment of the project’s likelihood for
success.
 Project Appraisal Answers two important
Questions

1. Will be project as designed meet its objectives?
2. How does the project compare with other competing
projects? (if more than one project has been found
feasible)
➢ The primary function of appraisal is to evaluate a
project's ability to achieve its objective.
➢ For private project, profitability is the objective.
➢ For Public project, socio economic development is
objective.
 Project Appraisal Document should include
the following:

 Project Introduction
 Project Objective and Scope
 Project Description
 Implementation Plan
 Executing Agency
 Project Organization
 Parties Involved in project
 Project Budget and Schedule
 Benefits and Output of Project
 Project Monitoring and Evaluation.
 Aspects of Appraisal

Market Analysis
Commercial Analysis
Economic Analysis
Technical Analysis
Managerial Analysis
Environmental Analysis
Financial Analysis
Social Analysis
 Market Analysis

 Market potential
 Raw material requirement and source of supply
 Sales forecast and market share
 Market demand levels
 Levels of competition and ability of the project to
satisfy the customers.
 Commercial Analysis

 Arrangement for marketing the output of the project
 Supply of inputs needed to build and operate project
 Analysis of project’s production is essential to ensure
that there will be an effective demand at a
remunerative price.
 It needs to be ensured that adequate input supplies
are available for the profitable operations of the
project.
 Economic Analysis

 Examines the economic viability of the project.
 The impact of the proposed project on national
economy and society is evaluated.
 It looks on social cost and benefits, project savings
and investment.
 Distribution of income and employment potential.
 Contribution of the project to the developmental
objectives of the country.
 Technical Analysis

 Focuses on choice of technology, human resources
requirement, design requirements, size, location
and site, technical risks.
 Technical viability is based on the technical data
and information as well as the experience of
carrying out similar projects.
 Includes project’s input (supplies) and output
(production) of real goods and services.
 Managerial Analysis

 Evaluates institutional strengths, weakness, and
adequacy of information system.
 Also monitors capabilities of the project
management team, project organization,
institutional interface and stakeholder analysis.
 Also it deals with the organizational structure of
the project.
 Financial Analysis

 Determine the requirements of funds and the
expected returns on investment from the viewpoint
of the various stakeholders involved in financing
the project.
 Involves assessment of financial impact,
judgement of efficient resource use, provision of
sound financial plan.
 Cost benefit analysis are calculated using current
market trend.
 Social Analysis

 Evaluate the aspect like employment opportunities
and income distribution.
 The project analyst examines the effect of a project
on particular group or region.
 PROJECT PROPOSAL

 It is simply a document used to bring revenue to
the concerned organization.
 It is extensively used in industrial, governmental
and academic circle.
 From project management viewpoint, proposal
simply means a blue print of project activities.
 It is a set of documents needed to evaluate the
project, which is under consideration.
 The set of documents submitted for evaluation of
project is called proposal.
 Project Proposal Have
Two Parts

1. Technical
 This provides technical details relating to project
work.
2. Financial
 This section contains the analysis of financial
details of project.
 Technical Part

 Problem statement: description of project problem.
 Special requirement: any special requirement as
specified in TOR by client is described.
 Test and inspection
 Logistics: detail of equipment, facilities, skills are
listed.
 Reporting: format, timing and nature of reporting
 CV: CV of key persons are listed.
 Financial Part

 Statement of work
 Cost summary
 Cost of basic materials
 Supporting schedules
 Element of Cost
 Profit Statement
 Sources of Fund : debt, equity, bonds, debentures.
 Cost estimating techniques.
PROCEDURE FOR DEVELOPING
PROJECT PROPOSAL

Project proposal is a blueprint of project and it should
be developed professionally. A project proposal
should start with:
Executive Summary
 It is a short summary statement, which includes fundamental
nature of the project proposal in simple and non-technical
language.
 It should focus on general advantages that can contribute or
obtained from its implementation.
Cover Letter
 It is the main document for selling of project ideas.
 It should be prepared with maximum attention and provide
the total perspectives of project.
Analysis of Technical Issues 
 It covers the technical problems and the approach to tackle
the problem.
 It describes the project to be undertaken. It should highlight
the general method of resolving the key problem.
 It should take note of test and inspection procedures to assure
performance, quality, reliability and compliance with
specification.
Implementation of Project
 It contains the estimate of time, cost and materials.
 It should show the project schedule by preparing Bar chart,
CPM/PERT, periodic review of human resources, equipment’s
and other resources are estimated. Milestones are indicated
on the bar chart.
Managerial Analysis of Project
 The project should include a detailed description of the
ability of the proposer to supply the routine facilities,
equipment and skills needed now and during project
implementation. 
 It should highlight how it will maintain the contact with sub-
contractor, how progress reports, audit and evaluation are
covered, and how the final documentation will be prepared
for the users.
Profile of Proposing Group
 It should contain the past experience of the proposing group
i.e. the list of all key project personnel together with their
titles and qualification.
 A full resume is prepared for each principal for the outside
client.
2.4 TECHNIQUES OF PROJECT
FORMULATION

A project needs to be fully defined in order to provide
terms of reference for the management of project. It
usually involves:
 Identification of Needs
 Project Ideas
 Project Proposal
 Project Formulation
 Most commonly used techniques
are :

Feasibility Analysis
Cost-Benefit Analysis
Input Analysis
Environmental Analysis
 Feasibility Analysis

 It is a process of

determining, if project can be
implemented.
 It requires a team of technician, economist, financial
analyst, managers, environmentalist, sociologist etc.
 If the project is of public nature or development project,
all aspects should be analyzed. Much more emphasis is
given to the social aspect.
 In private sector, technical, market and financial aspects
is given more focus.
 It is usually done to justify the concept of project at
disposal and its further action. It is a backbone of project
planning.
 It Covers Following
Areas

Technical analysis
 It seeks to determine whether the prerequisites for
the successful commissioning of project has been
considered and reasonably good choice have been
made with respect to location, size, process, layout
of site, scale of production, equipment and
machine, human resource requirement, choice of
techniques etc.
 
Marketing analysis
 It examines the aggregate demand and market
share of the product.
 It also focuses on consumption trend, supply
position, production capacity, marketing policies,
distribution channels, cost structure etc.
Economic analysis

 It deals with net impact of proposed project to the economy
and society.
 It judges the project from larger social point of view.
 It examines the social costs and benefits of project. Issues
such as economic direct cost and benefits measured in terms
of investment and distribution of income in society and
contribution of the project towards the fulfillment of
employments etc. are analyzed.
 Cost-Benefit analysis is used to assess the overall
profitability of the project in the private sector as against the
social profitability of the public sector.
 
Financial analysis
 It seek to ascertain whether the proposed project
will be financially viable in the sense of being able
to meet the burden of debt servicing and return
expectation of the funders.
 The aspects such as investment outlay, cost of
project, cost of capital, projected profitability,
breakeven point, project financial position and risk
are taken into consideration while considering
analysis.
 
Managerial analysis
 It examines the institutional viability of project.
 Political and legal acceptability, project
organization, project management, key
stakeholders, relationship of project with funders,
regulatory agencies and support agencies are
analyzed in detail.
 Cost Benefit Analysis

 It is concerned with judging a project from social point
of view.
 In such evaluation, the focus is on the social costs and
benefits of the project, which may often be different
from monetary costs and benefits.
 It is the methodology developed for evaluating public
investment particularly in developing countries, where
government plays a lead role in economic development.
 It examines the profitability of project ability to earn
net profit to investors.
 
 In public project, it focuses on social profitability
expressed in terms of economic growth, social
development, employment generation etc.
 It is used to determine whether or not specific
project should be undertaken, which of the
possible alternative project should be selected and
within time cycle is beneficial to the project.
 Financial Analysis

 It basically aims at examining the project from the
angle of capital cost, operating cost, working
capital requirement, profitability, financing
arrangement etc.
 More over beside servicing social benefits, the
money invested in the project must bring a fair rate
of return.
 Pay back period, average rate of return, discounted
cash flow, debt service coverage ratio, sensitivity
and breakeven analysis are used in financial
analysis.
 Input Analysis

 It makes the analysis of human and non human
resources of the project.
 The human resource analysis focuses on acquisition,
utilization, development and maintenance of workforce
in a project.
 It also includes allocation of responsibilities, job
description and job specification.
 Non human resources include material, their supplies,
quantity and quality, machinery, information,
production technology, plant capacity etc.
 SP112
Environmental Analysis

