Project Analysis and Evaluation

OROMIA STATE UNIVERSCITY

College Of Finance & Management Studies
Department of Accounting and Finance

February 2024

www.dans.knaw.nl
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Course Introduction

Dear learner, this course is designed to equip you with the knowledge and skills on different stages
of project management. Topics covered include: national plans and programs, the project cycle,
market and demand analysis, raw materials and supplies study, location, site and environmental
assessment, production plan and plant capacity, technology and engineering study, financial
analysis, economic analysis, appraisal criteria, and project management.

Course Objective and Competences to be Acquired

This course aims to help students create an understanding of the processes, techniques, and
procedures of project identification, formulation, appraising, planning, organizing, and
implementing. It also highlights the monitoring, evaluation and impact analysis concepts.

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UNIT ONE
INTRODUCTION TO PROJECT
1.1. Definitions of project
A discipline can be defined in different ways by different authors. Likewise, as a concept project is
defined in different ways by numerous authors. As a result, it is very difficult to find a single
comprehensive definition of project because projects are different in terms of their nature and
objectives. However, the following are among the most common definitions of the concept of
project:
1. Project is a scheme or part of a scheme for investing scarce resources, which can be
reasonably evaluated and analyzed as an independent unit.
2. Project refers to an investment activity in which resources are committed within a given
time framework, to create assets over an extended time in expectations of benefits which
exceeds the committed resources.
3. A project is a complex set of economic activities in which we commit scarce resources in
expectation of benefits that exceed the value of these resources.
Although the definitions above seem different, all definitions imply the same concept: a project is a
set of proposal for investment of resource in to a clearly identified set of actions that are expected
to produce future benefits of a specific kind, the whole series of actions being the subject of
individual planning and examination before being adapted and implemented within a single over
all financial and managerial frameworks. From these definitions, it is clear that a project:
has specific objective (private or public);
involves set of activities (planning, financing, and implementing);
involves resource use;
deals with future expectations (risk and uncertainty);
involves comparing benefits and costs to occur in the future; and
has defined period of life;
In most case, it is easier to describe than to define a project. In practice, a project idea gradually
crystallizes and thus defines itself out as analysts think about it and delineates its various aspects.
As more understanding is gained among the stakeholders and deeply conceptualizes its aspects, a
good deal of confusion can be avoided by describing the project than trying to define it precisely.
Absence of effective and well defined project preparation is one major problem in Least Developed
Countries (LDCs) like Ethiopia. Economic development planners often give little time to the
preparation of suitable development projects. However, project preparation is not the only aspect of
development planning; rather it includes:
▪ identifying national development objective;
▪ selecting priority areas for investment;
▪ designing effective regulatory framework for free market operations;
▪ designing effective ways of government intervention where there is a market failure so as to
mobilize and allocate the resources effectively and efficiently.
Additional descriptions of projects
➢ Project Boundary: It is extremely important to properly establish the boundaries of a project.
One should avoid attributing too few or too many positive (negative) effects to a project.
Distribution of costs (investment and recurrent costs, intangible costs) and benefits differs
based on the nature of projects. How the boundary is drawn will depend upon the point of

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view (financial, economic, and social) from which the project is being appraised. Boundary
of a project is conceptually simple but in practice it is extremely difficult as it is not simple
where to delineate its boundary. As we move down to the different levels of Cost Benefit
Analysis (financial to economic to social) the project boundary gets wider.
➢ Project Types: As to their type, projects may be agricultural, industrial, transportation,
commerce etc.
➢ Projects Input use: in relation to input use, projects may be capital intensive, labor
intensive, and/ or energy intensive.
➢ Project Scope: It should be neither too small nor too large. A plan of action that deals with
the agricultural sector can’t be called a project. On the other hand, to employ or not an
extension agent in a given government office can’t be called a project.
➢ Project Size: Size of a project is a function of capital invested, human labor requirement
(skilled /unskilled), coverage of beneficiaries, total value of inputs used and total value of
goods and services produced by the project.
➢ Project Duration: A project has a limited duration. We can find projects of long and short
duration (number of years required to complete the project) Economic life of the project (the
number of years the project remains economically productive) is different from the duration
of the project. Duration of project is 10 years does not mean that economic life of the project
is 10 years.
From all the discussions above, one can derive the following more dynamic and comprehensive
definition of a project, which links development planning, development programs, and project
planning together.
I. A project is an instrument of change.
It is coordinated series of actions resulting from a policy decision to change resource combinations
and levels so as to contribute to the realization of the country’s development objectives. Projects
should, according to this definition, be formulated within the framework of the country’s
development priority objectives, which may include agricultural production growth, improving
income distributions, eradicating poverty and malnutrition, promoting larger public involvement in
producing goods and services.
II. A project is beneficiary - oriented (responds to people’s needs).
Projects can also be developed on the basis of the people’s need/ demand to satisfy unsatisfied
needs.
Example: Hydroelectric power supply project is oriented by society’s demand for electricity. Hence,
projects should forecast the response of their ultimate beneficiaries. A project within the framework
of a national development changes plan into action at a micro-level. Hence, a project is undertaken,
among other things, for development reasons, which may include:
executing national objectives at the micro level,
national increases in agricultural production,
promoting exports,
employment creation,
utilizing non-utilized and under-utilized resources - full employment, and pursuing
agricultural diversification policies (minimizing risk)
To understand the role of projects as instrument of change, it is indispensable to conceptualize the
meanings of national development (goal) objective, national development plan, national
development strategy,

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1.2. Programs Vs Projects
Some time, people confuse a project with a program and often use interchangeably, but the terms
are not the same. Unlike a project, a program is an ongoing development effort or plan.
A program is “a group of related projects managed in a coordinated way to obtain benefits and
control not available from managing them individually.” Imagine, it is often more economical to
group projects together to help streamline management, staffing, purchasing, and other work. The
following are examples of programs
▪ A construction firm has programs for building single-family homes, apartment buildings,
and office buildings. Each home, apartment building, and office building is a separate
project for a specific sponsor, but each type of building is part of a program. There would be
several benefits to managing these projects under one program,. For example, for the single-
family homes, the program manager could try to get planning approvals for all the homes at
once, advertise them together, and purchase common materials in bulk to earn discounts.
▪ A government agency has a program for children’s services, which includes a project to
provide pre-natal care for expectant mothers, a project to immunize newborns and young
children, and a project for developmental testing for pre-school children., to name a few.

A program manager provides leadership and direction for the project managers heading the
projects within the program. Program managers also coordinate the efforts of project teams,
functional groups, suppliers, and operations staff supporting the projects to ensure that project
products and processes are implemented to maximize benefits. Program managers are responsible
for more than the delivery of project results; they are change agents responsible for the success of
products and processes produced by those projects.
Program managers often have review meetings with all their project managers to share important
information and coordinate important aspects of each project. Many program managers worked as
project managers earlier in their careers, and they enjoy sharing their wisdom and expertise with
their project managers. Effective program managers recognize that managing a program is much
more complex than managing a single project. They recognize that technical and project
management skills are not enough. In addition to skills required for project managers, program
managers must also possess strong business knowledge, leadership capability, and
communication skills.
A program may include various projects at various times as its constituent units. Hence, a project is
a specific activity, with a specific starting point and specific ending point intended to accomplish a
specific objective. A project is narrower than a program in terms of technical performance, time and
resources (scope). A program may consist of more than one project. The following comparisons
may explain the difference between the two:
Bases of comparisons Program Project
Scope/objectivities wide /diverse Narrower /limited
Location diffused /wide Specific
Lifetime Non-time bound Time bound
Resources Larger budget Limited budget

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1.3. Classification of projects
Projects can be classified based on several criteria.
1. Ownership
a. Private sector – mostly projects undertaken by business enterprises
b. Public sector projects undertaken by national and local government body,
c. NGO’s development projects undertaken by non- government and not for profit
organizations
2. Based on the sources of finance
a. Government treasury
b. Government treasury and external sources
c. External sources of finance
3. Based on the forces behind
a. Demand driven/need driven- based on identified unsatisfied demand project can be
created or on unsatisfied basic needs like food, water, and shelter ,
b. Donor driven – the force behind the financing organization
c. Political driven
1.4. Why projects are undertaken
The purpose (goals) to a project depends on the nature of the project. Development projects (usually
undertaken by government or NGOs) may have the following objective.
Projects are very powerful and efficient means to achieve development (growth), rightly
called ‘cutting edge’ of development.
They are mechanisms for improving income distribution (as government policy instrument).
Ex. implementing a project that enhances the income of the poor people to benefit the poor,
They are mechanisms to solve immediate problems. Ex implementing a project to solve a specific
problem in the society such as project to eradicate malaria, prevent the spreading of HIV, Project
undertaken by business organization have a primary objective of maximizing the wealth of current
shareholders. Other objectives may include maximization of profit, maximization of earning per
share or maximization of return on equity.
1.4.1. Projects as policy instruments
The specific sectoral and national objectives specified in plans can be achieved through various
means: projects, fiscal policy, monetary policy etc. Therefore, projects are policy instruments
through which national and sectoral plans are translated into action. Thus, projects are rightly called
“cutting edge” of development. Projects aim at increasing the production of goods and services
which are fundamental components of people’s welfare. However, projects are not a panacea, (can’t
cure all social and economic ill of a country) – although projects are capable of serving many
purposes, they are better in some and inferior in other cases. There are cases where projects are
inferior as policy instrument in comparison with other policy instruments in addressing specific
issues. For example, Fiscal and monetary policy instruments are more effective in correcting macro
economic instability than project (immediate response to the problem).
1.4.2. Project as capital Expenditure decision
Almost all projects involve a capital expenditure decision. Capital expenditure decisions often
represent the most important decisions taken by an economic entity. The importance of project as
capital expenditure decision stems from three inter – related facts:

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Long-term effects. The consequence of capital expenditure decisions extend far into the
future. The scope of current manufacturing activities of a firm is governed largely by capital
expenditures in the past. Likewise, current capital expenditure decisions provide the
framework for future activities.
Irreversibility. Most of the time, wrong capital investment decision can not be reversed
without incurring a substantial loss.
Substantial outlay. Capital expenditures usually involve substantial outlays.
1.5. Why project analysis?
The basic economic problem facing all developing countries is that of allocating inherently limited
resources (such as labor, capital, and other natural resources, as well as foreign exchange) to a
variety of different uses (such as current production of consumer goods and public services as
against investment in infrastructure, industry, agriculture, or other sectors of the economy in such a
way that the net benefit to society is as large as possible.
We have been convinced that, comprehensive macro-economic plans and sectoral programs are
valuable in identifying development projects and in providing the framework within which the
projects should be evaluated. However, these macroeconomic plans and sectoral programs are
drafted based on assumptions and forecasts, which may not necessarily reflect the reality. And yet
project formation, implementation and evaluation require concrete (realistic) information for the
project implementation involve substantial resource commitment; most of the decisions are
irreversible and projects have long term effect.
Given the limited resources, choices must be made among the competing uses, and project analysis
is one method of evaluating alternatives in a convenient and comprehensible fashion. In essence,
project analysis assesses the benefit and costs of a project and reduces them to a common yardstick
(benchmark / standard). If benefits exceed costs, with both measured by the common yardstick, the
project is acceptable; if not, the project should be rejected. The same justification is used for project
analysis made by business organizations. All business organizations face problem of allocating the
scarce resource they have to the alternative projects available. Project analysis helps them to select
the alternative that will bring more benefits than costs.
Characteristics of projects
The following attributes help to define a project further:
➢ A project has a unique purpose.
Every project should have a well-defined objective. For example, many people hire firms
to design and build a new house, but each house, like each person, is unique.
➢ A project is temporary.
A project has a definite beginning and a definite end. For a home construction project,
owners usually have a date in mind when they’d like to move into their new homes.
➢ A project is developed using progressive elaboration or in an iterative fashion.
Projects are often defined broadly when they begin, and as time passes, the specific details
of the project become clearer. For example, and there are many decisions that must be
made in planning and building a new house. It works best to draft preliminary plans for
owners to approve before more detailed plans are developed.
➢ A project requires resources, often from various areas. Resources include people,
hardware, software, or other assets. Many different types of people, skill sets, and resources
are needed to build a home.

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➢ A project should have a primary customer or sponsor. Most projects have many
interested parties or stakeholders, but someone must take the primary role of sponsorship.
The project sponsor usually provides the direction and funding for the project.
➢ A project involves uncertainty. Because every project is unique, it is sometimes difficult
to define the project’s objectives clearly, estimate exactly how long it will take to complete,
or determine how much it will cost. External factors also cause uncertainty, such as a
supplier going out of business or a project team member needing unplanned time off. This
uncertainty is one of the main reasons project management is so challenging
1.6. Project success criteria
Every project is constrained in different ways. Some project managers focus on scope, time, and
cost constraints. Other people focus on the quadruple constraint, which adds quality as a fourth
constraint. The scope, time, and cost limitations are sometimes referred to in project management as
the triple constraint.
To create a successful project, a project manager must consider scope, time, and cost and balance
these three often-competing goals:
1. Scope: What work will be done as part of the project? What unique product, service, or
result does the customer or sponsor expect from the project?
2. Time: How long should it take to complete the project? What is the project’s schedule?
3. Cost: What should it cost to complete the project? What is the project’s budget? What
resources are needed?
Other people focus on the quadruple constraint, which adds quality as a fourth constraint.
➢ Quality: How good does the quality of the products or services need to be? What do we
need to do to satisfy the customer?
Other also suggests these four constraints plus risk.
➢ Risk: How much uncertainty are we willing to accept on the project?
Whatever its size, a project’s success is based on the three main criteria as shown by the following
triangle:
Scope

Time Budget

Therefore, project will deem to be successful if it:

Delivers the outcome with an agreed upon quality.
Does not overrun its end date.
Remains within budget (cost of resources).
Note however, that outcome, time and budget are interrelated, and during a project you may need to
do trade-offs between them. For example, if you want to get something done more quickly, you may
have to pump in more money into your project for additional resources.
1.7. Why are organizations using project management?
Today’s highly competitive business environment forces organizations to make high-quality
products at a lower cost and in a shorter duration. Organizations therefore are increasingly using
project management because: it allows them to plan and organize resources to achieve a specified

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outcome within a given timeframe. The techniques of project management also help managers
manage and anticipate risks in a structured manner. Surveys of organizations using project
management have shown that project management allows for;
➢ better utilization of resources,
➢ shorter development times,
➢ reduced costs,
➢ interdepartmental cooperation that builds synergies across the organization, and
➢ a better focus on results and quality.
1.8. Project Stakeholders
Stakeholders are the people involved in or affected by project activities. These include:
the project sponsor, users,
project team, suppliers, and
support staff, Opponents to the project.
customers,
These stakeholders often have very different needs and expectations. For example, there are several
stakeholders involved in a home construction project.
The project sponsors would be the potential new homeowners. They would be the people paying
for the house and could be on a very tight budget, so ;
They would expect the contractor to provide accurate estimates of the costs involved in
building the house.
They would also need a realistic idea of when they could move in and what type of home
they could afford given their budget constraints.
The new homeowners would have to make important decisions to keep the costs of the
house within their budget. Can they afford to finish the basement right away? If they can
afford to finish the basement, will it affect the projected move-in date? In this example, the
project sponsors are also the customers and users for the product, which is the house.
The project manager in this example would normally be the general contractor responsible for
building the house. He or she needs to work with all the project stakeholders to meet their needs and
expectations.
The project team for building the house would include several construction workers, electricians,
carpenters, and so on. These stakeholders would need to know exactly what work they must do and
when they need to do it. They would need to know if the required materials and equipment will be
at the construction site or if they are expected to provide the materials and equipment. Their work
would need to be coordinated since there are many interrelated factors involved. For example, the
carpenter cannot put in kitchen cabinets until the walls are completed.
Support staff might include the employers of the homeowners, the general contractor’s
administrative assistant, and other people who support other stakeholders. The employers of the
homeowners might expect their employees to complete their work but allow some flexibility so they
can visit the building site or take phone calls related to building the house.
Building a house requires many suppliers. The suppliers would provide the wood, windows,
flooring materials, appliances, and other items. Suppliers would expect exact details on what items
they need to provide, where and when to deliver those items, and similar information.
There are many different stakeholders on projects, and they all have different interests.
Stakeholders’ needs and expectations are important in the beginning and throughout the life of a
project. Successful project managers develop good relationships with project stakeholders to
understand and meet their needs and expectations.

