UNIT - IV

PROJECT MANAGEMENT

Definition of Project:

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

endeavor undertaken to create a unique product or services. Temporary means that
every project has a definite end, and Unique means that the product or service is
different from all similar products or services.

Project as related set of activities and milestones with a preset goal and time frame that
is designed as a specific event and not an ongoing process.

Project Management:

Project Management is a methodical approach to planning and guiding project

processes from start to finish.

Project Characteristics:

Fixed set of Objectives:Every project has a fixed set of objectives to be accomplished;

the project starts when the objectives is finalized.

Tenure:Every project has a fixed tenure. Project is never a continuous activity; it has to
come to an end. Its life span is fixed, a successful project is completed within the
stipulated time.

Unique:All projects are unique in themselves; no two projects are exactly similar. It has
similar objectives but projects are different and unique in themselves.

Life cycle: Like all living organisms, project starts slowly (definition phase), them starts
building up in size (planning phase), then reaches pick (implementation phase) before
finally getting terminated.

Made to Order:Projects are always made to order and follow ‘pull’ rather than ‘push’.
The customer always decides the objective and informs the constraints like time and
cost.
Single entity: Projects are the responsibilities of a single person/entity but certainly
there are many participants in a project.

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

Subcontracting:Subcontracting is practically unavoidable in project management. As

specialized knowledge or work force is needed for a very small duration in a project, it is
difficult and costly to employ or retain.

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

Objectives of Project Management:

Scope

Cost Time

Performance

Scope:Scope means what are the expectations from you as a project manager and
your team. There may be enhanced scope being asked for during the implementation
phase of any project. Shortage of skills, funds or time may lead to reduced scope of
any project.

Performance: A project is always expected to have a well-defined performance level. If

a project is unable to adhere to desired performance of a customer, it is certainly an
unsuccessful project.

Time:As mentioned earlier, there is always a fixed tenure of any project. There is
always an end to a project. A successful project is the one which is completed within
the time limits perceived during the planning. As cost is dependent on the time, time
management becomes a crucial activity of project management.

Cost:it is dependent on all the above objectives. Mathematically, we can write as

Cost = f(P,T,S)

Therefore, cost is a function of performance, time and scope. If any of the above
increases it is surely going to increase the cost of the project.

SMART approach is defining the objectives of project, it means

Specific: Project should be targeting a specific aim or goal

Measurable: It should be quantifiable

Attainable: It should be attainable with resources available

Realistic: It should be realistic in nature. Dreaming is fine, but we certainly

cannot manage the dreams we need some real things to be managed.

Time limited: There is a fixed time limit for any project.

Importance of Project Management:

Rapidly changing technologies:technologies are changing very fast, so all

manufacturing as well as service organization have to scope up with technological
changes, which provide a big scope for project management

High entropy of the system: changes are very fast, so, energy levels are high. To
adopt to the fast changing world, no organization can stick to old things or systems.
Any modification or modernization leads to the need of projects.

Squeezed life cycle of products:product life cycle is squeezed to a great extent with
innovations taking place at a very rapid rate. Projects are needed for the up gradation
of products.
Globalization impact:All producers and service providers in the present world are
exposed globally. They need to modify their system of operation to match the global
practices, thus creating opportunity for projects.

Large organizations:They face problems of management of huge workforce and work

division, so they divide their work in projects and create a team to accomplish the
objectives in the form of projects. This has also helped to organization to develop a
method for performance appraisal.

Customer focus: Increased customer focus has been a market trend in recent times.
A few years back, cost reduction was a major formula of success for an enterprise.
Thus, there was more emphasis on standardization. In recent years, customer focus
has redirected market towards customization.

Project life cycle and its phases:

Project management is a one-time carefully planned and organized effort to achieve a

specific goal.

Project management includes developing a project plan, which includes defining project
goals and objectives, specifying tasks or how goals will be achieved, what resources
are need, and associating budgets and timelines for completion Implementing the
project plan, carefully to make sure the plan is being managed according to plan.

Project management usually follows major phases:

1. Project Initiation phase

2. Project planning phase
3. Project Implementation or execution phase
4. Project close-up phase
1. Project Initiation phase
The Project Initiation Phase is the 1st phase in the Project Management Life Cycle, as it
involves starting up a new project. You can start a new project by defining its objectives,
scope, purpose and deliverables to be produced. You'll also hire your project team,
setup the Project Office and review the project, to gain approval to begin the next
phase.

2. Project planning phase

The Project Planning Phase is the second phase in the project life cycle. It involves
creating of a set of plans to help guide your team through the execution and closure
phases of the project.

The plans created during this phase will help you to manage time, cost, quality, change,
risk and issues. They will also help you manage staff and external suppliers, to ensure
that you deliver the project on time and within budget.

3. Project Implementation or execution phase

The Project Execution Phase is the third phase in the project life cycle. In this phase,
you will build the physical project deliverables and present them to your customer for
signoff. The Project Execution Phase is usually the longest phase in the project life
cycle and it typically consumes the most energy and the most resources.
To enable you to monitor and control the project during this phase, you will need to
implement a range of management processes. These processes help you to manage
time, cost, quality, change, risks and issues. They also help you to manage
procurement, customer acceptance and communications.