 It focuses on impact of project on environment.
 Issues such as pollution, soil erosion, resource
depletion, damage to ecology, and other negative
and positive effects of project on environment are
analyzed.
 Environmental suitability i.e. the capacity of
environment to support the project is examined.
 EIA and IEE are major tools of environmental
analysis.
Ishwar Adhikari
 In the simple sense, planning means thinking ahead of
an operation to be performed.
 The managerial function of deciding what to do, how
to do and when to do is known as planning.
 It is a predetermined course of action to be undertaken
in future.
 It begins with the analysis of external environment and
internal resources and ends with formulation of goals.
 Project planning must be systematic and flexible
enough to handle unique activities.
Planning Functions
 Stating the objectives of the project to be
undertaken.
 Definition of work requirement
 Definition of resource needed such as funds,
materials, machines, human resources, facilities
etc.
 Determining the time frame of the overall project
and also scheduling its various stages.
 To eliminate or minimize the risk and uncertainty
 It provides a basis for organizing the work on the
project and allocating responsibilities to
individuals.
Need For construction planning
 To eliminate or reduce uncertainty
 To improve efficiency of the operation
 To obtain better understanding of objectives
 To provide a basis for monitoring and
controlling work.
1. Proper design of each element of the project.
2. Proper selection of equipment and machines.
3. Procurement of material well in advance.
4. Employment of trained and experienced staff on the
project.
5. To provide incentives for good workers.
6. To arrange constant flow of funds for the completion
of the project.
7. To provide proper safety measures such as proper
ventilation, proper arrangement of light and water.
8. Proper arrangements or means of communications
and feedback etc.
“ To Eat a Goat You Have
to Cut Into Different
Small Pieces”
• How many task does the project have?
• How much detail should the project
plan have?
This query is overcome by work break
down structure.
 This is the first major step in the planning after
formulation of project.
 WBS is a hierarchical (from general to specific)
tree structure of deliverables and tasks that need
to be performed to complete a project. The project
is broken down into smaller elements which are
manageable, measurable and integratable into
total package.
 The purpose of WBS is to identify terminal
elements (the actual items to be done in a
project); therefore WBS serves as the basis for
much of project planning.
 In establishing the WBS, each work package must
be clearly defined using a written verbal
description (scope of work) as well as information
as to what work will be included with this part of
the project.
 The WBS acts as a vehicle for breaking the work
down into smaller elements, thus providing a
greater probability that every major and minor
activity will be accounted for.
 After initial project funding is received, the
Project Director (PD) develops a WBS that
identifies necessary funds according to the
schedule and needs of the tasks in the WBS
elements
 The project work should be structured in WBS in
following way:
 Definable—can be described and easily understood
by project participants.
 Manageable—a meaningful unit of work where
specific responsibility and authority can be
assigned to a responsible individual.
 Estimatable—duration can be estimated in time
required to complete, and cost can be estimated in
resources required to complete.
 Independent—minimum interface with or
dependence on other ongoing elements (i.e.,
assignable to a single control account, and clearly
distinguishable from other work packages).
 Integratable—integrates with other project work
elements and with higher level cost estimates
and schedules to include the entire project.
 Measurable—can be used to measure progress;
has start and completion dates and measurable
interim milestones.
 Adaptable—sufficiently flexible so the
addition/elimination of work scope can be
readily accommodated in the WBS framework.
Level Description
1. Total Program
2. Project
3. Task
4. Subtask
5. Work package
6. Level of effort
 Level 1
Project

Level 2

Task 1 Task 2
Level 3

Sub Task 1.1 Sub Task 1.2 Sub Task 2.1 Sub Task 2.2

Level 4

Work Work Work Work

package 1.1.1 package 1.2.1 package 2.1.1 package 2.2.1

A typical WBS structure

 There is no hard and fast rule as to number of levels
into which the project is to be breakdown.
 The number of stages/ levels should be neither too few
nor too large. If the project is broken down into only
one or two levels, integration of activities may become
difficult.
 On the other hand if number of level are very high it
will make analysis complex and unproductive.
 So WBS should be carried on till such time that the
work package (small element) available is capable of
giving a good definition of work content, the resource
required and the cost and time requirement.

 A schedule is a “time-phased” plan for performing
the work necessary to complete project.
 A schedule is a tool to determine the activities
necessary to complete a project, the time it will
take to complete the activities, and the sequence
in which the work must be performed to complete
the project in a timely and cost-effective manner.
“ Construction scheduling is a graphical
representation which show the phasing
rate of constructions activities with the
starting and completion dates and the
sequential relationship among the
various activities or operations in a
project so that work can be carried out
in an orderly and effective manner”
 To predict project completion time and
activity completion time.
 To control financing and payment.
 To serve as a record.
 To support delay claim.
 To manage changes and uncertainties
 Bar chart/ Gantt chart
 Linked bar chart.
 Critical path method (CPM)
 Program Evaluation and Review
Technique (PERT)
 Line of balance. (LOB)
 Precedence Diagramming Method
(PDM)
 Graphical representation of completion of
various activities of a project.
 Developed by Henry Gantt around 1919.
 The job/ activities are listed vertically as per
their sequence and each of them is allotted a
horizontal strip, denoting the estimated time
to complete that particular activity.
 Used as planning and scheduling tool for
small and medium size project.
Method of preparation of Bar chart
 Breakdown the whole project into various
activities or into sub activities.
 Develop a logical sequence of the activities and
also find out the activities that can be executed
concurrently.
 Decide the time duration for each activity for its
completion.
 Finally by using a number of bars, as required the
different activated to be performed are indicated
on a chart.
S.N. Job/ Activity Calendar month

Jan Feb Mar Apr May June

1 Foundation
work
2 R.C.C. work

3 Door and
windows
work No defined relationship

4 Interior
Finish
5 Sanitary
works
6 Electrical
works
7 Exterior
finish

A bar chart example of a building project

➢ Easily understood and easily prepared.
➢ The overall performance of the activity can be
judged from chart without going through the
detailed report.
➢ Useful for reporting who are not involved in
day to day management.
➢ Used as a preliminary planning tool.
 If too many activities are shown separately
in a bar chart, then it becomes messed up.
Hence it is not suitable for large and
complicated project.
 Lack of interrelationship and
interdependencies among the activities.
 It cannot be used as control device for large
projects.
 Each activity receives the consideration
with no indication where management
attraction should be focused.
 Critical activities are difficult to be
identified and floats are unknown.
 A project consist of 8 activities A,B,C,D,E,F,G,H with
their time of completion as follows.
Activity Duration (week)
A 2
B 4
C 2
D 4
E 6
F 4
G 5
H 4
Condition
 A and B can be performed in parallel
 C and D can not start until A is complete.
 E can not start until half the work of activity C is
complete.
 F can start only after D is complete.
 G succeeds C
 H is the last activity which should succeed E.

Q. Draw the bar chart and find out the completion

time of the project.
 A linked bar chart is a modified form to
overcome some of the limitation of bar chart.
 It shows the link between an activity and the
preceding activities which have to be
completed before this activity can start and
the succeeding activities which are dependent
on this activity.
Type 1 Finish to Start (FS)
(Activity B cannot start until Activity A is
finished)
A

B
Type 2 Start to Start (SS)
(Activity B should start when Activity A starts )
A

B
Type 3 Finish to Finish (FF)
(Activity B should be finished when Activity A
starts)
A

Type 4 Start to Finish (SF)

(Activity B should be finished when Activity A
starts) A

B
 It is a modification over the original bar chart.
 When a particular activity represented by a bar on
a bar chart is very long, the details lack.
 If the activity is broken down into number of sub
activities, each one of which can be easily
recognized during the progress of the project.
 The beginning and end of these subdivided
activities are termed as milestones.
 Network technique is one of the modern tools
of Project management.
 For a project involving large number of
activities, the project scheduling becomes very
complex and the use of conventional method
of scheduling like bar charts will not be
effective.
 Network based scheduling of projects come
handy in solving complex projects scheduling
problems.
 There are two popular network based
scheduling techniques.

CPM developed in the

 Critical Path Method –
year 1957 by Morgan R. Walker of DU Pont
and James E. Kelly of Remington Rand for
preparing shutdown schedule of a chemical
plant.
 Program Evaluation and Review Technique –
PERT, developed by US Navy in 1958 for
scheduling Polaris Missile Project
 Project is broken down into a series of
activities.
 Activities are linked together according to their
logical relationship (preceding, succeeding and
concurrent)
 The time of completion or duration of each
activity is estimated
 The network diagram is drawn and from
diagram the completion time of whole project
is determined.
 The technique of network-based scheduling
by critical path method is used for planning
and scheduling project involving the
sequential operation.
 It is an activity oriented network diagram
showing the interdependencies and
relationship between the various activities.
 In a network diagram, the path along
which the project takes the maximum
time from start to finish is called critical
path.
 It is the longest path of the network and
gives the total time taken to complete
the project.
 Any delay along this path delays the
project.
 6
3 3

1 2 1

4 4
5 6

8
3

The critical path is 1-2-3-4-5 (20 days)

1. Activity:
 It means the performance of the specific task of
project.
 Arrow in a network diagram represents activity.

Activity (i-j)
j
A
i
1
B
A B C
1 2 3 4 A and B are Concurrent
Activity
A is the predecessor of B C is the Successor of B
2. Duration (t):
 Estimated time to perform a definite
activity/task.
 It is mentioned alongside with activity
name.
Activity Duration =
Work Quantity/ Production rate
3. Event/Node:
 It is the point in time denoting
completion of an activity and start of
an activity.
 i j k
Event Event Event

Tail/ Burst event Head/ Merge event

 It is a hypothetical activity shown in a dotted line
on network diagram, indicating the dependence
of one activity to another.
 It doesn’t consume time and resources.
A C D
1 2 3 5

B
4 Dummy activity

 Here, Activity D cannot start until activity B is

completed.
 LOGICAL PURPOSE
A C D
1 2 3 5

Dummy activity
E
B
4
F
 GRAMMATICAL PURPOSE

A C D
1 2 5

3 Dummy activity
B
4
4. Earliest start time (EST): This is the
earliest time an activity can start.
5. Earliest finish time (EFT): Earliest finish
time for any particular activity.
i j
ti-j
EFT (i-j) = EST (i-j) + ti-j

6. Latest finish time (LFT): Latest time of

finishing an activity without delaying
completion of project.
7. Latest Start Time (LST):
➢ Latest time of starting an activity without
delaying completion of the project.
LST (i-j) = LFT- ti-j
8. Float/ Slack:
 Float or slack is the time margin available for
commencement and completion of various
activities that are not critical.
 The difference between the early and late start
or finish times indicates the maximum time
the activities can be delayed without
impacting the project completion date.
1. Total Float (TF): It is the time that the start or
finish of an activity can be delayed without
delaying the project.

t(i-j)

TF TF
i j

EST(i-j) LST(i-j) EFT(i-j) LFT(i-j)

EFT (i-j) = EST (i-j) + t (i-j)
LFT (i-j) = LST (i-j) + t(i-j)
LFT (i-j) – EFT (i-j) = LST (i-j) – EST (i-j)
TF = LFT (i-j) – EFT (i-j) OR LST (i-j) – EST (i-j)
2. Free Float (FF) : Finish of an activity can be delayed
without delaying the early start time (EST) of the
following activity.