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Program managers often have review meetings with all their project managers to share important
information and coordinate important aspects of each project. Many program managers worked as
project managers earlier in their careers, and they enjoy sharing their wisdom and expertise with
their project managers. Effective program managers recognize that managing a program is much
more complex than managing a single project. They recognize that technical and project
management skills are not enough. In addition to skills required for project managers, program
managers must also possess strong business knowledge, leadership capability, and communication
skills.
Definition Project cycle refers to the various stages through which a project passes from time of its
inceptions up to its implementation and realization of objectives.
Models
There are many models which differ in their perspective, emphasis and level of detail. However,
there are main features of project life cycles which are common for all models.
➢ Information gathering
➢ Analyzing the information
➢ Decision making
This means, regardless of their differences in approaches, all project cycle models involve
information gathering, analyzing the information to be used as input for decision-making purposes.
The following is brief descriptions of some basic project cycle models.

The Baum Cycle (World Bank 1970)

The traditional project cycle in development was formulated in 1970 by Baum based on the
processes of the World Bank at the time. It included four major components in linear progression:
identification, preparation, appraisal and implementation (Baum, 1970). This traditional project
cycle emphasis top down approaches to development project planning. In essence, community
participation in project idea generation, alternative identifications, project implementation,
controlling as well as utilization was marginalized. As a result, projects planned were facing
implementation problems, and could not be sustained, if ever implemented as planned. In 1978
Baum revised his formulation of the project cycle and included a fifth component, evaluation.
Furthermore, the importance of community participation in project idea generations, alternative
identification, over all planning as well as project management is recognized in the revised
approach to project formulation.

Identification

Evaluation
Preparation

Implementation Appraisal

Figure 1.1: Baum's project cycle (Source: Baum 1978)

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Identification: in the first part, identification, a current situation suitable to be improved is
recognized. In a business environment, a project will make sense when there is a demand for the
outputs of the project. It is important to distinguish between demand and need. The existence of a
demand implies the ability and willingness to pay for the outputs provided by the project, while the
existence of needs may not. This first phase also includes the identification of available resources
and at least one potential technical solution to generate the required output from those resources.
In sum, the identification phase should:
➢ specify the goals of the project as regards its output;
➢ list current and potential obstacles for reaching the goals;
➢ explain alternative ways to overcome the obstacles and achieve the goals; and
➢ Identify the resources required and the actors involved.
Projects are identified in multiple ways. The identification might arise from a government planning
process, from local NGOs or other civil organizations, from private sector actors that see an
opportunity for profit, from the local community, etc. There will be more discussion on this topic
somewhere in this chapter.

Preparation: in the second phase, which Baum calls project preparation and is often referred to as
project formulation, the scope of the project and all the details are specified to the point where a
definite decision can be made whether or not to go on with it. This decision will take place in the
following stage of appraisal. Issues raised in the identification phase are further elaborated in this
preparation phase.
During the preparation, it is important to exhaustively list and elaborate:
➢ Who are the target beneficiaries?
➢ What are the goals?
➢ What are the current constraints for the achievement of those goals? and
➢ How does the project propose to overcome those constrains?
If the elaborated project proposal is prepared along these main axes, it will be much easier to
appraise it in the next stage. Indeed, international development agencies normally provide specific
guidelines for the preparation of this proposal.
During this preparation work, the conceptual project defined during the identification phase is
subjected to an analysis of its feasibility. The feasibility studies should determine if it is possible to
carry out the project according to the stated objectives with the financial, technical, human,
material, and institutional resources available. It should also include an analysis and description of
all suitable alternatives that might be used to achieve the desired results.
Appraisal: the next phase is project appraisal, where the project is reviewed and the decision is
made whether to go ahead with it or not, and which of the remaining alternatives is chosen.
When loans are required from external agencies, as is commonly the case, these external agencies
provide specific guidelines for the appraisal process, which they often carry out themselves. Project
appraisal needs to address two major questions:
➢ First, will the project as it is designed meet its own objectives as well as the wider needs of
its location and nation? and
➢ Second, how does the project compare with other projects it may be competing with for
funding?

This appraisal tries to understand:

➢ What will happen if a particular proposal is implemented?

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➢ Whether the expected outcome will occur?
➢ Who will benefit and lose?
➢ When will the outcome take place? and
➢ How efficient is the investment considering the resources employed and the benefits
generated?
The appraisal is based on the detailed and accurate information generated in the previous phase and
uses several well-established techniques for the analysis of this information. These techniques
include economic cost-benefit analysis, socio-economic analysis, and environmental impact
assessment. When there are a few alternative ways to define the final project to be implemented, it
is in this appraisal phase that the best alternative is chosen.
Implementation: After the appraisal follows the implementation phase where the project proposal
is executed and turned into tangible actions. The tasks to be done during project implementation:
➢ Breaking down the project into its component tasks and activities;
➢ Assignment of tasks and activities to project team members, and detailed scheduling of these
tasks;
➢ Allocation and use of resources such as personnel, finance, time and materials;
➢ Coordination, monitoring and control of the performance of the project team and the use of
project resources in a manner which ensures the completion of all project activities in an
orderly and optimal way.
Well established project management techniques and tools such as Gantt and PERT Chart are used
in this phase to facilitate monitoring and adjustments of the project,
Evaluation: Finally, in the evaluation phase, the whole project will be re-analyzed in order to
provide feedback information which might be useful for future interventions, closing the project
cycle as a circle in an ideally continuous learning process. In this phase the project performance is
compared with the stated objectives. The idea is to understand the reasons for the success or failure
of the project, looking at what works and what does not, so that errors are not repeated in future
interventions. The evaluation exercise should look at the impact of the project in target groups and
their environment beyond the stated goals, trying to understand any positive or negative unintended
effects.

New Project Cycle

Projects implemented during the Baum's traditional project cycle approach were not successful
mainly due to lack of popular participation in their formulation, selection, implementation and
utilizations. The projects could not achieve their objectives, if ever at all, they were not sustainable.
Recognizing these limitations, during 1994 the World Bank changed its approach from top down
planning to bottom up, which emphasis on the need of beneficiary participation in project planning.
The essence is that the beneficiaries can better identify their problems; identify possible alternative
course of actions; generate ideas for project planning addressing what resources need for its
implementations and how it helps them to overcome their problems.
If beneficiary participation is essential for the quality and sustainability of projects, what level of
beneficiary participation is required? Is participation a means for or an end contribution of
sustainability of projects?

There are different levels of participation and accordingly different views as to its role in project
planning and overall economic development. Some view participation as means for sustainability of
projects. Others view it as an end result of sustainable project to the community. However, the

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reality is that as far as project is a policy instrument to achieve development and as far as popular
participation is means and ends for development, it could be safely concluded that participation is
both a means and ends for sustainable project. But, which level of participation is desirable?
The decision as to which level of participation depends on level of democratization in a community,
educational level of a community, level of awareness of the community and objectives of the
project sponsoring entity.

According to the new project cycle (World Bank 1994), project cycles have four phases:
a) Listening to the stakeholders: As the issue of project is the issue of development, and
since development is a community issue, the community is supposed to be the agents of
project planning. In essence, the idea for a project should come first from the
beneficiaries and the role of the project sponsoring entity is limited to facilitating issues
related to its implementation.
b) Piloting the project: refers to implementing the proposed project ideas from the
community on a very small scale to be used as a testing ground. This is experimentation
phase.
c) Demonstrating: refers to showing the result of the experiments to the community so
that they can judge its viability and decide whether to continue or discontinue with the
project idea.
d) Mainstreaming the project: this refers to expanding the project ideas which receive
sufficient community supports and decided to be viable to other areas.

1.9.The project lifecycle

We define a life cycle as the various phases, from inception to completion that a project goes
through to meet its final goal. The use of well-designed life cycles bring definite advantages: for
instance, life cycles clearly define the phases of a project and the essential management activities on
a per-phase basis. Each phase requires different techniques, and the project manager refers to the
project life cycle to determine the activities to be performed. Formalized life cycles also promote
the retention of strategic knowledge within the organization, as they identify techniques recognized
as best practices for each phase of a project. In addition, a flexible, organization-wide project life
cycle may be tailored to the needs of individual projects, because a viable strategic alignment
between projects and business objectives requires malleable processes.

A project is not a one shot activity. Even a shooting star has a time and life span. Project lifecycle is
spread over a period of time. There is an unavoidable gestation period for the complex of activities
involved to attain the objectives in view. This gestation period, however, varies from project to
project but it is possible to describe, in general term, the time phasing of project planning activities
common to most projects.
The principal stages in the life of a project are:
The project life cycle can be put in different ways based on the detailness of the identification of the
different phases of the project process. Accordingly we will have two project life- cycle models.
1. The six phased project life –cycle model, and
2. The four phased project life –cycle model.

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1. Six phase project life-cycle model –this project-life cycle model has six stages for project
development like- identification, initial formulation, evaluation or project appraisal,
formulation, project implementation and project completion.
A. Identification: Development projects are expressly designed to solve the varied problems of the
economics whether in the short or long run. Business projects can be initiated from
problems/potential problem of stakeholders of a business entity. The surveys or in depth studies
would locate the problems and the project planner will have to identify the projects that would
solve the problems most effectively. At this stage, we are concerned with the kind of action and
type of project that would be required in rather broad term. In other words the surveys and
studies will give us ideas and throw up suggestions which would be worked out in detail later
and then evaluated objectively before being accepted for implementation.
B. Initial Formulation: Identification is only the beginning in the lifecycle of a project. Having
identified the prospective projects, the details of each project will have to be worked out and
analyzed in order to determine which of them could be reckoned as suitable for inclusion in the
plan, allocate funds and put into execution. As a follow up to the finding of techno-economic
surveys, and number of feasibility study group are set up, as the name implies to examine the
possibility of formulating suitable projects and to put concrete proposals in sufficient detail to
enable authorities concerned to consider the feasibility of the proposal submitted.
C. Evaluation or Project Appraisal: After the business or socio-economic problems of an
economy have been determined and developments objectives and strategies agreed, concrete
steps have to be taken. The main form this takes is that of formulating appropriate development
projects to achieve plan objectives and meet the development needs of the economy. Proposals
relating to them are then put to the plan authorities for consideration and inclusion in the plan.
These proposals as pointed out above take the following forms of feasibility studies:
Commercial viability
Economic feasibility
Socio-economic feasibility
Financial feasibility
Technical feasibility
The scope for scrutiny under each of these five heads would necessarily render their careful
assessment and the examination of all possible alternative approaches. The process almost
invariably involves making decision relating to technology, scale, location, costs and benefits, time
of completion (gestation period), degree of risk and uncertainty, financial viability, organization
and management, availability of inputs, know-how, labor etc. The detailed analysis is set down in
what is called a feasibility report.
D. Formulation: Once a project has been appraised and approved, next step would logically,
appear to that of implementation. This is, however, not necessarily true, if the approval is
conditional to certain modifications being affected or for other reasons, such as availability of
funds, etc. The implementation stage will be reached only after these pre-conditions have been
fulfilled. Project formulation divides the process of project development into eight distinct and
sequential stages. These stages are:
General information
Project description
Market potential
Capital costs and sources of finance

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Assessment of working capital requirement
Other financial aspect
Economic and social variables.
E. Project Implementation: Last but not the least, every entrepreneur should draw an
implementation time table for his project. The network having been prepared, the project
authorities are now ready to embark on the main task of implementation the project. To begin
with successful implementation will depend on how well the network has been designed.
However, during the course of implementation, many factors arise which cannot be anticipated
or adequately taken note of in advance and built into the initial network. A number of network
techniques have been developed for project implementation. Some of them are PERT, CPM,
Graphical Evaluation and Review Technique (GERT), Workshop Analysis Scheduling Program
(WRSP) and Line of Balance (LOB).
F. Project Completion: It is often debated as to the point at which the project life cycle is
completed. The cycle is completed only when the development objectives are realized.

The summary of the six phase project life cycle can be shown by the following figure:

Project Identific
Comple ation
tion

Intial formulation
Implemen
tation

Evaluation (Select or
Final formulation reject)
(Selection)

2. Four phase project life-cycle model- the four phase project-life cycle model has four stages for
project development which include:- Initiating, Planning, Executing, and Controlling and
monitoring

A. Initiating

During the initiating process, you will:

refine the project goals,
review the expectations of all stakeholders, and
determine assumptions and risks in the project.

You will also start project team selection -- if the project team has been imposed, then you need to
familiarize yourself with their skill set and understand their roles in the project. At the end of this

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phase you will produce a Statement of Work (SOW), which is a document that provides a
description of the services or products that need to be produced by the project.

B. Planning
During the planning process,
you will detail the project in terms of its outcome, team members’ roles and
responsibilities, schedules, resources, scope and costs.
you will produce a project management plan, which is a document that details how your
project will be executed, monitored and controlled, and closed.
Such a document also contains a refined project scope, and is used as the project baseline.

C. Executing
During the executing process, you apply your project management plan. In other words you direct
your team so that it performs the work to produce the deliverables as detailed in the plan. The
executing process also involves implementing approved changes and corrective actions.

D. Controlling and monitoring

During the controlling and monitoring process, you supervise project activities to ensure that they
do not deviate from the initial plan and scope. When this happens, you will use a change control
procedure to approve and reject change requests, and update the project plan/scope accordingly. The
controlling and monitoring phase also involves getting approval and signoff for project deliverables.

E. Closing
During the closing process, you formally accept the deliverables and shut down the project or its
phases. You will also review the project and its results with your team and other stakeholders of the
project. At the end of the project you will produce a formal project closure document, and a project
evaluation report.

The entire project cycle for four phased model can be summarized by the following figure.

Closing Intitation

Controlling &
Monitoring

Executing Planning

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UNIT TWO
2. GENERATION AND SCREENING OF PROJECT IDEAS

Identification of a new project is a complex problem. Project selection process starts with the
generation of project ideas. In order to select the most promising project, the entrepreneur needs to
generate a few ideas about the possible project one can undertake. The project ideas as a process of
identification of a project begin with an analytical survey of the economy (also known as pre-
investment surveys). The surveys and studies will give us ideas.

The process of project selection consists of following stages:

1. Idea generation
2. Environment appraisal.
3. Corporate appraisal
4. Preliminary screening.
2.1.Idea Generation
Project selection process starts with the generation of a project idea. Ideas are based on
technological breakthroughs and most of the project ideas are variants of present products or
services. There is no standardized formula to come up with a project idea. The project ideas can be
generated from various internal and external sources. These are:
Knowledge of market, products, and services.
Knowledge of potential customer choice.
Emerging trends in demand for particular product.
Scope for producing substitute product.
Market survey & research.
Going through Professional magazines.
Making visits to trade and exhibitions.
Government guidelines & policy.
Ideas given by the experienced person.
Ideas by own experience.
SWOT analysis.
2.2.Environment appraisal
An entrepreneur or a firm systematically appraise the environment and assess its competitive
abilities. The key elements of the environment are as follow:
A. Economic Sector
State of the economy Growth rate of primary, secondary
Overall rate of growth and territory sector
Cyclical fluctuations Growth rate of world economy
Inflation rate Trade surplus and deficits
Balance of Payment
B. Government Sector
Industrial policy Financing norms
Government programs and Subsidies incentives and
projects concessions
Tax structure Monetary policy
Export-import policy

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C. Technological Sector
Emergence of new technologies
Access to technical know-how, foreign as well as indigenous
D. Socio-demographic Sector
Population trends Employment of women
Age shifts in population Attitudes toward consumption
Income distribution and investment
Educational profile
E. Competition Sector
Number of firms in the industry and the market share of the top few
Degree of homogeneity and differentiation among the products
Entry barrier
Comparison with substitutes in term of quality and price
Marketing policies and practices
F. Supplier Sector
Availability and cost of raw material
Availability and cost of energy
Availability and cost of capital
2.3.Corporate Appraisal
A realistic appraisal of corporate strengths and weaknesses is essential for identifying investment
opportunities which can be profitably exploited. The broad areas of corporate appraisal and the
important aspects to be considered under them are as follow:
a. Marketing and Distribution
Market Image Distribution Channels
Product Line Customer loyalty
Product Mix Marketing & distribution costs
b. Production and Operations
Condition and capacity of plant Degree of vertical integration
and machinery Location advantage
Availability of raw material and Cost structure
power
c. Research and Development
Research capabilities of the firm Laboratories and testing facilities
Track record of new product Coordination between research
developments and operations
d. Corporate Resources and Personnel
Corporate image
Dynamism of top management
Relation with government and regulatory agencies
State of industry relations
e. Finance and Accounting
Financial leverage and borrowing Relation with share holders and
capacity creditors
Cost of capital Accounting & control system
Tax structure Cash flow and liquidity

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2.4. Preliminary Screening project ideas
After gathering the project ides from the various sources as aforesaid, it is essential to eliminate
ideas which prima facie are not promising. This process f eliminating the irrelevant and unviable
ideas is called screening of project ideas. It can be done with the help of testing the following
conditions of the propositions.
Compatibility with the promoter
Consistency with governmental priorities
Availability of inputs
Adequacy of market
Reasonableness of cost
Acceptability of risk level etc.
The project idea must be compatible with interest personality and resources of the entrepreneur. It
should be accessible to him and also it offers him the prospects of rapid growth and high return on
invested capital.
The project idea must satisfy or go along with the governmental priorities, National goals and
governmental regulatory framework. Considerations may include:
No Contrary environmental effects to governmental regulations
Easily accommodation foreign exchange requirements
No difficulty in obtaining license.
The resources and inputs required for the project must be reasonably assured. This feature of the
project can be assessed with the help of determining the following points relating to a project.
Capital requirement within manageable limit
Obtaining technical know-how
Availability of raw materials at a reasonable cost
Obtaining power supply
Identifying the adequacy of market is the key factor to select, the viable project idea. To judge the
adequacy of market the following factors have to be examined.
Total present domestic market
Competitors and their market shares
Export market
Quality price profile of the product.
Sale and distribution system
Projected increase in consumption
Barriers to the entry of new units
Economic social and demographic trends favorable to increased consumption
Patent protection
Reasonableness of cost is another factor to screen the project ideas. The cost structure of the
proposed project must enable it to realize and acceptable profit with a competitive price. The
following cost factors must be carefully considered to design a viable cost structure:
Cost of material inputs, labor costs, factory overheads.
General administration expenses, selling and distribution costs.
Service costs, economics of scale etc.
Acceptability of risk level is another factor which helps to screen the project ideas and hence
determine the desirability of a project.