4. Project close-up phase

The Project Closure Phase is the fourth and last phase in the project life cycle. In this
phase, you will formally close your project and then report its overall level of success to
your sponsor.

Project Closure involves handing over the deliverables to your customer, passing the
documentation to the business, cancelling supplier contracts, releasing staff and
equipment, and informing stakeholders of the closure of the project.

After the project has been closed, a Post Implementation Review is completed to
determine the project’s success and identify the lessons learned.

Project planning phase:

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

The purpose of the project planning phase is to:

1. Determine project requirements

2. Decide project cost and schedules
3. Search for sources of all resources

The basic processes of the project planning phase are:

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

Other subsidiary processes in the planning stage are:

i. Risk management planning:It includes identification of possible causes and

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

Implementation or Execution Phase:

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

1. The team members perform the tasks allocated in the earlier phase under the
supervision of the project manager and report to him.
2. Project manager is responsible for performance measurement, which includes
finding variances with respect to cost schedule and scope.
3. Project manager is responsible for providing project status report to all key
stakeholders.
4. All project key stakeholders are responsible for the review of the variances.
5. All project key stakeholders are responsible for taking necessary action of the
variances thus determined so as to complete the project within time and cost.

The basic processes of the project execution can be:

a. Execution of the project plan

b. Handle the changes
c. Project control

The subsidiary processes during project execution can be:

a. Quality control
b. Performance monitoring
c. Project administration
 d. Risk monitoring and control
e. Scope control
f. Schedule and cost control
g. Management of outside agencies (subcontractors)

The project execution and control phase has a direct correlation to the progress of
the project and stakeholders’ expectations. Even the minor issues, if unnoticed, can
cause major impact on cost schedule and risk, can deviate the project from the
project plan.

PROJECT SELECTION METHODS:

Project selection is the process of evaluating individual projects or groups of projects,

and then choosing to implement one or some of them to attain the objectives of either
the entrepreneur or the parent organization.

There is no perfect method for the selection of a project, but there are various
quantitative and non-quantitative methods developed to assess the need of certain
project and the selection of a project among various alternatives available.

BCG matrix:

The matrix developed by Boston Core Group to analyse the current status of a firm and
decide its future strategy. The matrix has two parameters: market share and business
growth rate.

The BCG matrix is also known as Boston Box. It was developed by Boston
Consultancy Group in the 1970s. This method can be helpful in selecting a project. It is
based on product life cycle.
 Select Few

High Divest others

Business
growth
rate

Low Liquidate

Low High

Market Share

Question Mark: Those categories of products which have high growth potential, but the
firm are not able to achieve a strong relative position. Management has to be alert in
such a situation.

Dogs:This is the category of products which are neither having potential to grow nor the
firm has strong market leadership. So, it is useless to invest in such projects or
products and they should be liquidated or divested.

Stars: Such products have market potential as well as strong relative position. So, the
firm should be well prepared to make the benefit of the situation and invest more. This
sector of products or projects consumes huge cash as they are the most attractive.

Cash Cows:This is a matured market situation when the product starts losing its charm,
but the firm continues to dominate and enjoy strong relative market position.
Management should be cautious in such situations and avoid additional investment.

GE nine cell matrix (spotlight matrix):This is an expanded version of BCG matrix

developed by General Electric Company. It applies wider parameters like business
position instead of just market share, and industry attractiveness instead of business
growth rate.
SPACE diagram:This tool measures four parameters before deciding a strategy or
future project of any firm. The four parameters include industry strength, environmental
stability, financial strength and competitive advantages.

Sacred cow: These are the projects suggested by senior and powerful people of the
organization based on their experience and foresight.

Operating necessity: These are the projects which are needed to maintain the
operations of any existing organization. A manufacturing industry is in shortage of
power supplies. The company goes in for power generation unit for captive
consumption. It is the need of the organization to remain operational.

Competitive necessity/comparative benefit model:Some projects are taken up by

running organizations to cope up with growing competition or get ahead of them.
Companies often take up modernization projects to compete with the competitors
technically and making it cost-effective.

PROJECT SELECTION CRITERIA:

The decision maker should first identify the criteria for the selection of a project. A
detailed list of various possible criteria is provided here.

Marketing factors:

➢ Size of potential market and focused customer segment

➢ Probability of extensions or expansion of market
➢ Export opportunity/import threat
➢ Customer acceptance
➢ Impact on current products
➢ Time to achieve proposed market share
➢ Current stage of product life cycle
Production factors:

➢ Time to complete the project

➢ Availability of resources
➢ Flexibility of operations
 ➢ Connections with existing production lines
➢ Energy requirements and its sources
➢ Expected quality of the product or services
Financial factors:

➢ Cost of project and means of sources

➢ Impact on current financial position of the firm
➢ Profitability in terms of profit margins and returns on investments
➢ Payback period
➢ Time period to reach the breakeven point
Personnel factors:

➢ Requirement of manpower and skills required

➢ Impact on existing employees
➢ Change in working environment
➢ Technical skill requirement
Legal factors:

➢ Government policies
➢ Patents and its protection
➢ Any other major legal complexity
Strategic factors:

➢ Impact on the image of the company

➢ Acceptance by existing shareholders
➢ In line with long-term mission of the firm
➢ Ease to exit in the case of failure
ROLE OF PROJECT MANAGER:

The project manager acts like the captain of a ship who has al authorities and is
responsible for making the ship reach the shore safely in time or the project
completed with its all scope in proper time and within the cost limits.
Entrepreneur:The project manager may not be the owner or entrepreneur himself,
but has to play the role of an entrepreneur. He is accountable for failure and wins all
credits in the situation of success.