FF
i j k

EST(i-j) EFT(i-j) EST(j-k)

FF = EST (j-k) – EFT (i-j)

3. Independent Float (IF): It is the excess of minimum
available time over the required activity duration.

t(i-j)
h i j k

EFT(h-i) EST(j-k)

IF = EST (j-k) – EFT (h-i) –t(i-j)

IF = FF (i-j) – Tail Event Slack

 Interfering Float (IF2): Total float (TF) – Free

Float (FF)
9. Event Slack:
 Difference between earliest event occurrence
time and latest event occurrence time.
Event Slack= latest event occurrence time (TL) –
Earliest event occurrence time (TE)
1. FORWARD PASS CALCULATION
 All activities in the network are assumed to start as
early as possible.
 The calculation begins from the left to the right
side of the network.
 When two or more activities merge into a event, the
largest value is taken as an earliest occurrence time
of that event.
 Forward pass calculation gives the EST and EFT of
each activity
1. BACKWARD PASS CALCULATION
 All activities in the network are assumed to start as
late as possible.
 The calculation begins from the right to the left
side of the network.
 When two or more activities merge into a event, the
smallest value is taken as an latest occurrence time
of that event.
 Backward pass calculation gives the LST and LFT of
each activity
 Activities should start from a single initial node
and end on single final node.

A
D

F
B E
C
 There should not be a loop formation in the
network.

 Two or more activities can start from a same

common node but cannot end on a same common
node.
 There should not be an intersection between the
activities.

 The number of arrows should not be more than

the number of activities.
A
D

A
B E
C
 There should not be unnecessary dummy in the
network diagram .
Construct a network diagram and find all the
components of CPM.
S.N. Activity Duration (day) Predecessor Successor
1 A 1 - D,E
2 B 6 - F,J
3 C 2 - G
4 D 2 A H
5 E 4 A H
6 F 3 B I
7 G 4 C J
8 H 2 D,E K
9 I 5 F L
10 J 3 B,G -
11 K 3 H L
12 L 4 I,K -
TE = Earliest Occurrence Time
TE = 5, 3
TL = Latest Occurrence Time TE = 7 EST EFT
5 H (2) LST LFT
1 3 9
5 7
TL = 9 5 7 TL = 11
TE = 1
D (2) 9 11
2 1 5
0 1 K (3)
5 9
4 5 TL = 5,7
TE = 5 7 10
A (1) E (4)
11 14
1 5 6 14 18
TE = 6 5 9
9 14
TE = 0 14 18
B (6) TL = 9 9 14
3 F (3) TE = 18, 9
1 TE = 14,10
0 6 TE = 9 I (5) L (4)
0 6 10 11
TL = 0
TL = 6,15 6 9 7
6 9
0 2 TE = 2 TL = 14 TL = 18
C (2) TL = 9
9 11
2 6 J (3)
4
11 15 TE = 6, 6
6 9
TL = 11
G (4) 8 15 18

TL = 15

Critical Path = 1-3-7-10-11 Critical Activity = B,F,I,L

Project Duration = 6+3+5+4 = 18 days
SN Activ Durat ES EF LS LF TF FF Ind Inf Remark
ity ion T T T T

1 A 1 0 1 4 5 4 0 0 4
2 B 6 0 6 0 6 0 0 0 0 Critical
3 C 2 0 2 9 11 9 0 0 9
4 D 2 1 3 7 9 6 2 0 4
5 E 4 1 5 5 9 4 0 0 4
6 F 3 6 9 6 9 0 0 0 0 Critical
7 G 4 2 6 11 15 9 0 0 9
8 H 2 5 7 9 11 4 0 0 4
9 I 5 9 14 9 14 0 0 0 0 Critical
10 J 3 6 9 15 18 9 0 0 9
11 K 3 7 10 11 14 4 4 0 4
12 L 4 14 18 14 18 0 0 0 0 Critical
S.N. Activity Duration Predecessor Successors

1 A 1 - C,D
2 B 3 - E
3 C 2 A F,G
4 D 2 A H
5 E 5 B I,J,K
6 F 1 C I
7 G 3 C I,J,K
8 H 3 D I,J,K
9 I 5 E,F,G,H L
10 J 1 E,G,H L
11 K 4 E,G,H M
12 L 1 I,J -
13 M 2 K -
 It is a probabilistic approach for estimating the
duration of an activity and event oriented
network diagram.
 PERT is used in the completely newly developed
project such as Research and design, new
industries product design and there may not be
record of past experiences in the particular field.
 PERT system is preferred for those projects in
which correct time determination for various
activities cannot be made.
The most optimistic time (to):
 This is the shortest possible time in which activity
can be completed. It is assessed considering that
there is no any constraint and everything goes
alright as planned.
The most pessimistic time (tp):
 This is the maximum possible time that would be
required to complete the activity. It gives the idea
about the maximum time the activity can be
prolonged due to bad weather, low productivity,
changes in design etc.
The most probable time (tm):
 In between the optimistic and pessimistic time,
there lies a most reliable time. This is the time
required to complete an activity if normal
condition is provided.
Probability of
occurrence
PERT weighted average
CPM time time/ Expected time
µ = (to + 4tm + tp )/6

possible
duration
Optimistic Most reliable Pessimistic
time
The weighted average of 3-time estimate
µ = (to + 4tm + tp )/6
Standard deviation (σ) = tp-to/6
Variance = σ2
Consider the following activities in a network.
 Determine expected completion time and critical path.
 Variance and standard deviation of the critical path

3
4 t= 2,6.5,8
t= 1,2,3 4
1 5 6
2 6
5 7
2
4
 PERT Average time / The most expected time
µ/te = (to + 4tm + tp )/6
For Activity 1-2 , te = (1+ 4*2+ 3) / 6 = 2
Standard deviation (σ) = tp-to/6 = 2/6 =1/3
Variance = σ2 = 1/9

S.N. Activity t0 tm tp te σ σ2 Remarks

1 1-2 1 2 3 2 1/3 1/9 Critical
2 2-3 1 4 7 4 1 1
3 2-4 3 4 11 5 4/3 16/9 Critical

4 3-5 3.5 4 4.5 4 1/6 1/36

5 4-5 5 6 13 7 4/3 16/9 Critical
6 5-6 2 6.5 8 6 1 1 Critical
Project Duration = Summation of expected time along critical path
= 2+5+7+6 = 20 days.
Variance of Project (σ2) = Summation of variance along CP
= 1/9 + 16/9 + 16/9 + 1 = 42/9

Standard Deviation (σ) = (42/9)1/2 = ………

 CPM PERT
1. Activity oriented network 1. Event oriented network
diagram diagram
2. Useful of cost evaluation 2. Useful for time evaluation
3. Uses Only a single time 3. Uses 3-time estimates for
estimates for activities. activities.
4. Includes relationship 4. PERT analysis doesn’t include
between activities time and costs.
cost. 5. It uses statistical tools.
5. Doesn’t uses statistical tools 6. Used for completely new
6. Used for repetitive work project involved with factor
such as construction, repair, of uncertainty such as R&D
maintenance etc. project.
 Project Scheduling with limited
resources.

 In a real life project, it is a very common

experience that the resources are frequently in a
limited supply causing delay in completion of
project.
 Particular material or some machinery may not
be available in the middle of the project due to
some reasons beyond the control of project
manager.
 Availability of skilled and unskilled labor may be
restricted as well as availability of fund may be
restricted.
 Due to this the following constraint are imposed
due to the limited resources.
 Starting of an activity is delayed.
 Non critical job may be critical due to delay in
starting.
 More than one type of resource may be scarce at a
time.
 Resource may be scarce in the middle of
performance of a particular job. Etc.

These above mentioned constraints can be

overcome by the proper allocation of the
resources.
Resource Leveling.
 It is an attempt to reduce peak resources
requirement and smooth out period to period
assignments within the constraints of project
duration.
 The objective of project manager is to level as far
as demand for resources throughout the project
execution time keeping in view that project
completion time does not exceeds.
Resource smoothing
 There is no constraint on project completion
time.
 There is only constraint of resource availability.
 Increase in project duration will lead to indirect
expenses (overheads). Hence the project duration
can be extended to satisfy resource constraint.
 It shall be done in such a way that the project
duration is extended to the minimum possible
extent and at the same time satisfying the
resource constraints.
Consider the following information of a project

Activity Duration (days) Mason per day

1-2 2 1
2-3 3 2
2-4 4 3
2-5 2 1
3-10 4 2
4-6 2 3
4-7 4 3
5-9 4 5
6-8 2 1
7-9 5 1
8-9 3 1
9-11 2 1
10-11 3 1
11-12 2 1
 Work
External
Outside Plan
Factors
Input