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UNIT THREE

3. PREPARATION OF PROJECT FEASIBILITY STUDY

Feasibility literally means whether some idea will work or not. It knows beforehand whether there
exists a sizeable market for the proposed product/service, what would be the investment
requirements and where to get the funding from, whether and wherefrom the necessary technical
know-how to convert the idea into a tangible product may be available, and so on. In other words,
feasibility study involves an examination of the operations, financial, HR and marketing aspects of
a business on exante (Before the venture comes into existence) basis.

Feasibility is a multivariate concept; that is, a project has to be viable not only in technical terms but
also in economic and commercial terms too. Moreover, there always a possibility that a project that
is technically possible may not be economically viable. After the problems of an organization or
economy have been determined and objectives and strategies agreed, concrete steps have to be
taken. The main form this takes is that of formulating appropriate development projects to achieve
plan objectives and meet the development needs of the economy. Proposals relating to them are
then put to the plan authorities for consideration and inclusion in the plan. These proposals as
pointed out above take the following forms of feasibility studies:
1. Market/Commercial viability
2. Economic feasibility
3. Financial feasibility
4. Technical feasibility
5. Social Cost Benefit analysis
6. Other feasibility considerations like legal, administrative, ecological
The scope for scrutiny under each of these five heads would necessarily render their careful
assessment and the examination of all possible alternative approaches. The process almost
invariably involves making decision relating to technology, scale, location, costs and benefits, time
of completion (gestation period), degree of risk and uncertainty, financial viability, organization and
management, availability of inputs, know-how, labor etc. The detailed analysis is set down in what
is called a feasibility report.

3.1. Market feasibility

A market, whether a place or not, is the arena for interaction among buyers and sellers. From
seller’s point of view, market analysis is primarily concerned with the aggregate demand of the
proposed product/service in future and the market share expected to be captured. Success of the
proposed project clearly hinges on the continuing support of the customers. However, it is very
difficult to identify the market for one’s product/service. After all, the whole universe cannot be
your market. You have to carefully segment the market according to some criteria such as
geographic scope, demographic and psychological profile of the potential customers etc. It is a
study of knowing who all comprise your customers, for this you require information on:
➢ Consumption trends
➢ Past and present supply position
➢ Production possibilities and constraints
➢ Imports and Exports
➢ Competition
➢ Cost structure

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➢ Elasticity of demand
➢ Consumer behavior, intentions, motivations, attitudes, preferences and requirements
➢ Distribution channels and marketing policies in use
➢ Administrative, technical and legal constraints impinging on the marketing of the
product.
The exercise of project appraisal often begins with an estimation of the size of the market. Before a
detailed study of a project is undertaken, it is necessary to know, at least roughly, the size of the
market because the viability of the project depends critically on whether the anticipated level of
sales exceeds a certain volume. Many projects have been abandoned because preliminary appraisal
revealed a market of inadequate size.
Requirements for market and demand analysis
A. Information requirement
The principal types of information required for market and demand analysis relate to:
1. Effective demand: to gauge the effective demand in the past and present, the starting point
typically is apparent consumption which is defined as:

Production + Imports – exports – changes in stock level

In a competitive market, effective demand and apparent consumption are equal. However, in most
of the developing countries, where competitive markets do not exist for a variety of products due to
exchange restrictions and controls on production and distribution, the figure of apparent
consumption may have to be adjusted for market imperfections. Admittedly, this is often a difficult
task.
2. Breakdown of demand: to get a deeper insight into the nature of demand, the aggregate (total)
market demand may be broken down into demand for different segments of the market. Market
segments may be defined by
(i) Nature of product,
(ii) Consumer group, and
(iii) Geographical division.
(i) Nature of product: One generic name often subsumes many different products: steel covers
sections, rolled products, and various semi-finished products; commercial vehicles cover trucks
and buses of various capacities etc.
(ii) Consumer groups: Consumers of a product may be divided into industrial consumers and
domestic consumers. Industrial consumers may be sub-divided industry-wise. Domestic
consumers may be further divided into different income groups.
(iii) Geographical division: A geographical breakdown of consumers, particularly for products
which have a small value-to-weight relationship and products which require regular, efficient
after-sales service is helpful.
B. Price: Price statistics must be gathered along with statistics pertaining to physical quantities. It
may be helpful to distinguish the following types of prices:
(i) manufacturer’s price quoted as FOB (free on board) price or CIF (cost, insurance, and
freight) price,
(ii) landed price for imported goods,
(iii) average wholesale price, and
(iv) average retail price.
C. Methods of distribution and sales promotion: the method of distribution may vary with the
nature of product. Capital goods, industrial raw materials or intermediates, and consumer

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products tend to have differing distribution channels. Further, for a given product, distribution
methods may vary. Likewise, methods used for sales promotion (advertising, discounts, gift
schemes, etc.) may vary from product to product. The methods of distribution and sales
promotion employed presently and their rationale must be studied carefully. Such a study may
explain certain patterns of consumption and highlight the difficulties that may be encountered in
marketing the proposed products.
D. Consumers: two categories of information about the consumers may be required:
a) Demographic and sociological information-, information on: age, sex, income,
avocation, residence, religion, customs, beliefs, and social background, and
b) Attitudinal information- information on - preferences, intentions, attitudes, habits, and
responses.
E. Governmental policy: the role of government in influencing the demand and market for a
product may be significant. Governmental plans, policies, legislations, and fiats which have a
bearing on the market and demand of the product under examination should be studied. These
are reflected in: production targets in national plans, import and export trade controls, import
duties, export incentives, excise duties, sales tax, industrial licensing, preferential purchases,
credit controls, financial regulations, and subsidies/penalties of various kinds.
F. Supply and competition: it is necessary to know the existing sources of supply and whether
they are foreign or domestic. For domestic sources of supply information along the following
lines may be gathered: location, present production capacity, planned expansion, capacity
utilization level, bottlenecks in production, and cost structure. Competition from substitutes and
near-substitutes should be examined because almost any good may be replaced by some other
good as a result of changes in relative prices, quality, availability, promotional strategies,
consumer taste, and other factors.
Demand estimation
The first and most difficult step in market feasibility analysis is determining the potential demand
for the product or the service we are intending to produce/render. There are different methods of
estimation.
A. Market survey
The information sought in a market survey may relate to one or more of the following;
(i) Total demand and rate of growth of demand;
(ii) Demand in different segments of the market;
(iii) Income and price elasticity of demand;
(iv) Motives for buying;
(v) Purchasing plans and intentions;
(vi) Satisfaction with existing products;
(vii) Unsatisfied needs;
(viii) Attitudes toward various products
(ix) Distributive trade practices and preferences;
(x) Socio-economic characteristics of buyers.
Market survey can be undertaken using the following steps:
1. Definition of the target population
2. Selection of sampling scheme and sample size
3. Preparation of the questionnaire
4. Recruiting and training of field investigators
5. Obtaining information as per the questionnaire from the sample of respondents

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6. Editing of information gathered
7. Analysis and interpretation of data
B. Demand forecasting
After gathering information about various aspects of the market and demand from primary and
secondary sources, an attempt may be made to estimate future demand. Several methods are
available for demand forecasting. The important ones are:
1. Trend projection: it consists of
(i) determining the trend of consumption by analyzing past consumption statistics, and
(ii) projecting future consumption by extrapolating the trend.
The trend of consumption may be represented by one of the following relationships:
Linear Relationship: Yt = a + bt
Where; Yt = demand for year t,
t = the time variable,
a, b and aj’s are constants.
This relationship may be estimated by using one of the following methods:
(i) visual curve fitting method, and
(ii) least squares method.
2. Consumption level method:
Useful for a product which is directly consumed, this method estimates consumption level on the
basis of elasticity coefficients, the important ones being the income elasticity of demand and the
price elasticity of demand.
a) Income elasticity of demand— The income elasticity of demand reflects the
responsiveness of demand to variations in income. It is measured as follows:
𝑄2 − 𝑄1 𝐼1 + 𝐼2
𝑌= ∗
𝐼2 − 𝐼1 𝑄1 + 𝑄2
Where; Y = income elasticity of demand
Q1 = quantity demanded in the base year
Q2 = quantity demanded in the following year
l1 = income level in the base year
l2 = income level in the following year
b) Price elasticity of demand - The price elasticity of demand measures the responsiveness of
demand to variations in price. It is defined as:
𝑄2 − 𝑄1 𝑃1 + 𝑃2
𝑌= ∗
𝑃2 − 𝑃1 𝑄1 + 𝑄2
Where, Ep = price elasticity of demand
Q1 = quantity demanded in the base year
Q2 quantity demanded in the following year
P1 = price per unit in the base year
P2 = price per unit in the following year
c) End use method
Suitable for estimating the demand for intermediate products, the end use method, also referred to
as the consumption coefficient method involves the following steps:
1. Identify the possible uses of the product.
2. Define the consumption coefficient of the product for various uses.
3. Project the output levels for the consuming industries.

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4. Derive the demand for the product
d) Leading Indicator Method
Leading indicators are variables which change ahead of other variables, the lagging variables.
Hence, observed changes in leading indicators may be used to predict the changes in lagging
variables. For example, the change in the level of urbanization- a leading indicator may be used to
predict the change in the demand for air conditioners a lagging variable. Two basic steps are
involved in using the leading indicator method:
(i) First, identify the appropriate leading indicator(s).
(ii) (ii) Second, establish the relationship between the leading indicator(s) and the variable to be
forecast.
e) Market penetration for the product: once a reasonably good handle over the aggregate
demand is obtained, the next logical question is: What will be the likely demand for the
product of the project under examination? The answer to this question depends on:
➢ Aggregate potential supply
➢ Nature of competition
➢ Consumer preferences
➢ Sales promotion efforts
If the aggregate potential domestic supply is likely to be significantly less than the aggregate
potential domestic demand, the demand for the product of the project under examination
is likely to be very strong, provided liberal imports which may hurt domestic
manufacturers are not allowed.
The nature of competition and market-sharing arrangement (if any) has a bearing on the
demand for the product of the project under examination.
Consumer preferences for competing products and the sales promotional efforts of
various competitors obviously influence the relative market shares enjoyed by them.
The promoter should be capable of creating a profile of the organization’s ideal customer. The
promoter must ask themselves:
▪ Who is our target customer?
▪ Am I operating as a Business to Customer or Business to Business enterprise?
▪ What are our ideal customers’ sex, age, income level and interests?
▪ Is there a distinction between our buyer and our end user? What are the target customer
segments (geographic, demographic, psychographic and behavioral)?
▪ What products/services are they already using?
▪ On what factors are buying decisions made?
4.2.Economic feasibility
Economics is the study of costs- and- benefits. In regard to the feasibility, the study of the
entrepreneur is concerned whether the capital cost as well as the cost of the product is justifiable
vis-à-vis the price at which it will sell at the market place. For example, technically, silver can be
extracted from silver bromide, (a chemical used for processing the X-ray and photo films); but, the
cost of extraction is so high that it would not be economically feasible to do so. Likewise, until
recently cost of harnessing solar power was prohibitively high. This cost-benefit analysis goes into
financial calculations for profitability analysis that we discussed under financial analysis. At this
stage it is also useful to distinguish between the economic and commercial feasibility; whereas
economic feasibility leads one to the unit cost of the product, commercial feasibility informs
whether enough units would sell.

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Apart from the cost-benefit analysis as above, which we also refer to as private cost-benefit
analysis, it is also useful to do what is known as social- cost-benefit- analysis (SCBA). For example,
the entrepreneur may be getting subsidized electricity in which case private cost would be less than
social cost. Likewise, exporting units earn precious foreign exchange resulting into social benefits
being more than private earnings. Many a time, a project that is worthy on SCBA may find greater
favor with the support agencies. This tells us that there is a huge overlap between economic
feasibility for a private project and financial feasibility and social cost-benefit analysis of a
developmental project. Hence the specific considerations and technical issue of this part of the
analysis will be covered in the subsequent sub-sections.
4.3.Financial feasibility
The objective of financial analysis is to ascertain whether the proposed project will be financially
viable in the sense of being able to meet the burden of servicing debt and whether the proposed
project will satisfy the return expectations of those who provide the capital.

Capital budgeting is a required managerial tool for project appraisal. One duty of a financial
manager is to choose projects with satisfactory cash flows and rates of return. Therefore, a financial
manager must be able to decide whether a project is worth undertaking and be able to choose
intelligently between two or more alternatives. To do this, a sound procedure to evaluate, compare,
and select projects is needed. This procedure is called capital budgeting.

In the form of either debt or equity, capital is a very limited resource. There is a limit to the volume
of credit that the banking system can create in the economy. Commercial banks and other lending
institutions have limited deposits from which they can lend money to individuals, corporations, and
governments. In addition, the Federal Reserve System requires each bank to maintain part of its
deposits as reserves. Having limited resources to lend, lending institutions are selective in
extending loans to their customers. But even if a bank were to extend unlimited loans to a
company, the management of that company would need to consider the impact that increasing loans
would have on the overall cost of financing.

In reality, any firm has limited borrowing resources that should be allocated among the best project
alternatives. One might argue that a company can issue an almost unlimited amount of common
stock to raise capital. Increasing the number of shares of company stock, however, will serve only
to distribute the same amount of equity among a greater number of shareholders. In other words, as
the number of shares of a company increases, the company ownership of the individual stockholder
may proportionally decrease.

The argument that capital is a limited resource is true of any form of capital, whether debt or equity
(short-term or long-term, common stock) or retained earnings, accounts payable or notes payable,
and so on. Even the best-known firm in an industry or a community can increase its borrowing up
to a certain limit. Once this point has been reached, the firm will either be denied more credit or be
charged a higher interest rate, making borrowing a less desirable way to raise capital.

Faced with limited sources of capital, management should carefully decide whether a particular
project is economically acceptable. In the case of more than one project, management must identify
the projects that will contribute most to profits and, consequently, to the value (or wealth) of the
firm. This, in essence, is the basis of capital budgeting.