Decision Maker:The project manager is responsible for the allocation of resources,

defining project scope, managing the cost and schedules as per the plans. He is
controlling the project to retain the project schedules and costs and decrease the
source of deviations.

Communicator:The project manager is the central point of all communications in a

project. He acts like a communication hub or a server. He collects information and
processes them. He is also responsible for communicating the methods, targets to
various members of the project team.

Change Agents:The project manager brings about the changes and attempts to
reduce the opposing forces developed due to change process. All changes bring in
oppositional forces and they are very high especially in projects as they are
generally aimed at radical changes.

Motivator:The captain of the ship or project manager is responsible to create

motivation level of his team members and maintain it through ups and downs. A
project also goes through situations when it is as dark as blue moon and no success
is visualized.

Foresighted and Fire fighter:The successful project manager foresees the risk or
variations and plans the route to face the possible deviations. In the situations when
the unexpected is not seen and it occurs, then the project manager leads the team
to face the problem like firefighter.

Traits of Project Manager:

Who can become a successful project manger? What are the qualities needed to
become a successful project manager? Let us answer these questions now. The
traits or skills needed for someone to be a project manager are as follows:

Human Skills or Soft Skills:

 Leadership: The project manager should be a leader instead of being a typical
manager. He should work with an example. If he leaves office on time and expects
his team to work long hours, it is not possible in the long run. He should set himself
as an example.

Influencing:A project manager should not just be influencing his team but he should
be able to influence the project owners or top management. This can help him get
the required resources and support for the project in a timely manner.

Decision-making skills: It is one of the most important skills expected of a

manager. But it becomes a crucial skill for a project manager. This is because the
teams and proper supportive decision makers are not generally available during
project implementation and he has to take various decisions himself.

Communicator:The project manager has to deal with many categories of people. It

includes the project owners, the subordinate teams, the subcontractors and vendors.

Negotiating Skills:A project comprises purchasing of various equipment and

contracting with many contractors and subcontractors. A project manager should
possess good negotiation skills to deal with all of them.

Training:Project team may or may not possess experienced staff members; the
project manger has to play the role of trainer for his team members.

Time management Skills:Schedule is a major success parameter of any project.

Time management becomes a crucial activity in project management. The project
manager should possess skills to manage the time.

Flexibility and Versatility:Project management cannot be completed with rigid

structures and sticking religiously to the principles. A project manager should have
quality of versatility and flexibility depending on situation.

Presentation Skills:A project manager’s first job is to get the project appraised and
funded by the project manager. He should have skills to present the project to get it
appraised by the project owners and funding agencies.

Technical Feasibility
Technical feasibility includes the selection of an appropriate technology, source for the
selected technology (developed or transferred), capacity planning location selection,
raw material identification, etc.

Location
Selection

Raw material
Technology Selection
Selection

Technical
feasibility

Utility
Scheduling Selection

Capacity
Planning

1. Location Selection:

If a company selects a wrong location, if may have inadequate access to customers,

workers, transportation, materials, and so on. Consequently, location often plays a
significant role in a company’s overall success. A location strategy is a plan for
obtaining the optimal location for a company by identifying the needs and objectives of
the company, and searching for location with offerings that are compatible with these
needs and objectives. Factors vary from industry to industry, but several factors are key
for most companies which are as follows:

• Suppliers
• Market proximity
• Infrastructure
• Labour availability
• Political and social environment
 • Government support
• Environmental regulation

2. Appropriate technology:

Appropriate technology can be defined as the technology which is best suited for the
conditions of its operations. A technology which appropriate today may become
inappropriate in future so, time is one big factor which can make a technology changes.

3. Capacity planning and cost capacity relationship:

Another important decision in technical feasibility is determination of optimum capacity

of the project. Over capacity may result in lower operating efficiency and wasted
investments and, on the other hand, under capacity may be losing opportunities.

4. Government incentives, SEZ, EOU, EPS.

Considering the need to enhance foreign investment and promote exports from the
company the government of India has introduced various types of special incentives
and benefits to SEZ (Special Economic Zones), EOU (Export Oriented Units), EPS
(Export Processing Units).

5. Layout Planning:

Plant layout also plays the important role in technical feasibility study. We choose the
appropriate plant lout according our project objectives.

6. Raw material planning:

Raw material planning also one of the important factor in technical feasibility study.
Procurement of raw material and material storage and issuing materials according to
poor production plans are to be considering in this study.