Field
Project operation
Manager

Cost/Schedule
Engineers

Historical
Data
 If your budget spend plan shows you over
spending and your schedule shows milestones
slipping, you can know you may be in trouble.
 But you will have no way to make a quantitative
assessment of how bad the trouble is?
 EVMS solves this problem by providing an
accurate picture of spending and
accomplishments related to a baseline plan.
 “EVA is a standard method of measuring a
project’s progress (performance) at any given
point in time, forecasting its completion date and
final cost and analyzing variances in the schedule
and budget as the project proceeds”.
 It compares the planned amount of work with
what has actually been completed, to determine if
the cost, schedule and work accomplished are
progressing in accordance with the plan.
1. Budgeted Cost of Work Scheduled (BCWS) / Planned
Value
 It is the budgeted amount of cost of the work
scheduled to be accomplished in a given time period
(including support and allocated overhead)
2. Actual cost of work performed (ACWP) /Actual Value
 It is the amount actually expended in completing
the particular work accomplished within a given
time period.
3. Budgeted cost of work performed (BCWP)/Earned
value
 The value, in terms of your baseline budget, of the
work accomplished by now (in dollars or hours),
called the Earned Value!
COST VARIANCE (CV)
 It is the budgeted cost of the work to date minus
the actual cost of the work done to date.
 CV = BCWP – ACWP
(-ve sign implies cost overrun)

Schedule/Performance Variance
 It is the value of the work done minus the value to
the work that should have been done.
 SV = BCWP – BCWS
(-ve sign implies work is behind schedule)
 The percentage overrun (under run) can also be
computed using the following formula:

% overrun (under run) = (ACWP-BCWP)

BCWP
+ve value gives the cost overrun
Cost Performance Index (CPI) = BCWP/ACWP
(< 1 indicates cost is over budget)

Schedule Performance index (SPI) = BCWP/BCWS

(<1 indicates project is behind schedule)
 Suppose that an activity had 5-day duration
and was expected to cost $10,000. Set into the
project, and prior to finishing an activity, the
following data were obtained about the
progress done to that activity:
 Have so far worked for 3.5 days on activity.
 60% of an activity has been accomplished
 $8000 already spent on C.
Perform the earned value analysis and
comment on the result
The following quantities can be easily computed:
 ACWP =$8000,
 BCWP = 60%*10000 = $6000
 BCWS = 3.5*10000/5 = $7000
Cost variance = $6000-$8000
= - $2000(cost overrun)
Schedule variance = $6000- $7000
= -$1000 (behind schedule)
CPI = 6000/8000 = 0.75(<1) (cost overrun)
SPI = 6000/ 7000 = 0.86 (<1) (behind schedule)
% overrun = (8000-6000) / 6000 = 33.33% (+ve)
(cost overrun)
From the above, a new activity duration estimate
can be computed as:
New activity duration = original time estimate/ SPI
= 5/0.86= 5.8 (i.e. 6 days)
New cost estimate = original cost estimate/ CPI
= 10,000/0.75 = $13,333.34
Project Monitoring,
Evaluation and Control
PREPARED BY:
ASMITA SUBEDI

1
Project Monitoring
❑ Monitoring is the regular observation and recording of activities
taking place in a project.
❑It is a process of routinely gathering information on all aspects of
the project.
❑Monitoring enables the gathered information to be used in making
decisions for improving project performance.
❑Monitoring also involves giving feedback about the progress of the
project to the donors, implementers and beneficiaries of the project.

2
 Project Monitoring
Whether right thing is being
delivered to the right people at
the right time in a right way is
known as Monitoring.

3
Need of Project Monitoring
Rescheduling the project

Re budgeting the project

Re-assigning the staff

To assess project result

4
Need of Project Monitoring
To improve project management and process
planning

To promote learning

To understand different stakeholders’

perspective

To ensure accountability

5
Project Evaluation
❑ Evaluation means finding out the value of something.
❑Evaluation simply refers to the procedures of fact finding
❑Evaluation consists of assessments whether or not certain activities, treatment and
interventions are in conformity with generally accepted professional standards.
❑Any information obtained by any means on either the conduct or the outcome of
interventions, treatment or of social change projects is considered to be evaluation.
❑ Evaluation is designated to provide systematic, reliable and valid information on the
conduct, impact and effectiveness of the projects.
❑Evaluation is essentially the study and review of past operating experience.

6
 Need of Project Evaluation
❑ The purpose of evaluation is to make the best
possible use of funds by the program managers
who are accountable for the worth of their
programs.

❑ Measuring accomplishment in order to avoid

weaknesses and future mistakes.
❑ Observing the efficiency of the techniques
and skills employed
❑ Scope for modification and improvement.
❑ Verifying whether the benefits reached the
people for whom the program was meant.
7
 Monitoring is
usually an
ongoing activity
throughout the
life of the
project
whereas
evaluation is
periodic

8
Project Control
❑ Controlling is the management function of comparing the actual achievements with the planned ones
at every stage and taking necessary actions, if required to ensure the attainment of the planned goals.

9
Project Control System (PCS)
❑ Project Control System is a process or mechanism for continuing regular monitoring and controlling of a
project.

Ensures regular monitoring of performances

Motivates project personnel to strive for achieving project objectives

10
 Actual
work
progress

Relationship
between
Auditability cost and
schedule
Information performance
provided by
PCS

Practical
actions to Potential
the Problems
problems

11
Elements of Effective Project Control
System (PCS)
❑ Conformity to plans and activities
❑Appropriateness to positions and personalities
❑Simplicity
❑Accepted by the persons concerned
❑Timeliness
❑Economy
❑Emphasis on critical factors
❑Corrective plan
❑Flexibility

12
Difficulties in implementing Project
Control System
❑ Departmental and Management Gaps

❑Uniqueness of the project and its organization

❑Human Factors
❑Complex Characteristics of project
❑Difficulties in keeping track of performance and expenditure of complex project
❑Difficulty in coordination and communication
❑Uncertainty and change
❑Poor control and information system

13
14
TASK 1
Suppose you are assigned a project and the deadline to complete it is
shorter than it usually takes to complete similar kind of project. How would
you take it forward and as a project manager, what would you prioritize
more:
1. Timely submission
2. Quality of Work
3. Health and safety of the staffs

15
16
QUALITY CONTROL
❑Quality refers to the sum of the attributes or properties that describe a product
❑These are generally expressed in terms of specific product characteristics such as
length, width, color, specific gravity and the like.
❑ Performance
❑ Conformity to performance standards

17
QUALITY CONTROL
❑Quality means the totality of features and characteristics of a product or
service that bear on its ability to satisfy given needs
❑From customer’s perspective, quality of a good or service is fitness for use of it
❑ Customer satisfaction for the price of the product

18
QUALITY ATTRIBUTES
❑Performance
❑Features
❑Reliability
❑Serviceability
❑Durability
❑Conformance
❑Aesthetic
❑Perceived Quality

19
 COST OF
QUALITY

Cost to Control Cost of failure to

Quality Control Quality

Internal Failure
Prevention Cost Cost

External Failure
Appraisal Cost Cost

20
COST OF QUALITY
❑ Prevention Cost: The cost of preventing defective work is usually extended
before the product is made or service is rendered.
❑These cost include:
❑Design review and drawing checks
❑Quality Orientation program, education and training
❑Process Control
❑Process Orientations
❑Suppliers evaluation and presentation
❑Workers Training

21
COST OF QUALITY
❑ Appraisal Cost: The cost of appraisal is incurred for auditing service
procedure to make sure they confirm to prescribed work practices
❑These cost include:
❑Test, gauges and test equipment
❑Prototype inspection and tests
❑In process and final inspection and tests
❑Checking material furnished by suppliers
❑Work in process goods testing and inspections.

22
COST OF QUALITY
❑ Internal Failure Cost: Internal failure cost is applicable when the product is in
factory and has not been sold.
❑These cost include:
❑Expenses for producing items that are scrapped.
❑Redesign
❑Reworking and downtime
❑Retesting defective items
❑Lost value of items sold per seconds
❑Cost of Delays
❑Administrative time to review non confirming materials

23
COST OF QUALITY
❑ External Failure Cost: These costs are applicable to goods when the products
has been sold.
❑These cost include:
❑Warranty Cost
❑Product Liability (Insurance and Settlements)
❑Consumers affairs
❑Field Service
❑Product return, recalls

24
LEVELS IN QUALITY MANAGEMENT

Quality
Inspection
Control

Quality Total Quality

Assurance Management

25
LEVELS IN QUALITY MANAGEMENT
1. Inspection
◦ Under simple inspection based system, one
or more characteristics of a product is
examined, measured or tested and
compared with specific requirement.
◦ This system is applied to the incoming goods
manufacturing components and assemblies
at appropriate point in manufacturing
process.
◦ Screening Process

26
LEVELS IN QUALITY MANAGEMENT
2. Quality Control
◦ Quality control is needed to review the quality of
the product or service. Inspection and testing is
necessary to identify problems and defects that
need correction.
◦ Quality Control focused on fulfilling quality
requirements

27
LEVELS IN QUALITY MANAGEMENT
2. Quality Control (Objectives and Functions)
❖To establish the desired quality standards which are acceptable to the customers?
❖To discover flaws or variations in the raw materials and the manufacturing processes
in order to ensure smooth and uninterrupted production.
❖To evaluate the methods and processes of production and suggest further
improvements in their functioning.
❖ To study and determine the extent of quality deviation in a product during the
manufacturing process.
❖To analyze in detail the causes responsible for such deviation.
❖To undertake such steps which are helpful in achieving the desired quality of the
product

28
LEVELS IN QUALITY MANAGEMENT
3. Quality Assurance
◦ Companies need to assure defects and
mistakes are avoided in the manufacturing of
good or the delivery of service, and quality
assurance guarantees consistent results.
◦ Quality Control focused on providing
confidence that quality requirements will be
fulfilled.

29
LEVELS IN QUALITY MANAGEMENT
3. Quality Assurance (Stages)
❖Understand the customer needs ❖Product pilot test
❖Define the objectives ❖Quality test
❖Designing the product ❖Customer feedback
❖Prototyping ❖Manufacturing
❖Quality Testing ❖Follow up customer feedback
❖Customer approval

30
31
32
33
LEVELS IN QUALITY MANAGEMENT
4. Total Quality Management
❖Total Quality management
is defined as a continuous
effort by the management as
well as employees of a
particular organization to
ensure long term customer
loyalty and customer
satisfaction.