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Capital budgeting is project decision-making as to whether a project is worth undertaking.
Capital budgeting is basically concerned with the justification of capital expenditures. Current
expenditures are short-term and are completely written off in the same year that expenses occur.
Capital expenditures are long-term and are amortized over a period of years are required by the
tax authorities
Basic Steps of Capital Budgeting
1 Estimate the cash flows (initial outflow and subsequent net inflows)
2 Assess the riskiness of the cash flows.
3 Determine the appropriate discount rate.
4 Find the PV of the expected cash flows.
5 Accept the project if PV of inflows > costs. IRR > Hurdle Rate and/or payback < policy
Basic Data
Expected Net Cash Flow
Year Project L Project S
0 ($100) ($100)
1 10 90
2 60 30
3 80 50
Evaluation Techniques:
A. Payback period and discounted pay-back period
B. Net present value (NPV)
C. Internal rate of return (IRR)
D. Profitability index
A. PAYBACK PERIOD
Payback period = Expected number of years required to recover a project’s cost.
Expected Net Cash Flow
Year Project L Project S
0 ($100) ($100)
1 10 90
2 60 30
3 80 50
Payback-L = 2 + $30/$80 years
= 2.4 years.
Payback-S = 1.33 years.
Weaknesses of Payback:
➢ Ignores the time value of money. This weakness is eliminated with the discounted
payback method.
➢ Ignores cash flows occurring after the payback period.
DISCOUNTED PAY-BACK PERIOD

Since the payback period rule ignores the time value of money, some firms have modified it to
reflect the time value of money. This is the discounted payback period. This technique specifies that
the cash flow from each period has to be discounted appropriately by the firm’s cost of capital (i.e. a
risk-adjusted WACC).

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Given a 10% weighted average cost of capital, the payback period will be:
Year Project L Project S
Cash flow Discounted cash flow Cash flow Discounted cash flow
0 ($100) ($100) ($100) ($100)
1 10 9.09 90 81.82
2 60 49.59 30 24.79
3 80 60.12 50 66.55

Discounted pay-back – project L = 2 + (41.32/60.12) = 2.7 years

Discounted pay-back – project S = 1 + (18.18/24.79) = 1.7 years
B. NET PRESENT VALUE
n CFt
NPV = 
t = 0 (1 + k) t
0 1 2 3

Project L:
−100.00 10 60 80

9.09
49.59
60.12
NPVL = $ 18.79
NPV-S = $73.16

Decision:
If the projects are independent, accept both.
If the projects are mutually exclusive, accept Project S since NPVS > NPVL.
Note: NPV declines as k increases, and NPV rises as k decreases.

C. INTERNAL RATE OF RETURN

n CFt
IRR :  = $0 = NPV .
t = 0 (1 + IRR )t

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0 1 2 3

Project L: -100.00 10 60 80
18.1%
8.47
18.1%
43.02
18.1%
48.57
$ 0.06  $0
IRRL = 18.1%
IRRS = 38%
Decision:
If the projects are independent, accept both because IRR > k.
If the projects are mutually exclusive, accept Project S since IRRS > IRRL.
Note: IRR is independent of the cost of capital.

IRR Vs NPV k NPVL NPVS

0% $50 $40
NPV
5 33 29
($)
50 10 19 20
15 7 12
20 (4) 5
40

30
Crossover Point = 8.7%

20
IRRS = 23.6%

10

0
5 10 15 20 25 k(%)

-10
IRRL = 18.1%

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Advantages and Disadvantages of IRR AND NPV
Advantages
A number of surveys have shown that, in practice, the IRR method is more popular than the
NPV approach. The reason may be that the IRR is straightforward, and it uses cash flows
and recognizes the time value of money, like the NPV.
In other words, while the IRR method is easy and understandable, it does not have the
drawbacks of the ARR and the payback period, both of which ignore the time value of
money.
Disadvantages
The main problem with the IRR method is that it often gives unrealistic rates of return.
Suppose the cutoff rate is 11% and the IRR is calculated as 40%. Does this means that the
management should immediately accept the project because its IRR is 40%.? The answer is
no! An IRR of 40% assumes that a firm has the opportunity to reinvest future cash flows at
40%.If past experience and the economy indicate that 40% is an unrealistic rate for future
projects, an IRR of 40% is suspect. Simply speaking, an IRR of 40% is too good to be true!
So unless the calculated IRR is a reasonable rate for project of future cash flows, it should
not be used as a yardstick to accept or reject a project.
Another problem with the IRR method is that it may give different rates of return. Suppose
there are two discount rates (two IRRs) that make the present value equal to the initial
project. In this case, which rate should be used for comparison with the cutoff rate? The
purpose of this question is not to resolve the cases where there are different IRRs. The
purpose is to let you know that the IRR method, despite its popularity in the business world,
entails more problems than a practitioner may think.
D. PROFITABILITY INDEX (PI)
The profitability index, or PI, method compares the present value of future cash inflows with the
initial project on a relative basis. Therefore, the PI is the ratio of the present value of cash flows
(PVCF) to the initial project of the project.
 PV of Cash Flows 
PI =
 Initial Investment 
In this method, a project with a PI greater than 1 is accepted, but a project is rejected when its PI is
less than 1. Note that the PI method is closely related to the NPV approach. In fact, if the net
present value of a project is positive, the PI will be greater than 1. On the other hand, if the net
present value is negative, the project will have a PI of less than 1. The same conclusion is reached,
therefore, whether the net present value or the PI is used. In other words, if the present value of
cash flows exceeds the initial project, there is a positive net present value and a PI greater than 1,
indicating that the project is acceptable. PI is also known as a benefit/cash ratio.
Project L
0 10% 1 2 3

-100.00 10 60 80

PV1 9.09
PV2 49.59
PV3 60.11
118.79

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 PV of cash flows 
PI =
 initial coast 
118.79
= = 1.10
100
Decision:
Accept project if PI > 1.
Reject if PI < 1.0
PROJECT DECISION ANALYSIS
Making Go/No-Go Project Decision
Virtually all general managers face capital-budgeting decisions in the course of their careers. The
most common of these is the simple “yes” versus “no” choice about a capital project. The
following are some general guidelines to orient the decision maker in these situations.
Focus on cash flows, not profits. One wants to get as close as possible to the economic
reality of the project. Accounting profits contain many kinds of economic fiction. Flows
of cash, on the other hand, are economic facts.
Focus on incremental cash flows. The point of the whole analytical exercise is to judge
whether the firm will be better off or worse off if it undertakes the project. Thus one wants
to focus on the changes in cash flows affected by the project.
The analysis may require some careful thought: a project decision identified as a simple
go/no-go question may hide a subtle substitution or choice among alternatives. For
instance, a proposal to invest in an automated machine should trigger many questions:
Will the machine expand capacity (and thus permit us to exploit demand beyond our
current limits)? Will the machine reduce costs (at the current level of demand) and thus
permit us to operate more efficiently than before we had the machine? Will the machine
create other benefits (e.g., higher quality, more operational flexibility)? The key economic
question asked of project proposals should be, “How will things change (i.e., be better or
worse) if we undertake the project?”
Account for time. Time is money. We prefer to receive cash sooner rather than later.
Use NPV as the technique to summarize the quantitative attractiveness of the project.
Quite simply, NPV can be interpreted as the amount by which the market value of the
firm’s equity will change as a result of undertaking the project.
Account for risk. Not all projects present the same level or risk. One wants to be
compensated with a higher return for taking more risk. The way to control for variations in
risk from project to project is to use a discount rate to value a flow of cash that is consistent
with the risk of that flow.
These 4 precepts summarize a great amount of economic theory that has stood the test of time.
Organizations using these precepts make better project decisions than organizations that do not use
these precepts.
CAPITAL RATIONING
Exists whenever enterprises cannot, or choose not to, accept all value-creating project projects.
Possible causes:

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Banks and investors say “NO”
Managerial conservatism
Analysis is required. One must consider sets of projects, or “bundles”, rather than individual
projects. The goal should be to identify the value-maximizing bundle of projects.
The danger is that the capital-rationing constraint heightens the influence of nonfinancial
considerations, such as the following:
Competition among alternative strategies
Corporate politics
Bargaining games and psychology
The outcome could be a sub-optimal capital budget, or, worse, one that destroys value!
Some remedies are the following:
✓ Relax and eliminate the budget constraint.
✓ Manage the process rather than the outcomes.
✓ Develop a corporate culture committed to value creation.

4.4. Technical feasibility

The technical aspects of a typical project idea can be scrutinized in detail to evaluate its technical
feasibility, as distinct from commercial, financial, economic and managerial feasibility. For the sake
of comprehensiveness we will cover Environmental Impact Analysis (EIA) also, as a part of this
analysis. While the various aspects to be examined will obviously vary from project to project, the
following summary covers the more common ones briefly.
4.4.1. Objectives:
First, the project proposal must fall within the ambit of the stated mission of the
sponsor(s).
Next, the proposal must be able to further the objectives and priorities of the sponsor(s).
These must therefore be ascertained and clearly recorded, along with detailed specifications for the
output which constitute the basic frame of reference for all future decisions.
The private sector would usually expect a project to earn a high enough profit, i.e. a stated
level of return on investment. Only for core projects (which are intended to basically support
other highly profitable projects) may this requirement be relaxed.
The public sector generally has multiple objectives and profitability normally takes a back
seat.
In either case, it is essential for the project analyst to keep the organization’s objectives - a along
with their interest priorities - in sharp focus, to ensure that his/her efforts follow the correct
direction.
4.4.2. Location and site
Initially, as many locations as possible should be identified which meet the most fundamental
operational requirements of the proposed project. These should then be evaluated and an optimum
location selected using the criteria of material versus market orientation, quality standards,
infrastructural status, local laws, and socio-economic and living conditions.
Within the geographical location so selected, alternative sites are similarly identified and the most
optimal one selected after considering factors like:
terrain, local climate land its impact on plant & equipment and their operation,

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availability and cost of land (plus its development),
local infrastructural facilities and their costs (power; water: road/ air/water transport;
telecommunications; etc.),
socio-economic conditions,
availability and quality of labour and construction equipment,
valid waste disposal alternatives and their costs,
local living conditions,
public policies,
local law, and
taxes, etc.

Note: Resource-oriented projects like mining of minerals involve items like geological analysis
covering geological structure, hydrological conditions, characteristics of the resource, resource
reserves, prospecting status, and expected geological problems.

The location decision should be made after giving due consideration to various benefits and
incentives offered by governments or local bodies for setting up production or service facilities in
certain specified areas. These may include assistance in the form of or in respect of capital loans
and grants, tax, concessions, clearances, subsidies, infrastructure, etc. One way to do this is to
evolve (or use available). Location Cost Indices (LCI) for different sites. If the cost (in a specified
currency) of setting up a plant is CA at location A and CB at location B, the LCI for location A is
defined as 100 x CA/CB. If reliable values of LCI for different locations, whether within one or
more countries, are available, the selection of an appropriate location becomes a bit easier. Such
valuable information is however kept a closely guarded secret by a consulting company and is
therefore difficult to come by.

Plant Size
Determination of an optimum plant size is critical to the success of a project. A plant represents
sunk costs and any under utilization of its capacity means either reduced profits or, for levels below
the Break-Even Point, losses. The adverse impact of an extra-large capacity is felt all the more
keenly during the early years when profits are all the more important for survival. It is therefore
normally better to err on the lower side and to build a plant having a capacity that is likely to be
fully utilized quickly, rather than to go in for a large capacity in the fond hope of a growing share of
the market.
In a feasibility study, one-begins by looking 'at projections of the demand-supply gap in the market
and anticipated arrives' at the possible range of project sizes after considering various constants like
availability of materials, technology, equipment, public policy (for example, a large company may
be precluded from setting up capacities beyond a size) and finances, etc.. The best possible size of
plant & equipment is then recommended after analyzing the availability, economics, and
practicability of different size options.
Technology
The same product or service can generally be obtained using quite different technologies.
Electricity, for example, can be generated using solar panels, coal (thermal plants), hydraulic power
plants, and nuclear power plants and so on. Basic telephone Sol-vices can similarly be provided
using manual, semiautomatic, or automatic exchanges. And, even the last-named category is
available if] various technological versions like Stronger, Crossbar, Analogue electronic and Digital
electronic. Needless to say, the latest technologies usually represent many improvements over the

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existing or older ones. They may also offer certain unique features. However, newly emerging
technologies may have some inherent dangers as well.
What is important for formulating a successful project is to weigh available alternative technologies
and select the one that is most appropriate in the prevailing situation, rather than blindly adopt the
latest, state-of-the-art technology assuming that it will work since it works elsewhere. A technology
is considered appropriate only if it is assessed to be satisfactory, and relevant, vis-à-vis the
following aspects in lie specific situation of the project.
▪ Specifications of the task/product
▪ Task uncertainties and interdependence
▪ [Especially for public sector] Developmental imperatives (e.g. growth of employment;
maximizing use of local resources; reduction of disparities in income levels)
▪ Required gestation period versus the time actually available of the project.
▪ Source(s) and ease of availability.
▪ Indigenous availability of comparable technology
▪ Field validation status in comparable situations. If necessary, field trials may have to be
set up.
▪ Adaptability to the qualitative characteristics of the locally (or indigenously) available
resources including energy and efficiency in their usage
▪ Dependence on nonrenewable sources of energy
▪ Capacity of the organization to absorb/adopt the technology
▪ Timely availability of manpower with requisite skills for installation, operation and
maintenance
▪ Cost of' acquisition, installation, repairs and maintenance versus availability of funds
(local/foreign)
▪ Safety characteristics
▪ Requirement or availability of R & D facilities • Environmental and sociocultural
sensitivities
▪ Likelihood, and time frame, of obsolescence
Design, Layout & Plant & Machinery
The feasibility study should broadly specify the recommended design of the processes and plant
(giving essential assumptions and design calculations). It should also present a rough layout of
various facilities and list out all the major equipments needed, with key specifications and available
source(s) of supply. Moreover, it should consider, and evaluate alternative equipments as well and
give reasoned recommendations about them.
The importance of thoroughness of planning at this stage of the feasibility study can hardly be
overemphasized. Many delays, cost overruns, and even failures of projects can be avoided provided
the design and physical formulation of the project are based on a sufficiently deep analysis and have
the support of the owner at the highest level. Otherwise, the project is likely to encounter mid-steam
changes, with untoward consequences. There is a general impression that "minor" midstream
changes would not pose much of a problem. This is not so. A project is a multi-task entity with
complex linkages and interrelationships between its various constituents, and even "small" changes,
which may result in certain made-to-order procured equipments being rendered unsuitable and thus
throw the project schedule and costs haywire.
The aim of all the efforts at this stage is to design a viable operating entity which not only works,
but works harmoniously (and with minimum costs) in relation to the stipulated inputs and local
environment. Apparent as well as latent and relatively infrequent factors having a bearing on the
effectiveness of the project must therefore be identified and considered. Neglect of climatic and

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geographical aspects (e.g. monsoons, floods, snowstorms, dust-storms, heat/cold-waves,
earthquakes, typhoons, etc.) at this stage can prove quite costly later on. It is equally important to
ascertain and give due consideration to local industrial and safety standards.

Construction Process
This needs to be tackled in the feasibility study in terms of its five aspects,
First, the methodology to be followed - viz., capital intensive or otherwise and its feasibility
under prevailing conditions.
Second, whether the construction or installation is to be done in-house, or on a turnkey
basis, or by farming out a number of contracts for different work packages, and their
feasibility. A recommendation may also be made whether any special agency (ies) should be
engaged as a part of backup or contingency arrangements for critical activity (ies).
Third, the determination of such construction equipments, materials and other essential
inputs (like cement, sand, steel, stores etc.) as are to be arranged by the owner, along with
their alternatives, availability, source of supply (local/foreign), lead-times, and infra-
structural requirements (like uninterrupted supply of power, clean water, gas, steam, etc).
Fourthly, the recommended sequence and time schedule of different activities in the form of
a bar-chart/PERT network.
Lastly, assessment of the financial implications of this phase based on the latest available
unit costs and with provision for inflation and contingencies.
Inputs
These relate to the operation phase of the project, but need to be identified at this stage of the
feasibility study to examine the technical feasibility of the proposed system(s). For this,
classification of the inputs into following categories will be found useful.
raw materials,
processed materials,
components & sub-assemblies,
spares and wear & tear parts,
water & steam,
gas, fuels and electricity.
Next, their qualitative and quantitative requirements (including buffer stocks, where applicable),
availability, feasibility alternatives and reliable sources of supply should be carefully ascertained
and record. The problems involved in their storage and handling should be also assessed.