7. Technology selection:

Which technology is the best? The latest technology? No, your answer is wrong if you
said latest technology. The technology that is selected should be appropriate
technology. An improper selection of technology can be futile for a project. There are
so many cases where the selection of a wrong technology has led a project to be sick in
the early year.

Sources of technology:

It is very vital to determine sources of technology, especially in this era of rapid

technological developments. There are always two option; either develop it or
buy it. In different situations, different options can be exercised. A proper
selection of the technology and its source can be vital for any project.

Technology transfer:

Different routes of technology transfer are as follows:

Licensing or franchise:it may include complete know-how of technology or a part

of it.

Supplier or materials or equipment: Technology supplier supplies the raw

materials or equipment for the process.

Turnkey projects:Such transfer includes all equipment, process know-how and

erection and commissioning. It is like a food ready to eat. Such type of
technology transfer is generally costly.

Joint ventures: Two companies join hands and form a joint venture where one
company provides technology and other company provides infrastructure and
other resources.

There are four stages of technology transfer

1. Adoption:In this pre-transfer stage, the technology seeker provides relevant

information to the technology vendor to assist him in making necessary changes
in the process to make it appropriate for the conditions or to make it appropriate.

2. Adaptation:This is the stage of technology transfer. The technical team can

suggest rectifications which are left at earlier stage to make it appropriate.
 3. Absorption:It is kike opening the technology after the transfer. This makes
technology more cost-effective and helps the buyer of technology in further
advancements of the same. The technology buyers makes it more appropriate
for himself.

4. Diffusion:This is the ultimate stage whre the bought technology is diffused to

other areas.

Technology development:

Different sources of technology development are:

In-house research and development: Technology development is carried out

through separate department of R&D within the country.

Cooperative R&D:A group of a particular sector of industry promotes R&D

through formation of a cooperative society.

Contract research: A company may contract parts of technology with some

research or educational institutes. IIT Mumbai is performing many such contract
researches for various companies.

Network analysis: It is refers to a number of techniques for the planning and control of
complex projects. The basis of network planning is the representation of sequential
relationships between activities by means of a network of lines and circles. The idea is
to link the various activities in such a way that the overall time spent on the project is
kept to a minimum.

Gantt’s bar chart: Before PERT and CPM were developed, Gantt charts and mile
stone charts were used tools to monitor the project progress in complex projects. Gantt
chart is a bar chart, which was developed by Henary Gantt around 1900.

It is consists of two coordinate axes, one represents the time and the other jobs
or activities performed.
 A 5 days

B 5 days

Activities in C
job x 4 days

D 7 days

E 3 days

Duration of time

The above figure shows job x which contains five activities ABCDE the different
time durations activity A is an independent activity followed by activities B, activity B is
followed by activity C, activities D, E have no such sequence. Activities C,D and E
reach completion together. However the total number o day taken for completing the
job is 14 days.

Limitation of Gantt Chart:

1. This Gantt bar charts not useful for big projects, consisting of large number of
complex activities
2. It does not show the relationship between various operations. It is very difficult to
find the sequence of various operations on the Gantt chart or the most probable
date of completion.
3. Does to indicate the progress of work
4. It cannot reflect uncertainty or tolerance in the duration time estimated for various
activities
5. It simply a scheduling technique, but not effective planning tool.
Milestone chart: Milestone chart is an improvement over Gantt chart. It has becomes
a good line between Gantt chart and PERT and CPM network. Every task represented
by a bar in Gantt’s bar chart, is subdivided in terms event or point in time.
 A 5 days
1 2

B 3 4 5 days

Activities in 5 6 3 days
C
job x
7 8 9 7 days
D

E 10 11 4 days

Duration of time

In the Gantt’s bar charts bar representing an activity is divided into certain
milestones. They are identified with a major event, and consecutively numbered such a
breakdown enhances the awareness about the inter dependencies among all
milestones.

Network analysis undergone several changes and many variants exist, which
evaluate the randomness due to imperfection in all human and physical systems. PERT
and CPM continue to be very popular, in handling the basic factors like time, cost,
resources, probabilities and combinations of all these factors.

PERT AND CPM:

PERT: Programme evaluation and review technique (PERT) is a tool to evaluate a

given programme and review the progress made in it from time to time. A programme is
also called a project. A project is defined as a set of activities with a specific goal
occupying a specific period. It may be a small or big project, such as construction of a
college building, roads, marriage, picnics etc.

It is concerned with estimating the time for different stages in such a programme
or a project and find out what the critical path is, which consumes a maximum
resources.

CPM: Critical path method assumes that the time required to complete an activity can
be predicted fairly accurately, and thus, the costs involved can be quantified once the
critical path has been identified. Since time is an important factor, CPM involves a trade-
off between costs and time. It involves determining an optimum duration for the project,
that is, a minimum duration that involves the lowest overall costs.

