Project Management

MBA - FINANCE
III Semester
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MBA (Finance) – III Semester Paper code: MBFM s

3004 PAPER – XIV

Project Management

Objectives

➢ To understand the concept of project and steps in

project management
➢ To enable the students to prepare business proposals and
➢ To enable the students to evaluate the Project feasibility

Unit - I

Project – Classification – Importance of Project

Management – An Integrated Approach – Project
Portfolio Management System – The Need – Choosing
the appropriate Project Management Structure:
Organizational considerations and project
considerations – steps in defining the project
– project Rollup – Process breakdown structure – Responsibility Matrices
– External causes of delay and internal constraints.

Unit-II

Project feasibility studies - Opportunity studies,

General opportunity studies, specific opportunity studies,
pre-feasibility studies, functional studies or support studies,
feasibility study – components of project feasibility studies –
Managing Project resources flow – project planning to
project completion: Pre-investment phase, Investment
Phase and operational phase – Project Life Cycle – Project
constraints.

Unit - III

Project Evaluation under certainty - Net Present

Value (Problems - Case Study), Benefit Cost Ratio, Internal
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Rate of Return, Urgency, Payback Period, ARR – Project
Evaluation under uncertainty – Methodology for

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project evaluation – Commercial vs. National Profitability –
Social Cost Benefit Analysis, Commercial or National
Profitability, social or national profitability.

Unit - IV

Developing a Project Plan - Developing the Project

Network – Constructing a Project Network (Problems) –
PERT – CPM – Crashing of Project Network (Problems -
Case Study) – Resource Leveling and Resource Allocation
– how to avoid cost and time overruns – Steps in Project
Appraisal Process – Project Control Process – Control
Issues – Project Audits – the Project Audit Process –
project closure – team, team member and project manager
evaluations.

Unit - V

Managing versus leading a project - managing project stakeholders

– social network building (Including management by wandering
around)
– qualities of an effective project manager – managing
project teams – Five Stage Team Development Model –
Situational factors affecting team development – project
team pitfalls.

[Note: Distribution of Questions between Problems and

Theory of this paper must be 20:80 i.e., Problem
Questions: 20 % & Theory Questions: 80 %]

References

Arun Kanda, PROJECT MANAGEMENT, PHI, Delhi, 2011

Panneerselvam & senthilkumar, PROJECT MANAGEMENT, PHI,
Delhi, 2009
Ramakrishna, ESSENTIALS OF PROJECT MANAGEMENT,
PHI, Delhi, 2010

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UNIT - I

When you travel, you happened to see bridges being

built, roads being laid, buildings being constructed and a
lot of other activities, which are unique in nature and
which deliver physical outputs. The same way, you might
come across several activities, which deliver services like
marriage contract, software development, health camp,
literacy camp, etc. If you look at the above activities, they
are unique in nature and they require defined time and
resources. We can call these activities as projects and
managing these projects has become more critical with
the limited time and resources at our disposal. Thus,
project management has become an important area and its
application is found in almost all the business and non-
business activities. Let us study in this unit, the meaning
of project management, its importance, classification of
projects, project portfolio management system, project
management structure, steps in defining project, causes
and constraints in executing project.

Unit Structure

Lesson 1.1 - Project Management – An Overview

Lesson 1.2 - Project Portfolio Management System
and Structure Lesson 1.3 - Steps in Defining Project
and Project Delays

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Lesson 1.1 - Project Management – An Overview

Learning Objectives

➢ To understand the concept, characteristics and elements

of projects.
➢ To understand the stages in Project Life Cycle.
➢ To know the classification of projects on various bases.
➢ To appreciate the importance of project management.
➢ To understand the importance of integrated
approach in project management.

Concept of Project

Project is defined as temporary but interrelated tasks

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

A project is a temporary endeavor, having a defined

beginning and end (usually constrained by date, but can
be by funding or deliverables), undertaken to meet
unique goals and objectives, usually to bring about
beneficial change or added value. The temporary nature
of projects stands in contrast to business as usual (or
operations), which are repetitive, permanent or semi-
permanent functional work to produce products or
services.