Infrastructural Facilities
Availability and characteristics of roads, bridges, railway facilities (like station, yards), air
transportation, waterways, ports, etc. depending upon their relevance to the assessed requirements
of the project at both implementation and operation stages need to be studied. After studying the
appropriateness of the infrastructure existing around the project location, the infrastructural
requirements at the project site itself. A large part of the land area is normally required to be
reserved for service roads, storm water mains, railways, over-ground or overhead gas, steam, and air
pipelines, water reservoirs, and even harbors for certain large-scale industrial projects. A detailed
study of all such requirements and of their implications in terms of time, resources, and approximate
costs is necessary to avoid surprises later on.
Manpower
The availability in needed numbers, of manpower of requisite skills where and when required, has
to be studied. This covers both the project implementation and the operation (& maintenance)

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phases. In case imparting of training is also involved, timely availability, and costs, of the training
facilities have also to be assessed.

Environment Impact Assessment (EIA);

This study identifies the environment in which a project is to be implemented, assesses the short --
and long-term impacts the former is likely to be subjected to as result of the project activities during
construction as well as operation phases, and generates preferred alternative courses of action, if
possible.
The EIA process can prove to be of immense benefit to the project promoter, if sincerely carried
out, by ensuring that the natural resources are conserved or used efficiently and serious problems
likely to arise out of any adverse effects on community or natural systems are duly anticipated and
provided for at the planning stage itself. For identification of impacts, a list of parameters relevant
to the project is drawn up, covering natural physical resources, natural biological/resources, and
quality-of-life values including aesthetic and cultural values. For instance, for rail/road/highway
project the following parameters have been identified:
▪ Surface water quality ▪ Terrestrial wildlife
▪ Air quality ▪ Noise
▪ Seismology/geology ▪ Aesthetics
▪ Erosion ▪ Archaeological/historical
▪ Land quality significance
▪ Fisheries ▪ Public health
▪ Forests ▪ Socio-economic factors

For each of these, the resulting impacts, whether beneficial or otherwise, are then identified and a
detailed Environmental Management Plan (EMP) prepared for such mitigation, protection and/or
enhancement measures, as are considered necessary,

4.5. Social cost benefit analysis

Social cost benefit analysis (SCBA) is a perfect necropsy where the identification and determination
of the best among project alternatives is made with reference to a country’s economic and social
prerogatives. It is a systematic procedure for comprehensive review of all the costs, benefits, and
effects of a project. Such appraisal is preformed for development and infrastructure projects usually
by emphasizing the economic, technical, operational, institutional, and financial factors to ensure
that the selected project meets all necessary requirements and is implementable.
SCBA focuses on the following objectives:
▪ To contribute effectively to GDP of an economy;
▪ To aid in economic development;
▪ To justify the utilization of economy’s scare of growth;
▪ To maintain and protect environment from pollution;
▪ To educate new lines of functioning that are simple and cost effective;
▪ To benefit the rural poor and reduce regional imbalances;
▪ To justify the risks undertaken to implement and the sacrifices made in the process.
Therefore, it is important to identify the major economic, environmental, social and other factors a
project may influence directly or indirectly. For instance, introducing a coal-fired power plant in a
location previously supplied with power over long transmission lines at great cost would introduce
economic benefits in terms of lower power costs, higher supply reliability and local employment at
the power plant and support activities. Similarly, economic costs might include the use of local land

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for use of the power plant and coal handling or storage activities, air pollution from both the plant
and coal handling, ground water and soil pollution from both the plant and coal handling, ground or
storage activities, air pollution from coal washing and run-off, temperature (heat) pollution from
heat rejection of cooling water, congestion of roads and or rail corridors, reduction of investment
capital for other projects, commitment of local consumption, and various other indirect costs. Some
of the local costs are usually hidden under various concessions given to public development
projects, such as capital generation by use of tax-free bonds, use of public land subsidizing local
development constructions, etc.
The net benefits equation can be written as:
NB =  (  X −  M − d )
Where  = weighing factor for exchange rate stability;
 = weighing factor for impact of protective practices;
 = weighting factor for labor availability
 = weighting factor for adequacy of support services
UNIDO - Guidelines for Project Evaluations released during early 70s
Fundamental focus of these guidelines is net increase in the aggregate consumption of an economy
due to the project output. Other subsidiary objectives are noted as:
Changes in the distribution of domestic income;
Changes in the savings and investment levels of a community;
Change in the labor market due to project implementation, etc.
Therefore, to survey the above objectives, the guidelines advocate the following steps for the
appraiser.
Identification of direct and indirect costs and benefits that affect the aggregate
consumption of an economy;
The consumption of the shadow prices of labor, foreign exchange, and investment;
The estimation of the social rate of discount, and also of relative weights to be attached
to the net benefits accruing to various groups in the economy if redistribution of
income is considered as separate objectives.
In a nutshell, the UNIDO guidelines base its arguments on:
The financial profitability of a project;
The net effect of costs and benefits on the economic situation of a country;
The opportunity cost of the investment;
The financial profitability which is similar to that used in normal commercial ventures based on
Discounted Cash Flow techniques and other standard financial management tools;
The concept of shadow prices that are associated with various types of goods and services dealt in
the project.
Diamond – Mirrleess Approach
Little and Mirrlees, through their pioneering efforts, interpret the problem of Least Developed
Countries (LDCs) as follows:
▪ In an LDC, the foreign trade sector is considered as the public sector program. The
public sector projects are to be efficient by setting their prices equal to marginal costs. (P
= MC – leaving to room for loss)
▪ Under such a threshold pricing level only world prices should be used as ‘shadow
prices’.

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▪ Distribution and efficiency be the twin important objectives of a government policy that
affects project performance.
▪ Therefore, shadow prices give risk to effect on social welfare of a small change in
quantity of an input or output. Its value depends on the welfare function being used and
the constraints imposed.
Rationale for Using World Prices as ‘Shadow Prices’
While considering shadow pricing philosophy, commodities are classified into four:
1. Traded goods for which the elasticities of demand and supply in the market are infinite;
2. Traded goods which are having definite elasticities of demand and supply in the global
markets;
3. Non-traded goods that are not being traded and will never be traded provided optimal
trade policies are employed by the economy;
4. Potentially traded goods that are not presently traded but can be traded if the trade
policies are optimal.
In all the above cases, world prices are recommended to be used as shadow prices since domestic
pricing policies keep changing.
The crux of the Diamond and Mirrlees approach is that, application of world prices as shadow
prices helps offset the fluctuations in domestic prices and justifies the project from the economy’s
point of view. They emphasis productive efficiency, trade efficiency, and optimal operations are the
key issues. This depends on the existence of optimal commodity taxes without which the exceptions
to the rule of using world prices would disappear.
4.6. Other feasibility issues
Ecological Feasibility
We have discussed Environmental Impact Analysis under the Technical analysis. When there are
serious ecological implications, it is worthwhile to have a separate and full-fledged ecological
feasibility. Ecological consideration is another issue to be covered in feasibility study. In recent
years, environmental concerns have assumed a great deal of significance especially for projects,
which have significant ecological implications like power plants and irrigation schemes, and for
environment polluting industries (like bulk drugs, chemicals and leather processing). The concerns
that are usually addressed include the following:
What is the likely damage caused by the project to the environment?
What is the cost of restoration measures required to ensure that the damage to the
environment is contained within acceptable limits?
Legal and Administrative Feasibility
Legal and administrative feasibility is another element of the study. Clearances and Approvals:
Setting up of an industrial unit requires the entrepreneur to obtain a number of clearances and
approvals regarding land use, pollution control and safety. In this regard, you would be required to
interact with the local government authorities. Certain products may require specific clearances
from the relevant departments/authorities. Those are the issues we address under legal and
administrative clearance.

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UNIT FOUR
5. PROJECT PLANNING

Introduction
Project Planning is foreseeing with blue print towards some predicated goals or ends. Project plan is
a skeleton which consists of bundle of activities with its future prospects; it is a guided activity. It is
a plan for which resour4ces are allocated and efforts are being made to commence the project with
great amount of preplanning, project is a way of defining what we are hoping to do about certain
issue. The project alone is not responsible for what happens during the course of a planning. Project
is a final form of written documents that guides us as to what steps need to be taken next.

4.1.Nature of project planning

One cannot conceive a project in a linear manner. It involves for activities, resources, constraints
and interrelationships which can be visualized easily by the human mind and planned informally.
However, when a project crosses a certain threshold level of size and complexities, informal
planning has to be substituted by formal planning. Besides that it is an open system oriented
planned change attempt which has certain parameters and dimension. So, the need for formal
planning is indeed much greater for project work than for normal operations. The pre-defined and
outlined in detail plan of action helps than manners to perform their task more effectively and
efficiently.
There are always competing demands on the resources available in a region or a country because of
the limited availability and ever expanding human needs. Planning for the optimum utilization of
available resources becomes a pre requisite for rapid economic development of a country or a
region. Project planning makes a possible to list out the priorities and promising projects with a
view to exercising national choice among various alternatives available. It is a tool by which a
planner can identify a good project and to make sound investments decisions.
4.2.Need for project planning
One of the objectives of project planning is to completely define all work requested so that it will be
readily identifiable to each project participant. Besides that there are four basic reasons for project
planning.
▪ To eliminate or reduce uncertainty
▪ To improve efficiency of the operation
▪ To obtain a better understanding of the objectives
▪ To provide a basis for monitoring and controlling work

4.3.Functions of project planning

The following functions are to be performed carefully in the Project Planning process.
▪ It should provide a basis for organizing the work on the project and allocating
responsibilities to individuals.
▪ It is a means of communication and co-ordination between all those involved in the
project.
▪ It induces the people to look ahead.
▪ It instills a sense of urgency and time consciousness
▪ It establishes the basis for monitoring and control.

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In planning a project, the project manager must structure the work into small elements that are:
▪ Manageable,
▪ Independent,
▪ Integrated and
▪ Measurable in terms of progress.
Project planning must be systematic and flexible enough to handle unique activities, disciplined
through reviews and control and capable of accepting multifunctional inputs.
4.4.Steps in project planning
Planning decisions involves a conscious choice or selection of one alternative from among a group
of two or more alternatives. The three main steps involving project planning decisions are:
1. Identifying alternative ways of action which are relevant to the decision to be made.
2. Defining each of the alternatives. Hence, the definition involving a determination of
consequences or impact of each of the proposed alternatives.
3. Making a choice among the alternatives i.e., one has to make a decision with maximum
input, feedback and participation of superiors as well as subordinates.
Planning is a systematic attempt to achieve a set of goals within the specified time limit under the
constraints of available resource restrictions involving the least sacrifice. Broadly speaking planning
involves two differences methodologies:
4.5.Planning by incentive and Planning by direction
Planning by incentive mainly depends on the controlling of economic tools to push
economic resources towards the attainment of set goals within the specified period.
Planning by direction gives more emphasis on the direct participation of the central
planning authority in ht economic activities to attain the set goal within the estimated
time limit.
Planning is decision making based upon futurity. It is a continuous process of making
entrepreneurial decisions with an eye to the future, and methodically organizing the effort needed to
carry out these decisions. This type of well structured project plan helps to establish an effective
monitoring and control system.
Project Planning Structure
The various activities involved in Project planning is given in the following chart as Project
Planning Structure.

Work Description and Instruction Net work Scheduling

Project Objectives Master Schedules
Management Decision making Budgets
Reports Time/Cost Performance
4.6.Planning and decentralizing
The different way of allocating the activities of a project are important means of delineating various
degrees of decentralization. These are three main ways in which project planning can be
decentralized into manageable divisions viz,
1. Project planning by subject
2. Project planning by type of plan and
3. Planning in phases

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1. Planning by subject is a simplest way of dividing the powers of planning. The planner takes
decision on related operation and planning by subject. He plans, decides and directs the part of
plan. He is the sale in charge of the plan from beginning to final completion.
2. Planning by type of plan broadly defines premises and assumptions leaving the detailing to
be done by persons at the grass root level of planning. Generally such cases involve decisions
which are routine and involve a lower degree of professional and financial risk.
3. Planning in phases - are designed by several individuals who participate at the formulation
stage. The level of people involvement is directly related to the phase and the degree of risk
involved.
4.7.Areas of project planning
Comprehensive project planning covers the following area; planning the project work: the activities
relating to the project must be spelt out in detail. They should be properly scheduled and sequenced.
▪ Planning the manpower and organizations: The manpower required for the project must
be estimated and the responsibility for carrying out the project work must be allocated.
▪ Planning the manpower and organizations: The manpower required for the project must
be estimated and the responsibility for carrying out the project work must be allocated
▪ Planning the money: the expenditure of money in a time-phased manner must be budgeted
▪ Planning the information system: The information required for monitoring the project
must be defined
4.8.Types of project plan
The planning process can be done in different ways depending on the type of plan. They can be:
a) One shot or single use plans and
b) Standing or Standard use plans
Single use plans: It includes programs schedule and special ways of operating under particular
circumstances. Single plans are meant as objectives which centre on focused and desired results. It
can also be known as short term plans, to deal with the specific problem for specific place with
prescribed time limit.
Standing plans: Standing plans are those plans which include policies, standard methods and
standard operation, procedures. They are designed to deal with recurring problems. It may be
treated as standard document to be used in different plans to deal with a set of problems. The design
procedure and steps are already described. It may require adjustment considering the unit of
operation.
4.9.Project objectives and policies
Project planning begins with the end result, the goal and works backward. Often the focus of project
planning is on questions like who does what and when before such operational planning is done, the
objectives and policies guiding the project planning exercising must be articulated.

If the project team lacks a clear goal, even excellent skills and the best equipment will not enable
the team to do a good job. Well defined objectives and policies serve as the framework for the
decisions to be made by the project manager. Throughout the life of the project, he has to seek a
compromise between the conflicting goals of technical performance, cost standard and time target.
A clean articulation of the priorities of management will enable the project manager to take
expeditious actions.

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An effective project goal has the following characteristics. These characteristics are captured in the
term SMART, an acronym for the aspects of a goal commitment. These characteristics of a project
goal are specific, measurable, agreed upon, realistic and time framed.
The objectives of a project may be:
▪ Technical objectives.
▪ Performance objectives
▪ Time and cost goals
Policies are the general guide for decision making on individual actions. Some of the policies of a
project are:
▪ Extent of work given to outside contractors
▪ Number of contracts to be employed
▪ Terms of the contract etc,
Project policies must be formulated on the basis of following principles:
▪ It must be used upon the known principles in the operating areas;
▪ It should be complementary for co-ordination
▪ It should be definite, understandable and preferably in writing,
▪ It should be flexible and stable,
▪ It should be reasonably comprehensive in scope.
4.10. Tools of project planning
There are different tools available for drawing the project plan in a formal way. They may be
grouped into two categories:
1. Traditional tools and
2. Network analysis.
The common traditional tool is Gantt chart.
4.10.1. Gantt chart
It is the oldest formal planning tool designed by Henry Gantt in 1903. Under this, the activities of
project are broken down into a series of well-defined jobs of short duration whose cost and time can
be estimated. It is a pictorial device in which the activities jobs are represented by horizontal bars
on the time axis. The length of the bar indicates the estimated time for the job. The left hand end of
the bar shows the beginning time, the right hand and the ending time. The manpower required for
the activity is shown by a number on the bar. An illustrative bar chart is shown as follows.

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The project review dates are indicated by a vertical dotted line and at this time a horizontal line is
drawn beneath each bar to indicate the progress actually made up to that date. The length of the
progress line is then drawn to represent the percentage of the job that has been completed at the
review date. The merits and demerits of Gantt are below:
MERITS: 1. It is simple to understand
2. Is can be used to show progress
3. It can be used for manpower planning
DEMERITS: 1. It cannot show inter-relationship among activities on large complete projects
2. There may be physical limit to the size of the bar chart
3. It cannot easily cope with frequent changes or updating
4.10.2. Network techniques
The foundation of the approach came from the Special Projects Office of the US Navy in 1958. It
developed a technique for evaluating the performance of large development projects, which became
known as PERT - Project Evaluation and Review Technique. Other variations of the same approach
are known as the critical path method (CPM) or critical path analysis (CPA).