Application of PERT and CPM:

➢ Construction of projects such as building, highways, houses or bridges

➢ Preparation of bids and proposals for large projects such as multipurpose
projects
➢ Maintenance and planning of oil refineries, ship repairs and other such as large
operations
➢ Development of new weapon systems and new products and services
➢ Manufacture and assembly of large items such as aeroplanes or ships repairs
and other such as large operations
➢ Simple projects such as home remodeling house keeping or painting and so on.
PERT Basic Terminology:

Event: A event is specific instant of time which indicates the beginning or end of the
activity event is also known as a junction or node. It is represented by a circle and the
event number is written with in the circle.

Tail event Head event

Predecessor event Successor event

Activity: Every project consists of number of job operations or tasks which are called
activity.

Ex: Start machine installation - An event

Machine installation - An activity

Completion of machine - An event

Classification of activities:

1) Critical activity

2) Non-Critical activity

3) Dummy activity

Critical activity: In a network diagram critical activities are those which if consume more
than their estimated time, the project will be delayed. It shown with thick arrow.

Non-critical activity: Such activities have a provision of float or slack so that, even if
they consume a specified time over and above the estimated time.

Dummy activity: When two activities start at the same instant of time like A and B the
head event are joined by dotted arrows and this is known as dummy activity.

Dummy Activity
1

3 4 5

Rules for Network Construction:

1. The complete network should have only one point of entry (a start) event and
only one point of exit (an end event)
2. The length of the arrow does not indicate the time which the activity takes or the
resources which the activity consumes
3. The direction of the arrow indicates the direction of work flow.
4. No activity can be shown twice in the network unless it occurs twice in the
project. Normally in such cases it will bear a different activity identification
5. No two events will be directly connected by more than one activity
6. An event cannot occur until all activities leading to it are completed.
 7. No activity can begin until its immediate preceding even has occurred.
Time Estimation in PERT:

PERT network is based on three time estimates, that is,

1 Optimistic Time (t0)
2 Most-Likely Time (tm)
3 Pessimistic Time (tp)
Optimistic time (to): It is the shortest time in which an activity can be completed
assuming that everything goes exceptionally well. It has low probability of occurrence.

Most – likely time (tm): It is the most likely time required to complete the activity taking
into consideration all favorable and unfavorable elements. This estimate of time lies
between the optimistic and pessimistic time.

Pessimistic time (tp): It is the time which an activity will take to complete, if everything
turnout to be against expectation. Similar to optimistic time it has low probability of
occurrence.
If the probability distribution of these time estimates is drawn the curve would
approximately follow beta distribution.

A B

Probability

to tm tp

Time duration

Expected time (te): The three times estimate to, tm, tp are combined statistically to
develop the expected time (te). It is assume that to and tp are about equally likely to
occurwhere as the probability of occurrence of tm is 4 times that of to and tp.
 t o + 4t m + t p
te =
6

Range, standard deviation, and varianceIn beta distribution, the range is equal to the
difference between the pessimistic time estimate (tp) and the optimistic time estimate
(to).

Range = (tp – to)

The standard deviation (σt) is equal to approximately one-sixth of the range, that is,

t p − to
S .D equal to ( t ) = (Means S.D of each activity)
6

 t p − to
2

Variance (vi ) = ( t ) =   (Means variance of each activity)
2

 6 

Probability of achieving completion date: Some times, the management would also
like to know the probability of completing project by a particular date with the help of β
distribution.

Sheduled time − Expected time

Z=
S tan dard deviation

t s − te
Z=


S.D of project length (σ) =  ( t )

2
(Means S.D of all critical activities)

Z = Probability for completing the project

ts = Target project completion time

tp = Expected project completion time

σ = S.D of activities on the critical path

or

S.D of project length

CPM Basic terminology:

Critical Path: Critical path is that path which consumes the maximum amount of time or
resources. It is that path which has zero slack value.

Slack: Slack means the time taken to delay a particular event without affecting the
project completion time. If a path has zero slack that means it is the critical path.

Slack = LFT – EFT

Earliest Start Time (EST): It is the earliest possible time at which an activity can start,
and is calculated by moving from first to last event in the network diagram.

Earliest Finish Time (EFT): It is the earliest possible time at which an activity can finish
EFT = EST + Duration of activity

Latest Start Time (LST): It is the latest possible time by which an activity can start
without delaying the date of completion of the project.

LST = LFT – Duration of the activity

Latest Finish Time (LFT): It is the latest time by which the activity must be completed.
So that the scheduled date for the completion of the project may not be delayed. It is
calculated by moving backwards.

Float: Floats in the network analysis represent the difference between the maximum
time available to finish the activity and the time required to complete it.

The basic difference between slack and float times is a slack is used with
reference to event, float is use with reference to activity.

Floats are three types:

1) Total float 2) Free float 3) Independent float

1) Total float: It is the additional time which a non critical activity can consume without
increasing the project duration. However total float may affect the floats in previous and
subsequent activities.
 Total float = LST – EST or LFT – EFT

2) Free float: Free float refers to the time by which an activity can expand without
affecting succeeding activities.

Free float = EST of Head Event – EST of Trail Event – Activity duration

3) Independent float: This the time by which activity may be delayed or extended
without affecting the preceding or succeeding activities in any away.