34
 ELEMENTS OF
TOTAL QUALITY
MANAGEMENT

35
 BENEFITS OF TOTAL QUALITY
MANAGEMENT
BENEFITS TO THE EMPLOYEES
BENEFITS TO THE COMPANY More training and improved abilities
Improvement in quality More recognitions and rewards
Reduces waste and defects hence reduced cost
Increases productivity BENEFITS TO THE CUSTOMERS
Results in Faster growth of the company Greater Satisfaction
Better Service
Less Number of Problems with Products

36
37
STAGES OF QUALITY CONTROL

Incoming goods,
services and In- Process End Product
information (Process) (Output)
(Input)

38
TOOLS FOR QUALITY CONTROL
❖ Well written specification
❖National and international standards (Codes)
❖Other international organizations
❖Procedural guidelines
❖Training

39
QUALITY SYSTEM
❖ A quality management system (QMS) is a formalized system that documents
processes, procedures, and responsibilities for achieving quality policies and
objectives.
❖A QMS helps to coordinate and direct an organization’s activities to meet
customer and regulatory requirements and improve its effectiveness and
efficiency on a continuous basis.

40
QUALITY PLAN
❖ A quality plan is a document, or several documents, that together specify quality standards,
practices, resources, specifications, and the sequence of activities relevant to a particular product,
service, project, or contract.

Quality plans should define:

❖Objectives to be attained (for example, characteristics or specifications, uniformity, effectiveness,

aesthetics, cycle time, cost, natural resources, utilization, yield, dependability, and so on)

❖Steps in the processes that constitute the operating practice or procedures of the organization

❖Allocation of responsibilities, authority, and resources during the different phases of the process or
project

41
QUALITY CIRCLE
A quality circle is a group of workers who do the same or similar work, who meet regularly to
identify, analyze and solve work-related problems.

Properties of Quality Circle:

❖Participative management technique within the framework of a company

❖Teams of 6 to 12 employees voluntarily

❖define and solve a quality or performance related problem.

43
 QUALITY MANAGEMENT TOOLS

Process Flow Chart:

Cause and Effect Check List:
Analysis: Helps to picture a
Brain Storming: Collection of
process where
Solution applied different activities
Idea generating overlaps,
after finding the accompanied with
process duplications and
root cause of required quality
iterative loops can
problem standards.
be easily identified

44
PROJECT CONTROL CYCLE

45
FEEDBACK CONTROL SYSTEM

46
COST CONTROL
❖Project cost management may be defined as management of the processes involved in
planning, estimating, and controlling costs so that the project can be completed within the
approved budget.
❖Cost control means controlling the changes to project budget
❖OBJECTIVES
❖To have a knowledge of the profit and loss of the project throughout the duration of the
project.
❖To have a comparison between the actual project performance and that conceived in the
original project plan.
❖Provides feedback data on actual project performance to future project planning

47
COST CONTROL PROCESS

48
ABILITY TO INFLUENCE COST

49
COST CONTROL PROCESS
❖ Controlling changes to the project budget.
❖Influencing the factors which create changes to the cost baseline to ensure
that changes are beneficial.
❖Determining that the cost baseline has changed with in acceptable units
❖Managing the actual changes when and as they occur.

50
ELEMENTS OF COST CONTROL
❖ Observation

❖Comparison
❖Identify reasons for variance
❖Corrective Action

51
METHOD OF COST CONTROL
❖ Short Term Planning and Control
❖Accounting Method of Control
❖Overall Profit/Loss Account
❖Profit-Loss on Valuation Date
❖Unit Costing
❖Project Cost Model
❖S Curve
❖Earned Value Analysis

52
METHOD OF COST CONTROL
❖ Short Term Planning and Control
▪Project is broken down into smaller components
▪Short term plans are then prepared
▪Easy to evaluate and monitor
▪Effective control due to less degree of uncertainities

53
METHOD OF COST CONTROL
❖Accounting Method of Control
❖Overall Profit/Loss Account
❑Profit/Loss Account is prepared after project is completed
❑Reasons are analyzed
❑Information used for next project
❑Used for small project
❖Profit-Loss on Valuation Date
❑Profit/Loss Accounts are prepared for various periods
❑Used for Large Project
❑Profit/Loss determined for regular period and trend of variation with time is
studied.

54
METHOD OF COST CONTROL
❖Method of Control
❖Unit Costing
❖Unit Cost of each item is checked and compared with planned or quoted cost of
item
❖Determination of profit or loss

55
METHOD OF COST CONTROL
❖ Earned Value Analysis
❖The earned value technique uses the cost control contained in the project
management plan to assess project progress and the magnitude of any
variations that occur.
❖The earned value technique involves developing these key values for each
schedule activity, work package, or control account.
❖It compares the planned amount of work with what has already been
completed to determine if the cost, schedule and work accomplished are
progressing in accordance with the plan

56
METHOD OF COST CONTROL
❖ Budgeted cost for the work Scheduled (BCWS) /Planned value (PV)-
❖PV is the budgeted cost for the work scheduled to be completed plus the amount of level of
effort scheduled to be accomplished in a given time period.
❖BCWS is the value of work that should have been done at given point of time
❖Expected expenditure at a given point of time
❖Budgeted cost for work performed (BCWP)/ Earned value (EV)-
❖EV is the budgeted amount for the work actually completed plus budgeted level of effort
❖Value of work done at a point of time
❖Actual cost for work performed (ACWP)/ Actual Value (AC)-
❖AC is the actual cost incurred in accomplishing work on the schedule activity
❖Actual Cost of Work done at a given pont of time

57
METHOD OF COST CONTROL

58
METHOD OF COST CONTROL
❖ Cost Variance (CV) = EV – AV
❖0 : Right on Budget
❖Negative: Over Budget
❖Positive: Under Budget
❖Schedule Variance (SV) : EV – PV
❖0: Right on Schedule
❖Negative: Behind Schedule
❖Positive: Ahead of Schedule
❖Cost Variance Percent (CVP) : (CV/EV)*100%
❖Schedule Variance Percent (SVP) : (SV/PV)*100 %
59
METHOD OF COST CONTROL
❖ Schedule Performance Index (SPI) : EV/PV
❖Value less than 1 means project is behind schedule
❖Cost Performance Index (CPI): EV/AV
❖Value less than 1 means the project is over budget
❖New Duration Estimate: Original Time Estimate/SPI
❖New Cost Estimate: Original Cost Estimate/CPI

60
METHOD OF COST CONTROL
❖A project is undertaken where the work has to be completed
within 60 days with a budget of Rs 20,000. The cost breakdown per
month is Rs 10,000. The work scheduled in each month is half of
the work to be completed. According to the progress report, at the
end of first month, only 25 % percent of the total work has been
completed and 50 % of the total budget has been spent. Also for
the completion of 25 % work, the actual cost incurred is 50 % of the
total budgeted cost. Perform the earned value analysis for the
project.

61
62
63
64
WORK BREAKDOWN STRUCTURE
❖ Every one of us has some goals and we plan accordingly to achieve them.
❖One of the effective ways to reach our goal quickly is to break down larger
goals into realistic achievable steps.
❖A work breakdown structure (WBS) is the process or technique of dividing
complex and difficult projects into smaller units.
❖This smaller unit can be a data, product, service or any combination.

65
WORK BREAKDOWN STRUCTURE
❖ Every one of us has some goals and we plan accordingly to achieve them.
❖One of the effective ways to reach our goal quickly is to break down larger
goals into realistic achievable steps.
❖A work breakdown structure (WBS) is the process or technique of dividing
complex and difficult projects into smaller units.
❖WBS is a hierarchical decomposition of work that must be performed to
achieve the objective.
❖This smaller unit can be a data, product, service or any combination.

66
WORK BREAKDOWN STRUCTURE
❖ Easy to define, organize and manage the project.
❖Improves the efficiency of the project.
❖Helps to estimate the resources required, such as cost, time, staff, etc.
❖Easy allocation of resources based on the importance of the task/sub-task.

67
WORK BREAKDOWN STRUCTURE

68
PROJECT MANAGEMENT INFORMATION SYSTEM
❖An information system consisting of the tools and techniques used to gather,
integrate, and disseminate the outputs of project management processes.
❖ It is used to support all aspects of the project from initiating through closing,
and can include both manual and automated systems.

69
OBJECTIVES OF PMIS
Main objective: Provide information to managers and supervisors of firm in order to maximize its
benefits through optimization of resources uses.
To reduce project duration
To make better use of resources
To increase resources productivity
To decrease cost/price
To bring the new facts to the knowledge
To reduce uncertainty in decision making

70
NECESSITY OF PMIS/Advantages of PMIS
❖Quality
❖Budget
❖Timeliness
❖Communications
❖Records Management
❖Training
❖Standardize Processes
❖Track Progress

71
THANK
YOU
72
 PROJECT RISK
MANAGEMENT
PREPARED BY:
ASMITA SUBEDI

6/22/2021
INTRODUCTION

Risk is any unexpected event that can affect your project — for better or
for worse. Risk can affect anything: people, processes, technology, and
resources

Risk is a combination of the probability of a negative event and its

consequences.