The heart of any chart is a network of tasks needed to complete a project, showing the order in
which the tasks need to be completed and the dependencies between them. This is represented
graphically:

Example of an Activity Network

The diagram consists of a number of circles, representing events within the development lifecycle,
such as the start or completion of a task, and lines, which represent the tasks themselves. Each task
is additionally labeled by its time duration. Thus the task between events 4 & 5 is planned to take 3
time units. The primary benefit is the identification of the critical path.
The critical path = total time for activities on this path is greater than any other path through the
network (delay in any task on the critical path leads to a delay in the project).
Tasks on the critical path therefore need to be monitored carefully.
The technique can be broken down into 3 stages:
1. Planning:
identify tasks and estimate duration of times;
arrange in feasible sequence;
Draw diagram.

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2. Scheduling:
Establish timetable of start and finish times.
3. Analysis:
establish float;
Evaluate and revise as necessary.
Diagram Symbols

To Produce the Diagram

There is a single start and end event;
Time flows from left to right (so does the numbering sequence);
Events are given a unique number (activities then have a unique label i.e. head & tail
event numbers);
The network can then be drawn taking into account the dependencies identified;
Working from the start event forward, calculate the earliest times, setting the earliest
time of the first event to zero. Add the job duration time to the earliest event time to
arrive at the earliest time for the successor event. Where the successor has more than one
activity dependent on to the latest time is entered;
Workings from the finish event backwards, calculate the latest times. Set the latest time
to the earliest time for the finish event. Subtract job duration from the latest time to
obtain predecessor latest event times. Where the predecessor event has more than one
arrow emanating from it enter the earliest time;
Event slack is calculated by subtracting the earliest event time from the latest event time;
Critical path(s) are obtained by joining the events with zero event slack.

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Worked Example
List of activities for the network:

Task Location Dependent on Duration

A - 3
B - 6
C - 3
D A 5
E C 2
F B, D, E 6
G A 9

Calculation of Earliest Time:

Use the instructions presented in section 3.2 and the following diagram.

Calculation of Earliest Start Time

What is the earliest time for event 4?

Solution to Calculation of Earliest Start Time for Event 4

Preceding
Activity Duration Calculated ET
ET

2 5 3 5 8

1 4 0 6 8

3 4 3 2 5

So the earliest start time for event 4 is day 8 (by this time all the preceding activities will have been
completed).
What is the earliest time for event 5? If you are unsure, the answer is explained
Solution to Calculation of Earliest Start Time for Event 5
This solution builds on the previous one - the earliest start time for event 4 was day 8 therefore...

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Preceding
Activity Duration Calculated ET
ET

2 5 3 9 12

4 5 8 6 14

So the earliest start time for event 5 is day 14 (by this time all the preceding activities will have
been completed).
Calculation of Latest Time:
Use the instructions presented above and the following diagram.

Calculation of Latest Start Time

What is the latest time for event 2?
Solution to Calculation of Earliest Start Time for Event 5
This solution builds on the previous one - the earliest start time for event 4 was day 8 therefore...
Activity Preceding ET Duration Calculated ET

2 5 3 9 12

4 5 8 6 14

So the earliest start time for event 5 is day 14 (by this time all the preceding activities will have
been completed).
What is the latest time of event 1? If you are unsure, the answer is explained
Solution to Calculation of Earliest Start Time for Event 5
This solution builds on the previous one - the earliest start time for event 4 was day 8 therefore.

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Activity Preceding ET Duration Calculated ET

2 5 3 9 12
4 5 8 6 14

So the earliest start time for event 5 is day 14 (by this time all the preceding activities will have
been completed).
Drawing the Critical Path:

Drawing the Critical Path

Analysis of the network allows the 'float' to be calculated, this is essentially the amount of time an
action can be delayed without delaying the overall project.
Activities on the critical path must be monitored very carefully.

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UNIT FIVE

5. PROJECT EXECUTING PROCESS

Time for action now! You will now hold a formal kick-off meeting to start the execution phase
of your project during which you will direct your team’s activities in order to produce the agreed
upon deliverables as detailed in the project plan.

5.1.Essential of project administration

For a company executing projects either regularly or for the first time it would be necessary for
the chief executive to issue what may be called project charter. It must define the project scope,
the project goals, name and authority delegated project manager, project reviewing authority and
request co-operation of all concerned in the execution of the project. An elaborate effort in this
direction may produce what is known as a project manual.
To demonstrate the project manager’s authority in a simplest and quickest way it is essential to
develop a proper organization chart.
There are two systems for the management of project and they are:
Project work system
Project control system
Project work system can be designed by developing and preparing the following tools.
Work breakdown structure
Project execution plan
Project procedure manual etc.
Similarly for effective project control system it is essential to design the tools such as project
planning, project scheduling and project monitoring.
5.2.Factory Design and layout
In creating a factory, an entrepreneur creates something which is attractive, useful and ingenious
from material resources which lack the dimension of targeted benefits. For this, the entrepreneur
uses his skills, abilities and strategies to combine a variety of material and human resources.
These potential resources manifest themselves in the selection of the factory location, in planning
and constructing the factory building, in procuring and installing machinery and equipment, in
putting up other production facilities and auxiliary services, and in recruiting and selecting men
of competence to use the physical resources for the purpose of producing goods.
The term factory design refers to the plan for a particular type of building, arrangement of
machinery and equipment, and provision of service facilities, lighting, heating, ventilation, etc. in
the building.
Importance of factory design
Factory design and layout of the factory are significant aspects of the factory organizations. They
have direct relationship with the process of manufacturing, productively and value of the
product. It also influences the operational costs of the enterprise. It also boosts the morale of
workers and ensures maximum supervision.
5.3.Factors affecting factory design
The following factors influence the design of a factory:
1. Location

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2. Nature of the manufacturing process
3. Plan Layout
4. Functional Smoothness
5. Material Handling and movement
6. Cost of Building
7. Lighting, Ventilation and Service Facilities
8. Nature of Product
9. Future expansion, modernization etc.
10. Projecting the image of a factory.
The factory design and layout should be flexible so that it may be adapted easily to technological
change, modernization, diversification and expansion with minimum cost and time.
Any planning exercise requires of the planner a good knowledge of what is involved in the
activity concerned, such as the nature of the materials to be handled, their quality and the
quantity, the processes they have to be subjected to, inspection and quality control at various
stages, assemble procedures, packing etc. He could also know the sequence of operations. He
should look ahead beyond the immediate future and anticipate changes, modifications, additions,
deletions etc., which may be forced upon his organization as a result of expansion, obsolescence,
diversification or any other reasons. Having anticipated these, provision should be made to
accommodate such changes.

While working on factory layout plan, a very important aspect to be kept in mind is the fact that
the movement of materials from one stage of manufacture to the next should be minimal. For
this, this movement has to be streamlined. If this is not initiated, it will result in the wastage of
human effort and time, both of which have a telling effect on the efficiency of an organization
and the cost of production. In industrial life, the economic and efficient usage of all the factors of
production is the key to profitability and the ability to compete in the market.
a. Plant layout
A plant layout is “a floor plan for determining and arranging the desired machinery and
equipment of a plant, whether established or contemplated, in the one best place to permit the
quickest flow of material at the lowest cost and with the least amount of handling in processing
the product from the receipt of the raw materials to the shipment of the finished products”.
During the course of appraisal, considerable emphasis is laid on a proper and scientific plant
layout as once the plant and equipment are erected, it becomes difficult and costly to change at a
later stage. The following aspect is kept in view while evaluating the plant layout:
▪ Production technology and product – mix
▪ Efficient, economic and uninterrupted flow if human and materials resources
▪ Proper space for maintenance
▪ Future expansion/diversification of the project
▪ Safety precautions particularly when explosive or bulky material is required to be
handled
▪ Proper lighting and ventilation
▪ Proper layout of utilities and services and provisions for effluent disposal, where
necessary
▪ Effective supervision of work, and
▪ Proper storage and stacking space, where required

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The success of an enterprise to a greater extent depends upon the factory design and layout. The
location, layout, amenities will influence productivity and facilitate better management. More
importantly, the efficiency of the production flow depends largely on how well the various
machines, production facilities and employee amenities are located in a plant.
b. Project design
Project design is the first stage in the execution of the project. Project design is concerned with
developing project scheduling techniques and also drawing the schedule for implementation of
the project. This is more or less a time frame for each phase in the project development. It
includes major items of project implementation such as finding of location, construction of
building, procuring plant and machinery and finally executing the production program.
Project design along with network analysis helps to develop work plan of the project and present
it in the form of diagrams representing duration of time for each work and adjustment of the time
schedule framed with reference to the problems that usually arise in the project execution.
Project design is useful to the entrepreneurs in the following ways:
▪ It gives a comprehensive idea about the entire project – described in every phase
along with the time schedule within which it has to be completed.
▪ It is a diagrammatic representation of work plan devised to execute the project, after
adjusting the usual delays that may arise4 in the implementation fo the project.
▪ The various constituent continent activities of the project are narrated in sequence to
highlight the various phases of the project.
▪ It defines the individual activities which go into the corpus of the project and their
interrelationship with each other.
▪ It enables to identify and know of events which must take place for the successful
completion.
▪ It helps entrepreneurs in coordinating project activities.
▪ It serves as an effective tool of planning and implementation of a project
▪ It helps managers to plan the project economically.
With the advent of the computer and large-scale introduction of computer based planning and
control, network analysis can considerably enhance managerial effectiveness in the context of
any time bound action programs. Computer-based network analysis can handle these problems
economically and efficiently. The binding condition is, however, that management is serious in
effecting economies in different areas of activities; and activities and events are closely watched
for initiating corrective action in proper time.
The main task of a project manager is to design systems and manage through them. A business
system refers to the total picture of men, machine, materials and paperwork involved in the
implementation of any phase of a project. System has a planned sequence of operations for
carrying out a recurring work involved in a system with family and consistently which is called a
procedure.
The first step in system design for project management is to conceive the total physical system
and its natural modules. In the next step, the connection between these modules has to be
identified. Finally, a control system using information as the media has to be developed for self
control as well as forced control of the total project. Project management system is mainly
constituted by project work system and project control system.
If the project is organized on the lines of process units or technological systems, coordination
will be extremely simplified and cooperation would be almost assured. Therefore, better result

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can be obtained if the design of work is systematized. The process of systematization starts with
the development of a work breakdown structure.
c. Work breakdown structure (wbs)
Work breakdown structure, WBS in short, is a technique which breaks down a work into its
components and at the same time establishes the connections between the components on the
lines of a family tree.
The work breakdown structure represents a systematic and logical breakdown of the project into
its components parts. It is constructed by dividing the project into its major parts, with each or
these being further divided into sub-parts. This is continued till a breakdown is done in terms of
manageable units of work for which responsibility can be defined. Thus the work breakdown
structure helps in:
▪ Effective planning by dividing the work into manageable elements which can be planned,
budgeted, and controlled.
▪ Assignment of responsibility for work elements to project personnel and outside
agencies.
▪ Development of control and information system.
▪ Work breakdown structure and Project organization
The project organization represents formally how the project personnel and outside agencies are
going to work. The work breakdown structure defines what work is to be done in a detailed
manner. To assign responsibility for the tasks to be done, the work breakdown structure has to be
integrated with the project organization structure.
d. Project Execution Plan (PEP)
Project execution plan (PEP) refers to that exercise of matching the project hardware and
software with the executing agencies to that a viable work system emerges.
Project execution plan, in fact, includes four sub-plans. There are:
1. Contracting plan
2. Work packaging plan
3. Organization plan
4. Systems and procedure plan
Project execution plan is a strategic plan – it does not deal with the operational details of
building a project. The operational details are covered in a network plan which is developed later
after the project execution plan is approved by the owner’s plan for project execution and,
therefore, it must from the basis for development of all operational plans including network
plans.
i. Contracting plan
This is the first step in the preparation of a project execution plan. Owners invariably need some
agencies with which they can share responsibilities. In the interest of developing self-regulation
systems it would be necessary to contract out those areas where the owner’s company does not
have inherent competence.
At this phase of the project, the following issues must be examined:
Which type of contract to choose,
which type of reimbursement to make,
what conditions of contracts to stipulate, and
What payment terms to offer, are all issues that must be examined during this phase
of the project.

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Contract planning would involve examination of a number of alternatives since there are so
many possible arrangements in terms of sharing of responsibilities, types of reimbursements and
general conditions of contract.
ii. Work Packaging Plan
Work packing plan will be the next important step in the preparation of the project execution
plan. A work package in a project is the smallest division of work where it still retains the
characteristics of a project. This when a project is progressively divided into systems and the
system into subsystems, a stage is ultimately reached where further division into components
will strip it of its multi-disciplinary character – the work at that stage can be consideration these
packages, grouping them or keeping them as they are, in order to from viable contracts.
Work packaging enables better organization and management of projects. A work package or
several work packages may be assigned to one individual who could serve as a mini project
manager. This enables prioritization of the entire project execution effort which, in turn, ensures
the closest possible adherence to time, cost and technical performance targets.
Work packaging can also ensure that all agencies in a project think and channel their effort in
one direction, i.e. towards the completion of the packages only. Thus, design engineers,
procurement engineers and construction engineers will then give priority to their work in relation
to a work package and not according to functional convenience. Fulfillment of the requirements
of a work package will alone be considered and achievement and not the mere volume of work
completed. This will lead to a well-coordinated completion of the project.
Thus, the contracting plan and work packaging plan together produce a list of contracts with the
scope of work defined in terms of self-contained work packages.
iii. Organization plan
Having decided the number of contracts and their scope, the owner is now in a position to set his
own house in order. The owner can deliberate on the form of organization to be adopted so that
the interest of the project is best served.
Several standard organizational arrangements are possible, ranging from pure functional
organization to pure project zed organization and an owner has to choose his own arrangement
depending on the project size, location, complexity, work packages, type and number of contacts.
It should be however, noted that an organization can become more self-regulation if it is on
taskforce or project zed. The participants in such cases fully identify themselves with the project
objectives and would regulate their behaviors on their own, as the situation may demand.
iv. System and procedure plan
The last section of the project execution plan deals with system and procedure. A heavy
emphasis has to be placed on routine system and procedure so that no intervention is required in
the day –to-day operation of a system. There are at least eight routine sub-system of project
management for which appropriate procedures can be conceived right at the start of the project
implementation.
These eight sub-systems are:
1. Contract management 5. Fund management
2. Configuration management 6. Materials management
3. Time management 7. Communications management
4. Cost management

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

5.4.Project execution system

Once these systems and procedures have been developed for the project, it is the duty of the
project administrator to set for smooth take off. It requires proper project execution systems
which should be more concerned about external intervention for survival than on its internal self
regulating capability.
The external intervention will be of the following forms:
▪ Project direction
▪ Project co-ordination
▪ Project communication
▪ Project organization
▪ Project control
These terms are often construed as actions for getting results. Too often the terms are used
interchangeably to mean management. Therefore, for the successful execution and administration
of project requires direction, organization, co-ordination, communication and control all at the
same time but in varying proportion. We shall discuss the nature of significance of project
direction, communication, co-ordination in this lesson.
a) Project direction
Project direction refers to the use of authority to channel the activities of the project on desired
lines. During the initiation of start-up period of the project this direction shall be provides by the
project manager. But once the project inters the production period direction will be exercised by
other members of the project organization of else the project will stall.
Project initiation/start-up
The need for project direction, as mentioned before, is maximum at the time of start-up of
implementation. The project manager during this period needs to provide directions relating to:
1. Scope of work
2. Specification of results of completed work
3. Basis of work
4. Division of work – imported vs. indigenous, departmental Vs. contract etc.
5. Schedule of work
6. Budget of work
7. Systems and procedure for work
8. Co-ordination of work
9. Authority and accountability for work
10. Control of work
The success of a project is heavily dependent on team work. All the items from 1 to 10 are
finalized with the involvement of project participants or else the directives will appear
authoritarian, and will unnecessarily invite opposition. If the directions can be formulated
through a participative approach, the some can be issued formally in the name of a project
manual with instructions for strict adherence to the same. Direction, during the project initiation
period, means not simply giving a push to the project; the direction issued at this stage will, in
fact, shape the destiny of the project.
Direction during production stage

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Direction after the initiation period can be considered to be of the administrative variety.
Invariably, after the start-up period, direction is provided of a case-to-case basis through formal
documents or personal contacts. A group meeting may also be used for this purpose. On-going
directions may refer to approval of work schedules, detailed budgets, specification, purchase
orders, work orders, construction drawings, travels, miscellaneous expenses, changes in baseline
etc.
Ongoing direction
Project start-up, design review, purchase order and work orders are on-time directions. But a
project will require only when unforeseen events occur, directors otherwise will require to be
provided when problems occur during project execution. In either case, a decision has to be
made as to what should be done and the same should be authorizing for implementation. Thus,
decision making and direction are part of every-day function of any manager.
Routine directions involve five steps:
1. Understanding the decision environment
2. Establishing the decision alternatives
3. Evaluation of the alternatives and selection of course of action
4. Communication the decision to the individual or agency who is to implement the
decision
5. Checking up if the decision is working so that the decision could e steered by the
consequences.
b) Communication in a project
For ongoing direction a two-way communications system is essential. For that matter, the entire
process of direction, co-ordination and control in a project revolves around communication.
It is often concluded that projects are run by communications. In fact, most of management
problems are caused in whole or in part by faulty management communications
Communication has two dimensions physical and mental, passing a memo, drawing, data,
instruction, information, etc. are the physical aspects of communication; understanding the same
in the light of role expectation, empathy, preconceived notion, language barriers, listening skills
etc., are the mental aspects of communication. While physical aspects of communication can be
easily achieved, the mental aspects often present barriers to communication. Prefer
communication requires a conscious and determined effort.
Affective communication in a project would require a communication oriented action plan. The
actions that may be taken in this regard are as below:
1. Organization or work, people and work place with communication orientation.
2. Selection and installation of appropriate communication devices
3. Project review and co-ordination meeting at predetermined frequency
4. Predetermined document distribution matrix.
5. Establishing healthy attitude towards communication by appropriate directions.
6. Installing structured reporting systems
7. Implementing routing communication systems and procedures
8. Establishing a control room
9. Using desk-top computers for communication.
Hence, in any action plan, organization of work and people is a basic project management
requirement. It is suggested that this must receive a communication orientation.
c) Project co-ordination
Co-ordination can be defined as the effort to bring parts into super relation for harmonious
functioning. A well coordinated project is as pleasing as a price of music.