A project is an investment made on a package of

interrelated time- bound activities; consequently, a project
becomes a time-bound task. Every project has two phases

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basically; the first is preparation and construction, and the
second, its operation. Project planning deals with specified
tasks, operations or activities which must be performed to
achieved the project

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goals. Any project that we may consider has an
objective, or a set of objectives, to achieve. It has to be
operated within a given set of rules, regulations,
constraints and restrictions. Implementation of projects
needs resources or inputs. Every project converts the
given inputs into outputs through a process of
implementation. The outputs in the short run lead to
outcomes, which, in the long run, should result in
impact.

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

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

Typical examples of projects include: construction of

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

Projects also involve one or more elements that have

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

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Characteristics of a Project

1. Temporary: Projects are temporary in nature. Every

project has a beginning and end. The word
‘temporary’ here may refer to an hour, a day or a
year. Operational work is an ongoing effort which is
executed to sustain the business. But projects are not
ongoing efforts. A project is considered to end when
the project’s objectives have been achieved or the
project is completed or discontinued. Only projects
are temporary in characteristic and not the project’s
outcomes. It will not generally be applied to the
product, service or result created by the project.
Projects also may often have intended and
unintended social, economic and environmental
impacts that long last.Eg. Building Eiffel Tower was
a project. The structure was built between 1887 and
1889. Project Eiffel Tower ended on 1889. But still
the outcome of the project exists as a monument.

2. Definite Beginning and Completion: Project is said to be

completed when the project’s objectives have been
achieved. When it is clear that the project objectives
will not or cannot be met the need for the project no
longer exists and the project is terminated. Thus,
projects are not ongoing efforts. Thus, every project
has a definite beginning and end.

3. Definite Objective/Scope and Unique: All the projects have

their own defined scopes/objectives for which they
are carried out. Every Project is undertaken to
create a unique product, service, or result. Eg.
Hundreds of house buildings may have been built by
a builder, but each individual building is unique in
itself like they have different owner, different design,
different structure, different location, different sub-
contractors, and so on. Thus, each house building is
to be considered as a Project and each Project
produces unique outcome.

4. Defined Time and Resources: As the projects have

definite beginning and end, they are to be carried out
within the time and resources constraints. Each
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project will have defined time and resources for its
execution.

5. Multiple Talents: As projects involve many interrelated

tasks done by many specialists, the involvement of
people from several

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departments is very much essential. Thus, the use of
multiple talents from various departments
(sometimes from different organizations and across
multiple geographies) becomes the key for successful
project management. For example, take the
construction of house building; the expertise of very
many professionals and skills of various people from
various fields like architect, engineers, carpenters,
painters, plumber, electrician, interior decorator,
etc, are being coordinated to complete the house
project.

Basic Elements of Project

There are three basic elements which must be

considered in a project cycle. These are discussed below:

Operations

Operations are the activities or jobs which must

be performed to meet the project objectives. These
activities should be identified and arranged in a logical
sequence. After determining the job sequence, the method
of performing each operation must be determined in
advance. The method, in turn, predetermines the time and
cost required to perform each activity.

Resources

The second of the project elements, resource can be

classified under manpower, money, methods, material,
machines and time. Time and cost estimates are
associated with the method of performance, where the
cost estimate relates resource expenditure to a common
measure of cost in money alone and the time estimate
defines the expected duration of the resource use.

Conditions or Restraints

The third project element refers to externally imposed

conditions or restraints, like supply of materials, machines,

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and designs by outside agencies. The delivery system
should be planned carefully in co-ordination with the
activities to be undertaken.

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The two basic activities which normally get
completed before undertaking the installation of
equipment in any project are: (a) land acquisition, and (b)
infrastructural development. Most of the projects are
undertaken next to a river or road/railway junction, or a
busy commercial centre with a view to cutting down the
expenditure for developing the external infrastructure
needed for the project, such as road/railway points,
schools, commercial centers, and residential
accommodation, which otherwise put a heavy burden on
the project authorities. There is a general sentimental
opposition from the landowners as well as tillers to
handover their land for fear of losing their earning
opportunities, and the project team must try to cope with
such contingencies.

White Elephants

In India, almost every project in infrastructural

sectors has been delayed for one reason or the other.
The reports of Ministry of Project Implementation,
Government of India carry alarming information on
project cost and time overruns, which have become a
serious economic problem. One can go on and on to
show that these modern temples are becoming white
elephants and it is the duty of the professional project
managers to identify the reasons and try to reduce the
delay in building modern India.

Stages in Project Life Cycle:

The project life cycle typically passes through four

stages, viz., Initiating, planning, executing and closing.
The following figure shows the Project Life Cycle.