Risk means uncertainty and the results of uncertainty

6/22/2021 2
Project Risk =
Summation of
(Events*
Probabilities *
Consequences)

6/22/2021 3
 RISK MANAGEMENT
• Risk Management is a logical and
systematic method of identifying,
analyzing, treating and monitoring
the risks involved in any activity or
process.
• Project risk management is the art
and science of identifying,
assigning, and responding to risk
throughout the life of a project and
in the best interests of meeting
project objectives
6/22/2021 4
6/22/2021 5
 RISK
MANAGEMENT

• It includes
maximizing the
results of positive
risks and
minimizing the
consequences of
negative events
6/22/2021 6
 PROJECT RISK MANAGEMENT

Risk management is often overlooked on projects, but it can help improve

project success by helping select good projects, determining project scope,
and developing realistic estimates

The goal of project risk management is to minimize potential risks while

maximizing potential opportunities.

6/22/2021 7
 • Identification of troubled projects
• Fewer project surprises
• Better quality data for decision making
• Communication is elevated
• More accurate budgets
BENEFITS OF
• Clear Expectations
PROJECT RISK
• Team Focus
MANAGEMENT
• Integration into Risks, Issues and Challenges
• Proactive vs reactive
• Historical Data

6/22/2021 8
6/22/2021 9
 NATURE OF PROJECT RISK
Nation/Religion Construction Industry Company
• Political situation • Market Fluctuations • Employer/Owner
• Economical and Financial • Law and Regulations • Architect
Situation • Standards and Codes • Labor and Sub Contractors
• Social Environment • Contract System

Project
Materials and • Defective physical work
Internal • Schedule Delay
Equipments
• Cost overruns

Force Majeure

6/22/2021 10
 TYPE OF PROJECT RISKS Design and
Construction
Phase Risk

6/22/2021 11
 Construction
phase risk
• Includes risk such as
project will not be
completed on time or
budget or at all
because of technical,
labor and other
construction difficulty

6/22/2021 12
 Operation Phase Risk

RESOURCES/RESERVE OPERATING RISK MARKET/OFF-TAKE RISK

RISK

6/22/2021 13
 Participants/Credit Risk
Risk
Common to Technical Risk
Both Currency Risk
Construction
Regulatory/ Approvals Risk
and
Operation Political Risk
Phases Force Majeure Risk

6/22/2021 14
 • Changes in project scope and requirements
• Design error and omissions
• Inadequately defined roles and
responsibilities
ANALYSIS OF
• Inaccurate cost and schedule estimates
MAJOR
• Insufficient skilled staff
SOURCE OF
• Force Majeure
RISK
• New Technology

6/22/2021 15
 Risk Management

• Risk Management Planning

• Risk Identification
• Qualitative and Quantitative
Risk Analysis
• Risk Response Planning
• Risk Monitoring and Control

6/22/2021 16
 Project Development Team
members assign team members to
create a project risk management
plan

Risk Risk management plan identifies

Management and establishes in the project plan

the activities of risk management
for the project
Planning
Use of spreadsheet that shows risks
and responses

6/22/2021 17
 Risk Identification

Identifying potential project risks and documenting their characteristics

using
• Sample risk list
• Knowledge of the project
• Consultation with others who have significant knowledge of the project

Team considers

• Risks
• Opportunities
• Triggers

6/22/2021 18
Construction phases and risks

6/22/2021 19
Qualitative and Quantitative Risk Analysis

Qualitative risk analysis assesses the importance of the identified risks

followed by development of prioritized lists of these risks for further
analysis

Assessing each identified risk for its probability of occurrence and its
impact on project objectives

6/22/2021 20
Risk probability and Impact Assessment
(Qualitative Method)
Risk probability and risk impact may be described in qualitative terms such as very high,
high, moderate, low and very low.

Risk probability is the likelihood that a risk will occur.

Risk impact is the effect on project objectives if the risk occurs, which may be a negative
effect (threat) or a positive effect (opportunity).

These two dimensions of risk are applied to specific risks, not to the overall project

6/22/2021 21
6/22/2021 23
 Likelihood
Scale

6/22/2021 24
 Impact Scale Definition

6/22/2021 25
 Risk
Assessment
Matrix

6/22/2021 26
 • All the activities in a work package are assigned weights, wj , in
order of their importance, or criticality, as per experts’ opinion.
• These weights are also known as local priority (local, because it
corresponds to the priority of the activities in a work package).
• The summation of the weights assigned to all the activities in a
work package, ∑wj , should be equal to one.
• Similarly, the likelihood of risk associated with each activity is also
assigned as Lj; and the impact of that risk is assigned as Ij .
Composite • Each of these wj , Lj and Ij have a value between zero and one.
Factor • A value of wj close to zero indicates that the activity is least
important, and a value close to one indicates that the activity is
Assessment very highly important.
• Similarly, the closer the value of Lj to zero, the less likely is the
occurrence of the risk event associated with the jth activity, and
vice versa.
• The same is true with the values of Ij as well – the closer the value
of Ij to zero, the less severe is the impact of the risk event
associated with the jth activity, and vice versa.
• These values can be determined from the experts’ opinion, as well
as from historical data for similar projects.
6/22/2021 27
 Composite Factor
Assessment
6/22/2021 28
 • The overall risk likelihood and risk impact for
the complete project is determined from
the CLF and CIF values of the individual work
packages.
• For this purpose, each work package is
assigned a weight, Wj, proportional to its
importance, or criticality. This is known as
Project Risk global priority. T
Assessment • he summation of all these weights ∑Wj
should also be equal to one. Thus, for a
by project containing ‘p’ work packages, the
Composite overall risk is determined as
Factors

6/22/2021 29
 • A project is composed of several work packages. In each work
package, there are several activities.
• For each activity, the Base Cost Estimate (BCE) and the Base
Time Estimate (BTE)can be obtained from the work package
specifications, project drawings and expert inputs
Probable • Suppose there are ‘p’ work packages in a project, and ‘a’
activities in each work package.
Cost and • The jth activity has a base cost estimate of BCj and a base
Probable time estimate of BTj .
• The expected failure cost or Corrective Cost (CC), and the
Time expected failure time or the Corrective Time (CT) can be
estimated from historical data as well as from expert opinion.
Estimate • The corrective cost for the jth activity is CCj , and the
corrective time for the jth activity is CTj .
• The corrective cost and the corrective time are measures of
the impact of the risk associated with an activity. The
likelihood of occurrence of a negative risk event associated
with the jth activity is Lj .
6/22/2021 30
 Probable Cost and Probable Time Estimate

• From the basic principle of risk it is known that the quantum of risk associated with an activity
is given by the product of the likelihood of occurrence of the risk event and the impact of the
risk event.
• The quantum of risk associated with the jth activity can be measured in terms of Risk Cost
(RCj) and Risk Time (RTj)

• The two factors, RCj and RTj , sum up the quantum of risk associated with the cost and time
estimates of the jth activity.
• Along with these direct effects of risk, there might also be some Opportunity Cost (OCj) arising
due to the occurrence of the risk event.
6/22/2021 31
Probable Cost
and Probable
Time Estimate
• The total PC and PT for a work
package is the summation of the
PC and PT of all the activities in
that work package. Similarly, the
PC and PT for the overall project is
the summation of the PC and PT
estimates of all the work packages
in the project.

6/22/2021 32
 Find out
• Risk Cost
• Risk Time
• Probable Cost
Estimate
• Probable Time
Estimate
• How much % is
probable cost
higher than base
cost
• How much % is
probable schedule
higher than base
schedule
6/22/2021 33
 • A matrix may be constructed that assigns
risk ratings (low, moderate or high) to risks
based on combining probability and impact
scales of a risk on a project objective.
Probability / • The organization must determine which
combinations of probability and impact
impact risk result in a risk’s being classified as high risk
rating matrix (red condition), moderate risk (yellow
condition), and low risk (green condition).
• The risk score helps put the risk into a
category that will guide risk response
actions.

6/22/2021 34
 • Risks with high probability and high impact
Probability are likely to require further analysis,
including quantification, and aggressive risk
/ impact management (both threats &
opportunities).
risk rating
• Lower Risks would require less emphasis and
matrix it may be enough to include them in a watch
list for monitoring

6/22/2021 35
 Risk Impact also can be expressed as a
numerical measure between 0 and 1,
where 0 is not serious and 1 is catastrophic

RISK Composite Impact Factor (CIF) = W1 * TI

+ W2 * CI + W3 * SI
IMPACT
Where W1, W2 and W3 are valued 0 to 1
and together sums to 1.

6/22/2021 36
 • Risk is a function of risk likelihood and risk
impact.
• Risk consequence rating, RCR is
• RCR = CLF + CIF - (CLF)*(CIF)
Risk • Small values represent unimportant risk
• Large values represent important risk
Consequences • Value over 0.7: High risk project
• Value under 0.2: Low risk project
• CLF: Composite Likelihood factor

6/22/2021 37
 Risk response planning
identifies and assign parties
to take responsibility of each
Risk risk response.
Response
Planning Ensures that each risk which
requires response has an
owner

6/22/2021 39
6/22/2021 40
Response to Threats

6/22/2021 41
6/22/2021 42
Response to Opportunities

6/22/2021 43
 Keeps tracks of identified
risks, residual risks and new
Risk risks
Monitoring
Ensures execution of risk
and Control response plans and
evaluate their effectiveness

6/22/2021 44
Risk Management
plan
• Document prepared
after risk management
planning meetings which
shows/describes the
way, mechanism and
methods of performing
risk identification, risk
analysis, response
planning and risk
monitoring and
controlling mechanism.

6/22/2021 45
Risk Register

• It is a record to document the

results of risk management
process.
• List of identified risks with
description
• List of potential response
• Root causes of risk
• Updated risk categories

6/22/2021 46
 Developed in advance to respond to risks
that arise during the project.

Contingency Reduces the cost of an action the risk

occurs
Plan
The most usual risk acceptance response is
to establish a contingency allowance or
reserve including amount of time, money
or resources to account for the known risks.