Independent float = EST of Head event – LFT of Trail event – Activity duration

Problems:

1) A small engineering project consists of 6 activities namely ABCDE & F with duration
of 4, 6, 5, 4, 3 and 3 days respectively. Draw the network diagram and calculate EST,
LST, EFT, LFT and floats. Mark the critical path and find total project duration.

Activity A B C D E F
Preceding
- A B A D C,E
activity
Duration 4 6 5 4 3 3

Solution:
10 10 EST LFT
3
B C
0 0 4 4 5 15 15 18 18
6 F
4
1 2 5 6
3
A 3
4
D E
4

8 12

Critical path = A-B-C-F

 Project duration = 18 days

Total Free Independent

Activity Duration EST LST EFT LFT
float float float
A 4 0 0 4 4 0 0 0
B 6 4 4 10 10 0 0 0
C 5 10 10 15 15 0 0 0
D 4 4 8 8 12 4 0 0
E 3 8 12 11 15 4 4 0
F 3 15 15 18 18 0 0 0

Note: LST = LFT – activity duration

LFT = EST + activity duration

Total float = LST – EST or LFT – EFT

Free float = EST of Head Event – EST of Trail Event – Activity duration

Independent float = EST of Head event – LFT of Trail event – Activity duration

Project crashing: In this chapter, we will discuss the concepts of direct and indirect
costs, the relationship between project time and project cost, the concept of cost slope
and how the optimum cost and optimum duration are ensured for a given projects while
crashing.

Project costs: Costs associated with any project can be classified into two categories
a) Direct cost b) Indirect cost

a) Direct cost: These costs are those, which are directly proportional to the number of
activities involved in the project Ex: Raw material cost

Direct cost

Crash time Normal time

b) Indirect cost: In direct cost are those costs that are determined per day. Some of
examples for indirect costs are supervisory personnel salary, supplies, rent, interest on
borrowings, ads, depreciation. These costs are directly proportional to the number of
days of the duration of the project. If the project duration is reduced the indirect cost
also comes down.

Project cost
Indirect cost

Project duration
Normal cost (Nc): It is the lowest cost of completing an activity in the minimum time,
employing normal means i.e. not using overtime or other special resource.
Normal time (NT): It is the minimum time required to achieve the normal cost
Crash cost (CC): It is the least cost of completing an activity by employing all possible
means like overtime, additional machinery, proper materials etc.
Crash time (CT): It is the absolute minimum time associated with the crash cost.
Cost Slope: Cost Slope is the amount that has to be spent over and above the normal
direct cost for reducing the duration by one unit of time (day, week etc.). Cost slope is
defined as the additional cost for reducing one unit of time, assuming a given rate of
increase in direct cost with a decrease in one unit of time.

Crash cos t − Normal cos t

Cost slope = CC
Normal time − Crash time
Activity Cost
NC
C − NC
S= C Ct Nt
N T − CT
Activity time

Crashing of Network: After identifying the critical path, it is necessary to identify the
priority to crash the activities by calculating the cost slope.
 For reducing the duration extra expenditure to be incurred, but to save resources,
organizations keep this extra expenditure at a minimum.

Total Cost (A+B)

O

Indirect Cost (B)

Project Cost

Direct Cost (A)

CT = Crash Time
CT OT NT
OT = Optimum Time
Project duration

NT = Normal Time

When the direct cost (A) decrease with an increase in time, as the project
duration increase, the indirect cost (B) like overheads, depreciation, insurance etc.
increases. The total cost (A+B) curve is a flat U-shaped curve, with implies that only up
to a particular point (O) the crashing is economical, not beyond. The time duration,
which involves the least total cost, is the optimum duration at optimum cost. Crashing
the duration of a project may not be possible beyond a particular point.
Problems:
1) Given the following data, work out the minimum duration of the project and
corresponding cost
Normal Crashing Normal Crashing
Activity Job
time time cost cost
A 1-2 10 6 400 600
B 1-3 4 2 100 140
C 2-4 6 4 360 440
D 3-4 8 4 600 900
E 2-5 8 6 840 1100
F 4-6 6 2 200 300
 G 5-6 10 8 1200 1400

Solution:
Cost Slope =
Normal Crashing Normal Crashing CC − N C
Activity Job time time cost cost Priorities
N T − CT
(NT) (CT) (NC) (CC)

A 1-2 10 6 400 600 50 1

B 1-3 4 2 100 140 20
C 2-4 6 4 360 440 40
D 3-4 8 4 600 900 75
E 2-5 8 6 840 1100 130 2
F 4-6 6 2 200 300 50
G 5-6 10 8 1200 1400 100 3

EST LFT 10 10 18 18
8
2 5
10
6
0 0 10 6 6
4
1
8 28 28
4 16 22
3

4 14

Critical path is 1-2-5-6 and Duration is 28 days

Total cost is = Direct cost + Indirect cost

= (3700) + 0 = 3700/-

1-2 activity crashing by 4 days:

EST LFT 6 6 14 14
8
2 5
10
6
0 0 6 6 6
4
1
8 24 24
4 12 18
3

4 10

Critical path is 1-2-5-6 and Duration is 24 days

Total cost is = Direct cost + Indirect cost

=(3700 + (4 x 50) + 0) = 3900/-

5-6 activity crashing by 2 days:

EST LFT 6 6 14 14
8
2 5
8
6
0 0 6 6 6
4
1
8 22 22
4 12 18
3

4 10

Critical path is 1-2-5-6 and Duration is 22 days

Total cost is = Direct cost + Indirect cost

=(3900 + (2 x 100) + 0) = 4100/-

2-5 activity crashing by 2 days:

EST LFT 6 6 12 12
6
2 5
8
6
0 0 6 6 6
4
1
8 20 20
4 12 14
3

4 6

Critical path is 1-2-5-6 and Project Duration is 20 days

Total cost is = Direct cost + Indirect cost

=(4100 + (2 x 130) + 0) = 4360/-

Optimum cost = 4360/-

Optimum Duration = 20 days

Forms of Project Organization:

1. Functional organizational structure.

Functional organizational structure is to be managed in the current organization
hierarchical structure, once the project begins operation, the various components of the
project are taken by the functional units, each unit is responsible for its charged
component. If the the project established, a functional area play a dominant role,
functional areas on completion of the project, senior managers will be responsible for
project coordination.
Advantages of this structure:
➢ The use of personnel with greater flexibility, as long as the choice of a suitable
functional departments as the project supervisor, the department will be able to
provide professional and technical personnel required by the project, and
technology experts can also be used by different projects and after completion of
the work can go back to his original work.
➢ When the project team members leave or leave the company, the functions can
be used as the basis for maintaining the continuity of the project; third, functional
department can provide a normal career path for professionals.
Disadvantage of this structure:
➢ Projects often lack of focus, each unit has its own core functions of general
business, sometimes in order to meet their basic needs, and responsibility for the
project will be ignored, especially when the interest taken in the project brought
to the unit not the same interest.
➢ Organization has certain difficulties in the inter-departmental cooperation and
exchanges.
➢ Motivation is not strong enough for project participants, they think the project is
an additional burden, and not directly related to their career development and
upgrading
➢ This organizational structure, sometimes no one should assume full responsibility
for the project, often the project manager is only responsible for part of the
 project, others are responsible for the other parts of the project, which leads to
difficulties in coordination situation.
2. Project-based organizational structure.
Project organizational structure refers to the creation of an independent project team,
the team’s management is separated from the parent organization’s other units, have
their own technical staff and management, enterprise assigns certain resources to
project team, and grant project manager of the largest free implementation of the project
.

Advantages of this structure:

➢ Focus on this project team, project manager is solely responsible for the project,
the only task for project members is to complete the project, and they only report
to the project manager, avoiding the multiple leadership
➢ The project team’s decision is developed within the project, the reaction time is
short.
➢ In this project, members work with strong power, high cohesion, participants
shared the common goal of the project, and individual has clear responsibilities.

Disadvantage of this organizational structure:

➢ A company has several projects, each project has its own separate team, which
will lead to duplication of efforts and the loss of scalable economies.
 ➢ The project team itself is an independent entity, prone to a condition known as
“Project inflammatory” disease, that is, there is a clear dividing line between the
project team and the parent organization, weakening the effective integration
between project team and the parent organization.
➢ The project team members lack of a business continuity and security, once the
project ended, return to their original functions may be more difficult.
3. Matrix organizational structure:
Matrix organizational structure is a hybrid form, it loads a level of project management
structure on the functional hierarchical structure. According to the relative power of
project managers and functional managers, in practice there are different types of
matrix systems, respectively, Functional Matrix: in this matrix, functional managers
have greater powers than project managers); Project Matrix: in this matrix, project
managers have greater powers than functional managers); Balance Matrix: in this
matrix, functional managers and project managers have the equal powers.

The advantages of this organizational structure:

➢ It is the same as functional structure that resources can be shared in multiple
projects, which can significantly reduces the problem of redundant staff.
 ➢ Project is the focus of work, with a formal designated project manager will make
him give more attention to the project, and responsible for the coordination and
integration work between different units.
➢ When there are multiple projects simultaneously, the company can balance the
resources to ensure that all the projects can progress to complete their
respective costs and quality requirements.
➢ The anxiety of project members is reduced greatly after the end of the project,
while they are strongly associated with the project, on the other hand, they have
a “home” feeling about their functions.
Disadvantage is that this organizational structure:
➢ The matrix structure has exacerbated the tensions between functional manager
and project manager;
➢ Under any circumstances, sharing equipment, resources and personnel among
different projects will lead to conflict and competition for scarce resources;
➢ In the process of project implementation, the project manager must negotiate and
consult with the department managers on various issues, which leads to the
delay in decision making; Matrix management is not according to the principles of
unified management, project members have two bosses, the project manager
and functional managers, when their commands are divided, it will make
members at a loss.
Self-Study Material:

Project Financing:

Definition: The financing of long-term infrastructure, industrial projects and public

services based upon a non-recourse or limited recourse financial structure where
project debt and equity used to finance the project are paid back from the cash flow
generated by the project.