The starting point begins the moment the project is

given the go- ahead. Project efforts starts slowly, build to a
peak and then declines to delivery of the project to the
customer. The stages in the project life cycle are discussed
below:

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

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b) Project Planning Stage: In this stage, the effort level

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

c) Project Execution Stage: In this stage, a major portion of

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

d) Project Closure stage: This is the final stage which

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

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Classification of Projects s

The projects can be classified into various types:

1) Based on Ownership

a) Public Projects: These are the projects which are done

by public projects. E.g. Construction of Roads &
Bridges, Adult Education Programmes, etc.
b) Private Projects: These are the projects which are
undertaken by private enterprises. Eg. Any business
related projects such as a construction of houses by
real estate builders, software development, marriage
contracts, etc.
c) Public Private Partnerships: These projects which are
undertaken by both government and private
enterprises together. E.g., Generation of Electricity
by Windmill, Garbage Collection, etc.

2) Based on Investment

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

or investments, say, crores. Eg. Real Estate Projects,
Road Construction of manufacturing facilities,
Satellite sending projects of ISRO, Unique
Identification Number project of India, etc.
b) Medium Scale Project: These projects involve medium
level investment and are technology oriented.
Example: Computer industry and electronic
industry.
c) Small Scale Project: These projects involve only a lesser
investments. E.g., agricultural projects,
manufacturing projects.

3) Based on Research in Academia

a) Major Projects: In academia, the major projects are

those projects which involve more than one year to 3
or 5 years and minimum funding of ` 3 lakhs in case
of social sciences and ` 5 lakh in case of sciences.

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

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4) Based on Sector

a) Agricultural Projects: These are the projects which are

related to agricultural sector like irrigation projects,
well digging projects, manuring projects, soil
upgrading project, etc.
b) Industrial Projects: These are the projects which are
related to the industrial manufacturing sectors like
cement industry, steel industry, textile industry, etc.
For example, technology transfer project, marketing
project, capital issue project like IPO, etc.
c) Service Projects: These are the projects which are
related to the services sectors like education,
tourism, health, public utilities, etc. For example,
adult literacy project, medical camp, general health
check up camp, etc.

5) Based on Objective

a) Commercial Projects: These projects are undertaken for

commercial purpose and return on investment is
expected out these projects. For example, Toll roads
based on BOLT – Build Own Lease Transfer Model or
BOOT – Build Own Operate and Transfer Model,
Product Launching project.

b) Social Projects: These projects are undertaken for

social purposes and welfare of the people is the aim
of these projects. These projects are undertaken
either by the Government or Service oriented Non-
Governmental Organizations. For example, Polio
immunization Project, Child Welfare Projects, Adult
Literacy Projects, etc.

6) Based on Nature

a) Conventional Projects: These projects are traditional

projects which do not apply any innovative ideas or
technology or method. For ex- ample, conventional
irrigational projects, handicraft projects, etc.

b) Innovative Projects: These projects involve the use of

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

i) Technology: Depending on the level of technological

uncertainty at the time of initiation of projects,
the projects can be classified

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into: Low-Tech projects which relay on the existing
and well established base technologies; Medium-
Tech projects which rest mainly on existing base
technologies but incorporate some new
technology or feature; High-Tech projects in which
most of the technologies employed are new, but
existent, having been developed prior to the
project’s initiation; and Super High- Tech projects
which are based primarily on new, not entirely
existent technologies.

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

can be classified into: Exploratory research projects
which may generate novel idea in the domain of
knowledge; constructive research projects which are
mainly done by many technological corporate to
find new or alternative solutions to any particular
crisis or problems, eg., renewable energy
research or development of the capacity of
optical fiber; and Empirical research projects are very
impressive observational type of research in
which testing on real life data or analysis of
pattern of some specific events in order to
identify the nature or the class of trend that
specific phenomenon maintains.

iii) New product development: These projects are

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

7) Based on Time

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

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

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

c) Short term projects: These projects are executed within a

short period, normally within a year. For example,
Pond cleaning project, health camps, software
development, etc.

d) Very short term projects: By very name you can

understand that these projects are completed within
a very short period, say, within a day. For example,
product launch project.