6/22/2021 47
Project Financing,
Capital Planning
and Budgeting
PREPARED BY
ASMITA SUBEDI

1
 Project financing is the long term financing of
infrastructures and industrial projects based upon
the projected cash flows of the project rather

Project than the balance sheets of the project sponsors.

Financing Project financing refers to financing in which

lenders to a project look primarily to the cash flow
(revenues) and assets of the project as the
source of payment of their loans.

2
Project Financing vs Conventional Financing
In case of conventional financing, creditor makes an assessment of repayment of his loan by
looking all the cash flows and resources from the borrower whereas in case of project financing,
cash flow from the project related assets alone are considered for assessing the repaying
capacity.

In conventional financing, end use of the borrowed funds is not strictly monitored by the lenders.
In project financing, creditors ensure proper utilization of funds and creation of assets as
foreseen in project proposal.

In conventional financing, creditors are not interested in monitoring the performance of the
enterprise and they are only interested in their money getting repaid in one way or the other.
Project financiers are keen to watch the performance of the enterprise and suggest/take remedial
measures as and when required to ensure that project repays the debt out of its cash generation

3
 Capital budgeting may be defined as the
firm's decision to invest its current funds
most efficiently in long term activities in
anticipation of an expected flow of future
Capital benefit over a series of years.
Budgeting The long term activities are those activities
which affects firms' operations beyond the
one year period.

4
 Investment can be in fixed or current assets

Investments in the fixed assets, which have long terms implications

for the firms in terms of expenditure and benefit is evaluated as
capital budgeting decision.

The capital budgeting excludes investment required for current

Nature of assets.

investment It includes following types of investment:

decisions Addition, dispostition, modifications and replacement of assets in a
long term basis.

Introducing a new product

Expanding the business

5
Features of Capital Budgeting

The exchange of the current funds for future benefits (I.e funds are invested only for future benefits)

Funds are invested in long term activities

The future benefits will occur to the firm over a series of years (I.e funds are only invested only if future
benefits occur over a series of years)

6
 They have long term implications for the firm
and influence its risks complexion

Importance They involve commitment of large amount of

funds
of Capital They are irreversible decisions

Budgeting They are among the most difficult decision to

be made

7
Capital Budgeting Process

1 2 3 4
Project Project Project Project
Generation Evaluation Selection Execution

8
Project Generation

Project generation is the development of proposal for investment

decision

The proposal may focus in adding new equipment for increasing the
rate of production or it may focus to reduce the cost of production

9
 Project evaluation is done by expert groups
Following points needs to be considered:
Project Estimate on cash flow
Evaluation Selection criteria to judge the project
viability
Estimated benefit over cost.

10
Project Selection

No standard administrative procedure can be laid down for selecting the project and approving the
investment proposal.

The screening and selection procedure may vary from firm to firm

Projects are screened at multiple levels

11
Project Execution

After the final selection of the investment proposal, the funds are appropriated for capital expenditure.

The formal plan for appropriation of funds is called capital budget

Such plans are prepared or approved by project execution committee or the top managemtn.

12
Investment Decision Criteria

It should provide a ranking of projects in order of their desirability ( viability)

It should also solve the problem of choosing among alternative projects

It should be criterion which is acceptable to any conceivable investment project

It should recognize the fact that bigger benefit are preferable to smaller ones, and early benefits are
preferable to later benefits

It should provide a means of distinguishing between acceptable and unacceptable projects.

13
Traditional Criteria

Payback period Accounting Rate of Return

Simple payback period
Discounted payback period

14
Discounted Cash Flow (DCF) Criteria

Net present value/Net future value/ Net annual value

Internal rate of return
Profitability index or B/C ratio

15
 Money has a time value.

—Capital refers to wealth in the form of money or

property that can be used to produce more
Time Value wealth.

of Money —Engineering economy studies involve the

commitment of capital for extended periods of
time.

—A dollar today is worth more than a dollar one or

more years from now (for several reasons).

16
Simple interest
When the total interest earned or charged is
linearly proportional to the initial amount of the
loan (principal), the interest rate, and the
number of interest periods, the interest and
interest rate are said to be simple.

17
Calculation of simple interest
The total interest, I, earned or paid may be computed
using the formula below.

I = P* N* i

P = principal amount lent or borrowed

N = number of interest periods (e.g., years)

i = interest rate per interest period

The total amount repaid at the end of N interest

periods is P + I.
18
Compound
Interest
Compound interest reflects
both the remaining principal
and any accumulated
interest. For $1,000 at 10%…

19
Economic Equivalence
Economic equivalence allows us to compare
alternatives on a common basis.

Each alternative can be reduced to an equivalent basis

dependent on
◦ interest rate,
◦ amount of money involved, and
◦ timing of monetary receipts or expenses.

Using these elements we can “move” cash flows so

that we can compare them at particular points in time

20
 i = effective interest rate per interest period

N = number of compounding (interest) periods

P = present sum of money; equivalent value of

one or more cash flows at a reference point in
time; the present
Economic F = future sum of money; equivalent value of one
Equivalence or more cash flows at a reference point in time;
the future

A = end-of-period cash flows in a uniform series

continuing for a certain number of periods,
starting at the end of the first period and
continuing through the last
21
Economic Equivalence

22
 Using the standard notation, we find that a present
amount, P, can grow into a future amount, F, in N time

Economic Equivalence periods at interest rate I

23
Economic
Equivalence

24
Economic
Equivalence

25
Economic
Equivalence

26
Economic
Equivalence

27
Economic
Equivalence

28
29
Economic
Equivalence

30
Economic Equivalence
31
Nominal
and Effective
Interest
Rates

32
Nominal and Effective Interest Rates

33
Nominal and Effective
Interest Rates
34
Nominal and Effective
Interest Rate
35
 Present Worth (PW)

Future worth (FW)

Annual worth (AW)

Evaluating a
single project
Internal rate of return (IRR)

External rate of return (ERR)

Payback period (generally not appropriate as a primary

decision rule)

36
Evaluating a
single project
To be attractive, a capital project
must provide a return that
exceeds a minimum level
established by the
organization. This minimum level is
reflected in a firm’s Minimum
Attractive Rate of Return(MARR).

37
 The present worth (PW) is found by
discounting all cash inflows and outflows to
the present time at an interest rate that is
Present Worth generally the MARR.
Method
A positive PW for an investment project
means that the project is acceptable (it
satisfies the MARR).

38
 Considers all cash flow

Advantages
of Net True measure of profitability

Present Value
Recognizes the time value of
money

39
 Requires estimation of cash inflow and
outflow, which is tedious job
Disadvantages
Sensitive to discount rate
of Net Present
Value Requires computation of the opportunity
cost of the capital or MARR which are
difficult concept

40
 Consider a project that has an
initial investment of $50,000 and
Present Worth that returns $18,000 per year for
Example the next four years. If the MARR
is 12%, is this a good
investment?

41
 • Looking at FW is appropriate since the
primary objective is to maximize the future
wealth of owners of the firm.

Future • FW is based on the equivalent worth of all

Worth cash inflows and outflows at the end of the

study period at an interest rate that is
generally the MARR.
(FW)
• Decisions made using FW and PW will be
the same.

49
 A $45,000 investment in a new conveyor
system is projected to improve throughput
Future worth and increasing revenue by $14,000 per year
for five years. The conveyor will have an
example. estimated market value of $4,000 at the end
of five years. Using FW and a MARR of
12%, is this a good investment?

50
 • Annual worth is an equal periodic series of
amounts that is equivalent to the cash
inflows and outflows, at an interest rate that
Annual Worth is generally the MARR.

(AW) • The AW of a project is annual equivalent

revenue or savings minus annual equivalent
expenses, less its annual capital recovery
(CR) amount.

51
Capital recovery reflects the capital
cost of the asset.
• CR is the annual • The CR covers the
equivalent cost of the following items. – Loss in
capital invested. value of the asset.

• The CR distributes the

– Interest on invested initial cost (I) and the
capital (at the MARR). salvage value (S) across
the life of the asset.

52
Numerical Example
A project requires an initial investment of $45,000, has a
salvage value of $12,000 after six years, incurs annual
expenses of $6,000, and provides an annual revenue of
$18,000. Using a MARR of 10%, determine the AW of this
project.

53
Internal Rate of Return
• Theinternal rate of return (IRR) method is the
most widely used rate of return method for
performing engineering economic analysis.
• It is also called the investor’s method, the
discounted cash flow method, and the profitability
index.
• If the IRR for a project is greater than the MARR,
then the project is acceptable.

54
 The IRR is the interest rate that equates the equivalent
worth of an alternative’s cash inflows (revenue, R) to
the equivalent worth of cash outflows (expenses, E).

The IRR is sometimes referred to as the breakeven

How the interest rate.

IRR works The IRR is the interest i'% at which

55
 The IRR is the interest rate that equates the equivalent
worth of an alternative’s cash inflows (revenue, R) to
the equivalent worth of cash outflows (expenses, E).

The IRR is sometimes referred to as the breakeven

How the interest rate.

IRR works The IRR is the interest i'% at which

56
 Considers all cash flow

True Measure of Profitability

Advantages
of IRR Recognizes the time value of money

Consistent with the wealth maximization

principle

57
Requires estimation of cash inflow
and outflow, which is tedious job
Disadvantages
It is difficult to understand and use in
of IRR
practice as it involves complicated
computational problems.

58
59
• The IRR assumes revenues generated are reinvested
at the IRR—which may not be an accurate situation. Reinvesting
revenue-
• The ERR takes into account the interest rate, ε,
external to a project at which net cash flows generated
External
Rate of
(or required) by a project over its life can be reinvested
(or borrowed). This is usually the MARR.