Method of Source of Finance:

The following are the common methods of finance:

1. Long – term source of finance

2. Short – term source of finance

Long – term finance: Long-term finance refers to that finance available for a long
period say three years and above. The long-term methods outlined below are used to
purchase fixed assets such as land and buildings, plant and so on.

1) Shares Capital: Normally in the case of a company, the capital is raised by issue of
share, the capital so raised is called share capital, the liability of the shareholders is
limited to the extend of his contribution to the share capital of the company.

a) Preference share capital: Preference share are those shares, which carry priority
rights with respect to payment of dividend so long as the company is in existence and
return of capital at the time of liquidation of company.

i) Cumulative preference share: The holders of cumulative preference shares enjoy the
right to receive, when profits permit, the dividend missed in the years when the profits
were nil or inadequate.

ii) Non-cumulative preference shares: The holders of these shares do no enjoy any
right over the arrears of dividend. Hence the unpaid dividend in arrears cannot be
claimed in future.

iii) Participating preference shares: The holder of these shares enjoys the dividend two
times. They get their normal fixed rate of dividend as per their entitlement. They
participate again along with the equity shareholders in distribution of profits.
iv) Redeemable preference shares: These shares are repaid at the end of a given
period. The period of repayment is stipulated on each share.

iv) Non-redeemable preference shares: These shares continue as long as the company
continues. There are repaid only at the en of the lifetime of the company.

b) Equity Share Capital: Equity or ordinary shareholders are the real owner of he
company. They have voting rights in the meeting of the company, thus have control
over the working of the company. Equity shareholders are paid dividend after making
payment to preference shareholders. There is no limit of dividend in case of equity
shares.

2) Debentures: A company may acquire long-term finance through public borrowing.

The issue of debentures raises these loans. “A debentures is a document under the
company’s seal which provides for the payment of a principal sum and interest there on
at regular intervals, which is usually secured by the fixed or floating charge on the
company’s property or undertaking and which acknowledges a loan to the company at
fixed rate of debentures are printed or written on the back of the document.

i) Secured vs Unsecured debentures: Secured debenture also called as mortgage

debentures. Secured debentures are those secured by some charge on the assets of
the company. They are empowered to sell such assets for the recovery by the issuing
company.

There is no security for these debentures. Normally, the companies having a

good financial record issue unsecured debentures.

ii) Convertible vs Non-convertible: These debentures are converted into equity shares
after the period mentioned in the terms and conditions of issue. In terms of cost,
debentures are cheaper than the equity shares. Where the company is not sure of
good profits to sustain the size of equity, it prefers to issue convertible debentures.
These debentures continue as loan for the defined period. These are converted into
equity shares on the specified date.

Non-convertible debentures will not converted into equity shares they continue as
loan till the date of repayment
iii) Redeemable vs Non-redeemable: These debentures are repaid on a specified date

Non-redeemable debenture are repaid only at the en of the lifetime of the

company.

3) Long – Term Loans: There are specialized financial institutions offering long-term
loans, provided the business proposal is feasible. The promoters should be able to
offer assets of the business as security to avail of this source.

4) Retain Profits: The retained profits are profits remaining after all the claims. They
form a very significant source of finance. Retained profits form good source of working
capital. Particularly in times of growth an expansion, retained profits can be
advantageously utilized.

5) Public Deposits: Another way of raising finance by a company is to invite public

deposits for some period at a certain rate of interest. Deposits are accepted for meeting
the short and medium term capital requirement of the company ranging from one year
to three years and renewal of deposit allowed.

Short – Term Source: Short-term finance is that finance which is available for a period
of less than one year. The following are the source of short-term fiancé:

1) Commercial Paper (CP): It is a new money market instrument introduced in India in

recent times. CPs are issued usually in large denominations by the leading, nationally
reputed, highly rated and credit worthy, large manufacturing and finance companies in
the public and private sector. The proceeds of the issue of commercial paper are used
to finance current transactions and seasonal and interim needs for funds. Reliance
Industries is one of the early companies, which issued CP.

2) Bank Overdraft: Over drafts means an agreement with bank by which a current
account holder is allowed to withdraw more than the balance in his credit up to a certain
limit. The interest is charged on the overdrawn account.

3) Advance from Customers: It is customary to collect full or part of the order amount
from the customers in advance. Such advance are useful to meet the working capital
needs.
4) Bank Loans: When a bank makes an advance in lump sum against some security it
called loan. The bank loan is usually provided for one year. But now-a-days term loans
are also provided for 3 to 7 years. The term loans may be either medium term or long-
term loans.

5) Trade Credit: This is a short-term credit facility extended by the creditors to the
debtors. Normally, it is common for the traders to buy the materials and other supplies
from the suppliers on credit basis. After selling the stocks, the traders pay the cash and
buy fresh stocks again on credit. Sometimes, the suppliers may insist on the buyer to
sing a bill (bill of exchange). This bill is called bills payable.

6) Internal Funds: The firm itself by way of secret reserves, depreciation provisions,
taxation provisions, retained profits, generates internal funds and so on and these can
be utilized to meet the urgencies.