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Co-ordination in a project gains its importance because of the need for simultaneous working of
number of activities. Therefore, one cannot proceed simply with the execution of a project
without proper co-ordination. Home, it is the important task in the effective project execution
and administration.
Project co-ordination procedure
Co-ordination basically addresses itself to two aspects of work – physical matching and timing.
The physical aspect would refer to what is to be done, how much is to be done and who to do it;
the timing aspect would refer to when these will be done. A schedule document which deals with
all these aspect of work should be prepared to enable proper co-ordination.
The word breakdown structures provide the basic frame work for both physical ant time co-
ordination preparation of work breakdown structure, structuring the organization, establishing a
project procedure manual, housing people under one roof wherever possible.

Similarly, development of project schedules coordinated with break down structure and
organization chart sets the stage for the time co-ordination.
Once the stages are so set, the day to day co-ordination in a project is ensured through.
a) Squad check
b) Co-ordination meeting and
c) Communication
A project is a group effort and in group there will always be differences of option. But
coordination is not merely smoothing out differences; it is re-integration of the parts into a whole
facing into account the subdivided functions and their interest.

5.5.Pre-requisites for successful project implementation

Time and cost over-runs of projects are very common in practice, particularly in the public
sector. Due to such time and cost over-runs, projects tend to become uneconomical, resources are
not available to support other projects, and economic development is adversely affected. This
helps to minimize time and cost over-runs and thereby improve the prospects of successful
completion of projects.
A lot of things can be done to achieve this goal; the most important ones appear to be as follows:
▪ Adequate formulation
▪ Sound project organization
▪ Proper implementation planning
▪ Advance action
▪ Timely availability of funds
▪ Judicious equipment tendering and procurement
▪ Better contract management
▪ Effective monitoring
a. Adequate formulation
Often project formulation is deficient because of one or more of the following shortcomings.
▪ Superficial field investigation
▪ Cursory assessment of input requirements
▪ Slip-shod methods used for estimation costs and benefits
▪ Omission of project linkages
▪ Flawed judgments because of lack of experience and expertise
▪ Undue hurry to get started

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▪ Deliberate over-estimation of benefits and under-estimation of costs
Care must be taken to avoid the above deficiencies so that the appraisal and formulation of the
project is through, adequate and meaningful.
b. Sound project organization
A sound organization for implementing the project is critical to its success. The characteristics of
such an organization are:
▪ It is led by a competent leader who is accountable for the project performance.
▪ The authority of the project leader and his team is commensurate with their
responsibility.
▪ Adequate attention is paid to the human side of the project.
▪ Systems and methods are clearly defined
▪ Rewards and penalties to individuals are related to performance.
c. Proper implementation planning
Once the investment decision is taken – and often even while the formulation and appraisal are
being done – it is necessary to do detailed implementation planning before commencing the
actual implementation. Such planning should inter alia, seek to:
▪ Develop a comprehensive time plan for various activities like land acquisition, tender
evaluation, recruitment of personnel, construction of building, erection of plant,
arrangement for utilities, trial production run, etc.
▪ Estimate meticulously the resource requirements (manpower, material, money, etc )
for each period to realize the time plan.
▪ Define properly the inter-linkages between various activities of the project.
▪ Specify cost standards
d. Advance action
When the project appears prima facie to be viable and desirable, advance action on the following
activities may be initiated: (i) acquisition of land, (ii) securing essential clearances, (iii)
identifying technical collaborators / consultants, (iv) arranging for infrastructure facilities, (v)
preliminary design and engineering, and (vi) calling of tenders
e. Timely availability of funds
Once a project is approved, adequate funds must be made available to meet its requirements as
per the plan of implementation – it would be highly desirable if funds are provided even before
the final approval to initiate advance action. Piecemeal, ad-hoc, and niggardly allocation, with
undue rigidities, can impair the maneuverability of the project team. It is a common observation
that firms which have a comfortable liquidity position are, in general, able to implement projects
expeditiously and economically. Such firms can initiate advance actins vigorously, negotiate
with suppliers and contractors aggressively, organize input supplies quickly, take advantages of
opportunities to effect economies, support suppliers in resolving their problems so that they can
in turn redound to the successful completion of projects, and sustain the morale of project-related
personnel at a high level.
f. Judicious equipment tendering and procurement
To minimize time over-runs, it may appear that a turnkey contract has obvious advantages. Since
these contracts are likely to be gagged be foreign suppliers, when global tenders are floated, a
very important question arises. How much should we rely on foreign suppliers and how much
should we depend on indigenous suppliers? Over-dependence on foreign suppliers, even though
seemingly advantageous from the point of view of time and cost, may mean considerable
outflow of foreign exchange and inadequate incentive for the development of indigenous
technology and capability. Over-reliance on indigenous suppliers may mean delays and higher

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uncertainty about the technical performance of the project. A judicious balance must be sought
which moderates the outflow of foreign exchange and provides reasonable fillip to the
development of indigenous technology.
g. Better contract management
Since a substantial portion of a project is typically executed through contracts, the proper
management of contracts should be done:
▪ The competence and capability of all the contractors must be ensured – one weak link
can jeopardize the timely performance of the contract.
▪ Proper discipline must be inculcated among contractors and suppliers by insisting that
they should develop realistic and detailed resource and time plans which are
congruent with the project plan.
▪ Penalties – which may be graduated – must be imposed for failure to meet contractual
obligations. Likewise, incentive nay be offered for good performance.
▪ Help should be extended to contractors and suppliers when they have genuine
problems – they should be regarded as partners in a common pursuit.
▪ Project authorities must retain latitude to off-load contracts (partially or wholly) to
other parties well in time where delays are anticipated.
h. Effective monitoring
In order to keep a tab on the progress of the project, a system of monitoring must by established.
This help in:
Anticipating deviations from the implementation plan
Analyzing emerging problems
Taking corrective action
In developing a system of monitoring, the following points must be borne in mind:
It should focus sharply on the critical aspects of projects implementation.
It must lay more emphasis on physical milestones and not on financial targets.
It must be kept relatively simple. If made over-complicated, it may lead to redundant
paper work and diversion of resources. Even worse, monitoring may be viewed as an
end in itself rather than as a means to implement the project successfully.
5.6.Effective project management at national level
The effective management of project is essential for the development of economy in as much as
the development itself is the off-shoot of a series of successfully managed projects. This reveals
that the project management is an extremely important problem area for a developing country
such as ours. Unfortunately many projects experience schedule slippage and cost overruns due to
a number of reasons. To remedy the situation, projects ought to be meticulously planned,
scrupulously implemented and professionally managed to achieve the objective of time, cost and
performance. Modern technique of project management can play a major role in streamlining the
management of projects.
Projects management is a complex process bristling with a number of variables contributing to
success in a project. It is not a facile task to ensure overall effectiveness of the project. Several
factors contribute to its success. The project determinants are plenty and many success of the
projects interalia include factors which little or no management control is possible. Discretionary
factors can be controlled either within the project itself or in the larger system, and the end
products serve as the basis for the determination of degree of success.

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5.6.1. Factor (Determinants) for effective project Management
The study of factors for effective projects management comprising both internal and external
determinant factors are taken into account. The internal factors are project managers, project
team, project management techniques, project organization structure, project monitor and
evaluation system, use of computers, detailed project engineering know how, management
reporting system, etc.
1. Internal Factors
a. Project Managers:
The project manager is the crux of the coordinating authority with various functional heads.
He/she is the seminal coordinating authority forging a lasting rapport with the financial
institutions, government and statutory bodies, etc. He/she is the main plank and fulcrum of the
project and he is a person who has been associated with the project right from the scratch to the
completion of the project. He play role like a lynch-pin. He/she encompasses into his fold the
whole gaumt of the project team and also entire spectrum of clientele contractors and turnkey
consultants. The foremost aim and motto of the project manager is to accomplish the project cost
within the stipulated amount. Hence, it can be observed that the project manager plays a vital
role in the firmament of industrial project.
b. Project Team:
The project team comprises of section heads of production, electrical and mechanical who are
looking after the activities of their respective wings. The project team is a la cricket team where
we could find players adept in bowling, batting and fielding with the result al the players would
put their unstinted and indefatigable effort to translate their action of accomplishing the objective
of the team. For any project, success could be attributed to the able support of all the players and
the project manager would don the role of a captain of the cricket team or of a captain of ship.
c. Project Managerial Techniques:
The project organization structure should be in consonance with the nature of the project, its
complexity, and type of process technologies developed. Centralized policy formulation with
decentralized implementation appears best suited for project management. The organizational
structure should provide for scheduling and monitoring, contract management, materials and
equipment procurement, on site co-ordination and control and information processing, etc.
Adequate powers should be delegated to enable on the spot decisions and thereby minimize
avoidable delays. The well designed and established project organization structure will effective
project implementation and improve project management performance tremendously.
d. Project Monitor and Evaluation System:
A well designed and in built project monitoring and evaluation system will minimize project
slippage. A project management information system with the help of computer net works and
methods would enable project monitoring and control at various levels and that would naturally
enhance the project management performance.
e. Use of Computers:
Project management software package are used to meet deadlines, to reduce costs and ultimately
to optimal utilization of resources. They offer services like planning, coordinate and monitor
product launches, plant commissioning, and erection, maintenance, and construction activities.
They also identify crucial problematic areas and sound warnings on possible delays and
contingencies and also to take instant and remedial measures to arrest the lapses before assuming
hiatus in the project management. They generate instant reports in project status, keep track of
project progress and trends to achieve targets and also allocate the resources in order to achieve

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realistic goals. Undoubtedly, the usage of computers saves precious time and money. The
application of computers will enhance and uplift the overall project management effectiveness.
f. Management Reporting System:
The management information and reporting systems ensures monitoring or the project progress
and also identifies the specific information requirement of the project. To achieve this objective
every project should develop requisite reporting formats for input and output of data, proper
information flow and communication systems and setting up adequate date processing and
storage systems necessary for the purpose. The well knit management reporting system will go a
long way I assisting speedy implementation of projects’ performance.
2. External Factors
a. Support from financial institutions:
The financial institutions support is an important determinant of project management
performance though achieving the project objectives of time, cost and quality. This study has
grasped the fact that there is average time delay of 6 to 7 months in obtaining finance. The
financial institutions has a role to play in project identification, appraisal, implementation and
monitoring and provision of adequate funds to projects as and when it is required will avoid
delay in implementing the projects.
b. Early Clearance from Government Department:
The simplification of bureaucratic rigmarole and redtapism of the government departments in
project approval and sanctioning for public sector projects and liberalization of industrial
licensing, foreign exchange regulation provision, MRTP clearance, environmental clearance etc.
for private and joint sector projects would minimize and reduce the time delay in clearing such
approvals thus ensuring early implementation of industrial projects so as to trigger fillip to the
project management success.
c. Detailed Project Engineering Know-how:
Detailed and scientific projects engineering know-how is sine-quinine to have optimum
utilization of the project cost. The latest development in design and engineering technology
could be applied for cost effectiveness. All these goes to ensure effective project implementation
for improving the performance of the project management.
d. Construction Management:
Construction management plays a unique part in the matter of industrial project management.
The construction management includes under its fold the construction of factory and office
buildings and erection and construction of factory sheds and plant commissioning etc. These
ought to be constructed according to the project schedule so as to minimize project delays.
e. Project Consultants:
Project management consultants are professionally qualified who are fully equipped to perform
services to the project management organization in the entire gamut of erection, commissioning
and implementing the industrial projects. A delay in project consultant’s performance of his hob
would mean procrastination of the project, for which ultimately client suffers more than the
consultants pay a vital role in the various stages of the project right from the stage of
commissioning of the project. He is also abundantly responsible for closely monitoring the
progress of the project. He is also abundantly responsible for closely monitoring the progress of
the project at every phase of the project. The unstinted and unflappable support of the project
consultants would naturally brighten the project’s success.

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UNIT SIX
6. PROJECT CONTROLLING, MONITORING AND CLOSING
Introduction:
Once the project has been launched, it is essential to control the projects to achieve the desired
results. In this process the control becomes closely inter-wined in an integrated managerial
process. Project control involves a regular comparison of performance against targets, a search
for the causes of deviation and a commitment to check adverse variances.
6.1. Introduction to Project control
Project control serves two major functions:
It ensures regular monitoring of performance
It motives project Personnel to strike for achieving projects objectives steps in
Projects Control.
There are two important steps in the project control;
1. Establishment of controls.
2. On-going controlling activities using above controls.
It is nothing but controlling a project when it enters the production period using the controls
established during the initiation period.
Control during the production period involves four steps, there are
1. Setting targets for what should be achieved,
2. Measuring of what is happening including anticipation of what may happen.
3. Comparison between what should happen and what is happening or likely to happen.
4. Taking corrective actions to make things happen, as they should these four steps
should fellow each other till the work is completed.
Projected Control themes
The Projects Control can be exercised on different aspects. Such as
on the progress of the activities
on the performance of project activities
on project Schedule
on Projects Cost
6.1.1. Problems of project Control
Effective control is critical for the realization of project objectives. Control of projects in practice
tends to be ineffective. There are three main reasons for poor control of projects viz.,
Characteristics of the project- Largeness and complexities Maintenance of non-
routine activities Co-ordination and communication problem.
People Problems- Managers do not have required experience & training lack of
competence and inclination to control projects.
Poor control and information system: Delay in reporting performance inappropriate
level of detail unreliable information.
6.1.2. Ganit Charts/Bar chart
In dealing with complex projects pictorial representation showing the various jobs to be done,
and the time and money they involve is generally helpful. One such pictorial charges, also
known is the bar chart, was developed by Henery Gantt around 1900. It consists of two
coordinate axes, one representing the time elapsed and the other, jobs or activities performed.

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The length of a bar indicates the duration the job or activity take for completion. Generally, in
any project some jobs can be taken up concurrently and some will have to be completed before
others can begin. Hence, in a bar chart representing a projects, some of the bars run parallel or
overlap each other times-wise (these correspond to concurrent jobs) and some run serially with
one bar beginning after another bar ends (corresponding to an activity that succeeds a preceding
activity). For example activities A, B and C can start at the sometime and proceed concurrently
or in parallel, though they take different time intervals for their completion. Activity D, however,
cannot begin until activity A is over. The bars representing A and D therefore run serially.
Let us consider a specific example. A piece of equipment is made of two parts A and B which
are to be assembled together before they are dispatched. Part A is of cast steel, which requires a
pattern and a mould. Part B is a machined item made on special machine M which needs to be
purchased and installed. Parts A requires special hear-treatment before assembly. The assembly
needs to be tested with a specially constructed rig before dispatch.
The time scale for each activity is as follows:
Preparing a pattern for casting 4 Weeks
Preparing a mould 2 Weeks
Costing the cleaning operation of A 1 Weeks
Heat-treatment of A 2 Weeks
Obtaining and installing machine M 7 Weeks
Machine part B 5 Weeks
Assembling part A and B 3 Weeks
Preparing the test rig 4 Weeks
Testing the assembly 2 Weeks
Packing for dispatch 1 Weeks
The various activities are shown along the ordinate or the vertical axis and the time elapsed along
the horizontal axis.