Return
• If the ERR happens to equal the project’s IRR, then
using the ERR and IRR produce identical results. (ERR)

60
• Discount all the net cash outflows to
time 0 at ε% per compounding period.

• Compound all the net cash inflows to The ERR

period N at at ε%.
procedure
• Solve for the ERR, the interest rate that
establishes equivalence between the two
quantities.

61
62
63
Payback Period

The simple payback period is the number of years required for

cash inflows to just equal cash outflows.

It is a measure of liquidity rather than a measure of profitability.

64
Payback Period

65
 Simple to understand and easy to calculate

It costs less than most of the sophisticated techniques which

Advantages requires lots of analysis time and the use of computers

of Payback A company can have more favorable short run effect on earning
per share by setting up a shorter payback period

Period The riskiness of the project can be tackled by having the shorter
payback period as it may ensure guarantee against loss

It gives insight to the liquidity of the project. The funds so released

can be put to other users.

66
 It fails to take account of the cash inflow
earned after the payback period
It doesn’t consider the entire cash inflow
yielded by the project

Disadvantages Fails to consider the pattern of cash inflow in

terms of magnitude and time
of Payback
Administrative difficulties may be faced in
Period determining the maximum acceptable
payback period
Payback period method is not consistent
with the objective of maximizing the market
value of the firm's share.
67
 ARR = Average Income/ Average Investment

Average income = (income – expenses –

Accounting taxes)/ number of years

Rate of Return Average investment = ( Original investment

+ Salvage or scrap value)/2

68
 Simple to understand and easy to calculate

Advantages It cost less than most of the sophisticated

techniques which require a lots of analysis time
and use of computers.

of ARR
method It can be readily calculated using accounting data

It uses the entire stream of income in calculating

the accounting rate

69
 It ignores the time value of money. Profit occurring in
different periods are valued equally.

It uses accounting profit, not cash flows in appraising the

Disadvantages project

of ARR
It does not consider the length of the project lives

It does not allow the fact that the profit can be re invested

method It is incompatible with the firm's objective of maximizing the

market value of the share. Share value does not depend on
the accounting rate.

70
 Numerical Problem
Best Flight, Inc., is considering three mutually exclusive
alternatives for implementing an automated passenger
check-in counter at its hub airport. Each alternative meets
the same service requirements, but differences in capital
investment amounts and benefits (cost savings) exist
among them. The study period is 10 years, and the useful
lives of all three alternatives are also 10 years. Market
values of all alternatives are assumed to be zero at the end
of their useful lives. If the airline’s MARR is 10% per year,
which alternative should be selected in view of the cash-flow
diagrams shown

71
Numerical
The Consolidated Oil Company must install antipollution equipment
in a new refinery to meet federal clean-air standards. Four design
alternatives are being considered, which will have capital investment

Problem and annual operating expenses as shown below. Assuming a useful

life of 8 years for each design, no market value, a desired MARR of
10% per year, determine which design should be selected on the
basis of the PW method. Confirm your selection by using the FW and
AW methods.

72
Numerical Problem
An airport needs a modern material handling system for facilitating
access to and from a busy maintenance hangar. A second-hand
system will cost $75,000. A new system with improved technology
can decrease labor hours by 20% compared to the used system.
The new system will cost $150,000 to purchase and install. Both
systems have a useful life of five years. The market value of the used
system is expected to be $20,000 in five years, and the market
value of the new system is anticipated to be $50,000 in five years.
Current maintenance activity will require the used system to be
operated 8 hours per day for 20 days per month. If labor costs $40
per hour and the MARR is 1% per month, which system should be
recommended?

73
 A new highway is to be constructed. Design A calls for a
concrete pavement costing $90 per foot with a 20-year life; two
paved ditches costing $3 per foot each; and three box culverts
every mile, each costing $9,000 and having a 20-year life.
Annual maintenance will cost $1,800 per mile; the culverts
must be cleaned every five years at a cost of $450 each per
mile.

Numerical Design B calls for a bituminous pavement costing $45 per foot
with a 10-year life; two sodded ditches costing $1.50 per foot

Problem each; and three pipe culverts every mile, each costing $2,250
and having a 10-year life. The replacement culverts will cost
$2,400 each. Annual maintenance will cost $2,700 per mile;
the culverts must be cleaned yearly at a cost of $225 each per
mile; and the annual ditch maintenance will cost $1.50 per foot
per ditch.

Compare the two designs on the basis of equivalent worth per

mile for a 20-year period. Find the most economical design on
the basis of AW and PW if the MARR is 6% per year.

74
 Capital : It is a term describing wealth which may
be utilized to economic advantages. Cash, land,
equipment, raw material, finished products,
humans are the forms of such capital

Equity Capital: Common share or equity capital is

Terminologies supplied and used by its owner in the expectation
in Capital that the profit will be earned. There is no
assurance that a profit will, in fact, be gained or
Structure that the invested capital will be recovered.
Debt Capital: It is the borrowed capital. When
borrowed funds are used, a fixed rate of interest
must be paid to the supplier of the capital and the
debt must be repaid at specified time.

75
 Bond: It is essentially a long term note
given to the lender by the borrower,
stipulating the terms of repayment and
other c
Terminologies Debentures: Bond issued without any
in Capital collateral. Thus debenture holders are the
general creditor of the company.
Structure
Preference Share Capital : This capital has
characteristics of both equity capital and
debt capital.

76
 Preference Share Capital:

Two types of dividends are provided to preference share holders.

They are

a. dividends based on fixed percentage ( like debt capital) which is

paid after tax reduction.

Terminologies b. dividends based on earning (like one paid to equity share

holders). So, there is more like a long term debt, and some time
in Capital referred to as hybrid capital.

Structure Like Equity share holders, preference share holders are considered
as owner of the firm, but they do not enjoy any voting rights of equity
shareholders.

In case of preference share capital, dividends are paid after the tax
profit. But, in the case of debt or bond, interests are paid from pre
tax profit. Therefore, preference share are mostly costly.

77
Capital Structure

Capital Structure or financial plan refers to the composition of long term

sources of funds such as debentures, long term debt, preference share
capital and equity share capital including reserve and surplus.

While planning capital structure, one Long Term Debts

needs to decide on the following Bond
aspects: Equity Share

78
 Planning of capital structure should be done
in such a way that long term market price
per share should be maximized and interest
of different groups of people ( promoters,
Basis of creditors, employees, society and
planning capital government) is to be met.
structure Capital structure is said to be appropriate
when the debt capital ratio varies between
45 and 75.

79
Features of a sound Capital Structure

Profitability: Within the constraints, maximum use of leverage at minimum cost should be made.

Solvency : Debt should be added only to the point which does not add substantial risk to the company.

Flexibility: Capital Structure should be flexible enough to meet the dynamic need of company.

Conservation: To some extent, capital structure of a firm should be conservative in the sense that debt
capacity of the company should not be exceeded.

Control: Capital structure should be planned in such a way that the company should always be able to keep
control on it.

80
 1. Leverage effect on earnings per share (EPS) :

The use of fixed cost source of finance such as debt or preference

share capital, to finance the assets of the company is known as
financial leverage or trading on equity.

Determinants Influence on EPS when debt or preference share capital is used

against share capital is leverage effect.
of Capital
Leverage effect is realized mainly due to following reasons:
Structure
a. Cost of debt is usually lower than cost of preference share capital.

b. Interest paid on debt or bond is from pre tax profit while interest
paid on preference share is from tax profit

81
 2. Growth and stability of sales
◦ A firm having stable sales can employ large
amount of debt ( high degree of leverage)
because they will not face difficulty in paying
back the debt

3 Cost of Capital
Determinants ◦ Capital structure of a firm is also shaped by
of Capital the cost of the capital. This means a company
can employ cheaper capital. Usually, debt is a
Structure cheaper source of funds than equity. This is
generally the case when tax are considered.
The tax deductibility of interest changes
further reduces the cost of debt.

82
Determinants of Capital Structure
4. Size of Company
◦ The size of company greatly influences the availability of funds from different sources. A small company finds
great difficulty in raising long term loans. The highly restrictive covenants in loan agreements in case of small
companies make their capital structure very inflexible and management cannot run business without any
interference.

5. Marketability
◦ It means the readiness of investors to purchase a particular type of security in a given period of time.
Marketability does not influence the initial capital structure but is an important consideration to decide the
appropriate timing of security issues

6. Flotation Cost
◦ Flotation cost are incurred only when funds are raised. Generally the cost of debt is less than a cost of floating
an equity issue. This may encourage a company to use debt than issue common shares.

83
Numerical
A firm has total capital of Rs. 10,00,000 which
consists of 3000 ordinary shares @ Rs.100 per
share, Rs. 200,000 preference share at 10 %
interest rate per year and Rs 500000 debts at 12 %
interest per year. If the firm's earning before interest
and tax are Rs. 2,50,000 and tax rate applicable is
30 %, determine earning per share.

84
 A firm has equity capital of 5000 ordinary share @ Rs
100 per share and loan of Rs 10,00,000 borrowed at
an interest rate of 10% per year. The firm wants to
raise Rs 6,00,000 to finance its investment and is
considering two alternative methods of financing I.e

I, To issue 3000 common shares @ Rs 100 each and

to borrow Rs Rs 3,00,000 at 12 % interest.
Numerical ii. To issue 1500 common shares @Rs 100, to issue
2,50,000 preference share at an interest rate of 10 %
and to borrow Rs 2,00,000 at 12 % interest.

If the firm's earning before interest and tax is Rs.

4,00,000 and the tax rate applicable is 30 %,
determine earning per share to decide on the
alternatives.

85