6.1.2.1. Weaknesses in Bar Charts

Interdependent of activities:
In a program where there are a large number of activities that can be started with a certain degree
of concurrency, the bar chart cannot show clearly the interdependent among the various efforts
or activities. This is a serious deficiency. The mere fact to or more activities are scheduled for
simultaneous or overlapping times does not necessarily make them related or interdependent, or
completely independent. Such activities as preparing a pattern, preparing a mould, costing and
cleaning, and heat-treating have to run sequentially, i.e., one activity must be completed before
the other can begin. The bars representing these activities are not allowed to overlap. On the
other hand, installing machine M and preparing the test rig can proceed simultaneously because
they are completely independent activities and hence the bars representing them can run parallel
to each other. However, this is exactly the weakness of the bar chart, because two parallel bars
need not necessarily stand for independent activities, as the following example will show.
Suppose a project involves digging foundation, erecting side boards or shuttering, and pouring
concrete. The time consumed is shown against each activity:
Digging foundation 20 Weeks
Erecting side boards 14 Weeks
Pouring concrete 16 Weeks

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If the activities are not allowed to run in parallel but in strict sequence, the total time taken for
the completion of the project is 50 weeks. As we can easily see, erection of the sideboards can
start after the completion of, say, one-half of foundation digging. Similarly, poring of concrete
can start, say, 5 Weeks after the erection of side boards. According to this plan, the side board
erectors still have 4 weeks of work after the excavation job is over. However, if due to certain
unexpected difficulties the excavation is delayed by 1 or 2 weeks, how will reflect on the
sideboard erection or the concrete pouring job? This is not revealed by the bar chart.

6.1.2.2. Project progress:

A bar chart cannot be used as a control device since it does not show the progress of work.
Knowledge of the amount of work in progress or jobs completed is absolutely necessary in a
dynamic program. Changes in plans are a necessary part of a large project and a bar does not
offer much assistance under such circumstances.
However, a conventional bar chart can be modified to give this additional information.. Suppose
16 weeks have elapsed after he project started: be the progress made in the project can be
depicted by partially filling in the blank bars. Foundation digging, is weeks behind schedule.
Uncertainties
One of the most important deficiencies of the bar chart is its inability to reflect the uncertainty or
tolerances in the duration times estimated for various activities. The modern day space system
programs or other complex projects are largely characterized by extensive research, development
and technological progress. The traditional knowledge or practices play a very insignificant role.
In such situations, the completion of various stages or jobs cannot be forecast with exactness.
Uncertainty about a test becoming successful or a sudden break though in technology to know-
how will always provide situations which will make rescheduling of various events a necessary
part of the project and give it a dynamic character which is not reflected in a bar chart.

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6.1.3. Milestone Charts
Because of the shortcomings or the inadequacies of the chart in meeting the requirements of the
modern day management, efforts have been made to modify it by adding new elements. One
such modification is milestone chart. Another important modification, relatively successful, has
formed a link in the evolution of the Gantt chart into the PERT or CPM network.
This modification is called the milestone system. Milestones are key events or point time, which
can be identified when, completed as the project progresses. In the Gantt chart a bar which
represents a long-term job is broken down to several pieces, each of which stands for an
identifiable major event. Each event is numbered and an explanatory table given identifying the
number with the event. These are specific event (points in time) which management has
identifies as important reference points during the completion of the project. This work
breakdown increases the awareness of the interdependent between tasks.
While the milestone chart was definitely an improvement on the bar chart, it still had one great
deficiency, i.e., it did not clearly show the interdependent between events. In a milestone chart
the events are in chronological, but not logical, sequence. A natural extension of the milestone
chart was the network where the events are connected by arrows in a logical sequence.

6.1.4. Critical path method (CPM)

The critical path analysis is an important tool in production planning and scheduling. Gantt
charts are also one of the tools of scheduling but they have one disadvantage for which they are
found to be unsuitable. The problem with Gantt chart is that the sequence of operation of a
project or the earliest possible date for the completion of the project as a whole cannot be
ascertained. This problem is overcome by this method of Critical Path Analysis.
CPM is used for scheduling special projects where the relationship between the different parts of
project is more complicated than of a simple chain of task to be completed on after the other.
This method (CPM) can be used at one extreme for the very simple job and at other extreme for
the most complicated tasks.
A CPM is a route between two or more operations which minimizes (or maximizes) some
measures of performance. This can also be defined as the sequence of activities, which will
require greatest normal time to accomplish. It means that the sequences of activities, which
require longest duration, are singled out. It is called at critical path because longest duration is
singled out. It is called as critical path because any delay in performing the activities should be
taken should be taken up first.
According to John L. Burbidge, “One of the purposes of critical path analysis to find the
sequence of activities with the largest sum of duration times, and thus find the minimum time
necessary to complete the project. This critical series of activities is known as the ‘Critical path”.
Under CPM, the project is analyzed into different operation or activities and their relationship
are determined and shown on the network diagram. So, first of all a network diagram is drawn.
After this the required time or some other measure of then combined to develop a schedule
which minimizes or maximizes the measure of performance for each operation. Thus CPM
marks critical activities in a project and concentrates on them. It is based on the assumption that
the expected time is actually the time taken to complete the object.
Main objects of CPM
The main objects of CPM are:
To find difficulties and obstacles in the course of production process
To assign time for each operation,

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To ascertain the starting and finishing times of the work
To find the critical path and the minimum duration time for the project as a whole.
Situation where CPM can be effectively used:
CPM techniques can be used effectively in the following situation:
a) In production planning
b) Location of and deliveries from a warehouse
c) Road systems and traffic schedules
d) Communication network
Advantages of CPM
The application of CPM leads to the following advantages:
It provides an analytical approach to the achievement of project objective which are
defined clearly.
It identifies most critical elements and pays more attention to these activities.
It assists avoiding waste of time, energy and money on unimportant activities.
It provides a standard method for communicating project plains, schedules and cost.
Thus CPM technique is a very useful analysis in production planning of very large project.
There are so many modern techniques that have developed recently for the planning and control
of large projects in various industries especially in defense, Chemical and construction
industries. Perhaps, the PERT is the best known of such techniques.
PERT is a time-event network analysis technique designed to watch how the parts of a program
fit together during passage of time and events. The special project office of the U.S. Navy
developed the technique in 1958. It involves the expected of any operation can never by
determined expected time of any operation can never by determined exactly.
Major feature of PERT or Procedure or Requirement for PERT
The following are the main feature of PERT:
All individual tasks should be shown in a network. Events are shown by circles. Each
circle representation event a subsidiary plans whose completion can be measured at a
given time.
Each arrow represents and activity the time consuming element of a program, the
effort that must be made between events.
Activity time is the elapsed time required to accomplish element an event. In the original PERT,
three-time values are used as follows: Is
t1 (Optimistic time) : It is the best estimate of time if everything goes exceptionally
well
t2 (Most likely time): It is an estimated time what the project engineer believes
necessary to do the job or it is the time which most often is required if the activity is
repeated a number of times.
t3 (Pessimistic time) : It is also an activity of under adverse conditions. It is the
longest time and rather is more difficult to ascertain.
The experiences have shown that the best estimate of time out of several estimates made by the
projects engineer is:
t1 + 4t2 + t3
t =
6
and the variance of t is given by-

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t3 t1
V (t) =
6
Here it is assumed that the time estimate follows the Beta distribution.
The next step is the compute the critical path and the slack time. A critical path or critical
sequence of activities is one, which takes the longest time to accomplish the work and the least
slack time

Advantage of PERT
PERT is a very important of managerial planning and control at the top level
concerned with overall responsibility of a project. PERT has the following merits.
Pert forces managers and subordinate manger’s to make a plan for production because
time event analysis is quite impossible without planning and seeing how the pieces fit
together.
PERT encourage management control by exception. It concentrates attentions on
critical element that may need correction.
It enables forwards-working control, as a delay will affect the succeeding events and
possibly the whole project. The production manager can somehow make up the time
by shortening that of some other time.
The network system with its sub-systems creates a pressure for action at the right spot
and level and at the right event.
PERT can be effectively used for re-scheduling the activities.
Limitations in using PERT
The uses of PERT techniques are subject to the following limitations:
It is a time-consuming and expensive technique.
It is based on Beta Distribution and the assumption of Beta Distribution may not
always be true.
PERT is not suitable when program is nebulous and a reasonable estimate of time
schedule is not possible.
It is not useful for routine planning of recurring events such as mass production
because once a repetitive sequence is clearly worked out; elaborate and continuing
control is not required.
The expected time and the corresponding variance are only estimated values.
Difference in PERT and CPM
Although these techniques (PERT and CPM) use the same principles and are based
on network analysis yet they in the following respects from each other:
PERT is appropriate where time estimate arte uncertain in the duration of activities as
measured by optimistic time, most likely time, and pessimistic time, where as CPM
(Critical Path Method) is good when time estimates are found with certainty. CPM
assumes that he duration of every activity is constant and therefore every activity is
critical or not.
PERT is concerned with events, which are the beginning or ending points of
operation while CPM is concerned with activities.
PERT is suitable for non-repetitive projects while CPM is designed for repetitive
projects.
PERT can be analyzed statistically whereas CPM not.

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PERT is not concerned with the relationship between time and cost, whereas CPM
established a relationship between time and cost is proportionate to time.
6.2. Project closing process

The last major phase of a project's life cycle is the close-out. Closing a project should be a fairly
routine process.
Key elements
The key elements to project close-out are:
• Accepting the project's products indicated by user sign-off
• Completing the Post Implementation Evaluation Report (PIER)
• Disbursing the resources—staff, facilities, and automated systems
• Conducting a lessons learned session
• Completing and archiving project records
• Recognizing outstanding achievement
• Celebrating project completion

These activities are particularly important on large projects with extensive records and resources.
This section does not address processes for transitioning the technical support into maintenance
and operation. These tasks are diverse and unique to the specific development environment of a
project.
The first step of the close-out process is the user's acceptance of the system. This is a critical and
important step, as the user decides when the project is completed. Acceptance is based upon the
success criteria defined in the very early concept and planning stages of the project. This
acceptance should be formal, meaning that user sign-offs should be obtained.

6.2.1. What is a Post Implementation Evaluation Report?

A Post Implementation Evaluation Report (PIER) documents the history of a project. It provides
a record of the planned and actual budget and schedule. The report also contains
recommendations for other projects of similar size and scope.
The PIER will be stored on the State’s database on IT projects. Additional specifications for the
PIER and the project database can also be stored.
The PIER Table of Contents should look like the following:
• PIER
• Schedules
• Successful risk assessment and mitigation techniques, i.e. What risks occurred and
what techniques were used to mitigate these risks
• Processes used for change control, quality, and configuration management
• Techniques used for project communication
• Techniques for handling customer expectations
• Success factors and how they were met
• Financial data
• Recommendations to future project managers
• Lessons Learned (from lessons learned session)

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Identifying and Addressing Success
Be certain that successes as well as problems on the project are identified in the PIER. Be certain
to include new ideas that were very successful on the project. Make recommendations on how
these processes might be adapted for other projects.
Share the project successes with other organizations. In the same way that problem
identification can lead to improvements, successes must be shared so they can be repeated.
Where possible, successes should be translated into procedures that will be followed by future
projects.

Who Prepares the Report?

The project manager has responsibility for preparing the report. The project manager gets input
from the entire project team, the users, and other major stakeholders. People performing
different functions on the project will have a different outlook on the successes and failures and
on possible solutions. If every project member cannot be consulted, at least ensure that a
representative from each major area of the project participates. The users’ overall view of the
project and its final product is also a major focus of the project. It is this view, along with the
view of the major stakeholders that lives on after closure has been completed.
Collecting Project Data
Following preparation of the Post Implementation Evaluation Report, the project database is
archived. Historic project data is an important source of information to help improve future
projects.
Typically, the following project data is archived:
• Project identification and evaluation report
• Project Plan
• Project Management Control Documents
 Correspondence
 Relevant Meeting Notes
 Status Reports
 Contract Files
• Technical documents
• Information that had been placed under configuration management
All the hard copy records should be stored following standard guidelines. Many of the technical
records and automated versions will be turned over to stakeholders responsible for maintenance
and operation of the system. Summary technical information should be electronically stored for
historical access. The project archive includes a description of the files being submitted, the
application (including version) used to create the archived materials, and a point of contact if
further information is needed.
Where is the Archive Maintained?
The units sponsoring the project usually maintain an archive of projects that includes only
project summary information. The more detailed information is archived at the organization.
How is the Archived Material Used?
Building a repository of past projects serves as both a reference source for estimating other
efforts and as a training tool for project managers.
Project archives can be used when estimating projects and in developing metrics on probable
productivity of the development teams. Use of past performance metrics provides the best

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source for future estimates. When sufficient project data is collected over time, the state may be
able to develop an experience database that will help to make strong estimates and develop
realistic project plans.
Recognition of Success
Celebrate the success of completing a project!
There is fairly universal recognition that positive reinforcement, or rewarding behavior, is an
effective management tool. Since it is a goal within the project promoters to execute all projects
successfully, it is important to recognize teams that have met this goal. When success in a project
is achieved, be certain to provide some recognition to the team. If individuals are singled out for
significant achievements, don’t forget to recognize the entire team as well.
What is Success?
Success is defined at the early stages of planning the project. In this project management
methodology, success factors are developed as part of the concept phase. Success is not tied only
to budget and schedule. Many projects can be considered a tremendous success even though the
project did ultimately cost more than had been anticipated.
Some key questions that determine success are:
• Were the success factors achieved?
• Do the stakeholders and end-users view in a positive manner the project product?
• Was the project well-managed?
• Did the team work well together and know what was going right and wrong?
Informal Recognition
There are many ways to reward people for a job well done. The reward might be an informal
after work gathering or a lunch-time celebration. If people are willing to chip in, you could
provide mugs that commemorate the event.
Formal Recognition
Management may also want to express recognition of a successful team effort by praising the
team at a key meeting or a large gathering of staff. People are proud to have senior management
appreciation stated, and such recognition sets the stage for future successful work.
Formal recognition can also be achieved through coordination with the Kansas Information
Technology Office for articles in industry periodicals and by updating the project data that is
circulated to the legislature.

Conduct a Lessons Learned Session

In addition to communicating the closure of a project in writing, it is also advisable to have a
mechanism for group review. A “lessons learned” session is a valuable closure mechanism for
team members, regardless of the project's success. Some typical questions to answer in such a
session include:

• Did the delivered product meet the specified requirements and goals of the project?
• Was the user/client satisfied with the end product?
• Were cost budgets met?
• Was the schedule met?
• Were risks identified and mitigated?
• Did the project management methodology work?
• What could be done to improve the process?

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The lessons learned session is typically a large meeting that includes:
• Project team
• Stakeholder representation - including external project oversight
• Executive management
• Maintenance and operation staff
Such a session provides official closure to a project. It also provides a forum for public
recognition and offers an opportunity to discuss ways to improve future processes and
procedures.

Document Lessons Learned

One purpose of the PIER is to document lessons learned. This means that problems encountered
by the project team are openly presented. Problem identification on completed projects provides
a method to discuss the issue in hopes of eliminating its occurrence in future endeavors. It is
important, however, that the problem discussions do not merely point a finger away from the
project team. Responsibility and ownership for problem areas are critical to developing useful
recommendations for future processes.
Problems that were encountered should be prioritized with focus on the top five to ten problems.
One should not document every problem.
Since problems or sensitive issues may be discussed in the PIER and Lessons Learned, it is
helpful to have all contributing parties review the materials prior to formally submitting the
document. It is useful to have the reviews in an interactive forum where all parties can discuss
their recommendations for improvement. The PIER can then present a complete view of the
project.

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