8) Based on Functions

Based on the functional area of management, the

projects can be classified into:

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

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

b) Financial Projects are undertaken to raise finance or

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

c) Human Resources Projects are undertaken in the area of

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

d) IT and Technology Projects which are undertaken in the

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

e) Production Projects are undertaken in the area of

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

f) Strategic Projects are taken by the organizations to

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executive a strategy, for example, mergers and
acquisition projects, Core Banking Solution
project introduced in banks, etc.

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9) Based on Risk

a) High Risk Projects: These projects involve a very high

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

b) Low Risk Projects: These projects do not involve risk

and they are carried out in the normal course of
action. For example, road and bridge construction,
house construction.

10) Based on Investment Decisions

On the basis how the projects influence the

investment decision products, project can be classified into

a) Independent Projects: An independent project is one,

where the acceptance or rejection does not
directly eliminate other projects from
consideration or affect the likelihood of their
selection. For example, if management plans to
introduce a new product line, as well as, replace a
machine which is currently producing a different
product. These two projects can be considered
independent of each other, if there are sufficient
resources to adopt both, provided, they meet the
firm’s investment criteria.

b) Mutually exclusive Projects: The mutually exclusive

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

c) Contingent Projects: A contingent project is one where

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the ac- ceptance or rejection depends on the
decision to accept or reject multiple numbers of
other projects. Such projects may be comple-
mentary or substitutes. Let us take the example of
bio fuel plant cultivation in a large scale and the
decision to set up a bio fuel manufacturing unit. In
this case, the projects are complementary to

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each other. The cash flows of the plant cultivation will
be enhanced by the existence of a nearby
manufacturing plant. Conversely, the cash flows of the
manufacturing unit will be enhanced by the exist-
ence of a nearby cultivation farm.

11) Based on Output

Based on output, projects are classified into

quantifiable and non- quantifiable ones.

a) Quantifiable projects: In these projects, the benefits /

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

b) Non-quantifiable projects: In these projects quantification

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

12) Based on Techno-Economic Characteristics

Based on the technology intensity, size of the

investment, and scope of the project, projects are also
classified as techno-economic projects. For instance, the
United Nations Organization (UNO) and its various
developmental agencies use the Standard Industrial
Classification of all economic activities in collection and
compilation of economic data regarding projects. On the
basis of Techno-economic factors, projects can be further
classified into a) Factor Intensity Oriented; b) Causation
Oriented and c) Magnitude Oriented.

a) Factor Intensity Projects: It is anybody’s knowledge that

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some projects are capital intensive while some are
labour intensive. However, as technological
advancements are taking place in every sector in a
big way, many projects are becoming more
technology intensive and less labour intensive. The
gestation period of some of the projects also is
quite long. Large scale investments are made

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in the plant and machinery. Economies of scale and
the associated cost competitiveness also prompt the
establishment of large scale organizations.

b) Causation-Oriented Projects: The availability of a

particular raw material in abundance in a particular
region could be the reason for conceiving projects
at times. To make use of the locally avail- able raw
material, skilled workforce and to promote
development of a backward region, some projects
are conceived and formulated. Similarly, in a few
cases, where the supply of a particular good falls
short of demand necessitating imports from abroad,
entrepreneur- ial projects are conceived. Thus, in
some case, the existing demand for goods and
services cause the establishment of business organi-
zations. The demand pull plays a dominant role in
such projects.

c) Magnitude Oriented Projects: Based on the size of the

project, projects may be classified under large,
medium and small scale projects. The size of the
investment, gestation period, employment
generation, etc. is some of the factors that influence
the size of the project.

13) Based on Financial Institutions’ Classification

Financial institutions – both central and state level

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

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

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

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

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

Project Management

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Project management is the discipline of planning,

organizing, securing and managing resources to bring
about the successful completion of specific project goals
and objectives. Project management is the application of
knowledge, skills and techniques to execute projects

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effectively and efficiently. It’s a strategic competency for
organizations, enabling them to tie project results to
business goals — and thus, better compete in their
markets.It has always been practiced informally, but
began to emerge as a distinct profession in the mid-20th
century. It is no longer a special-need management. It is
rapidly becoming a standard way of doing business.
Project Management Institute’s A Guide to the Project
Management Body of Knowledge (PMBOK® Guide) identifies its
recurring elements. Project management processes fall
into five groups such as initiating, planning, executing, monitoring,
controlling and closing.

Project management knowledge draws on nine areas,

viz., integration, scope, time, cost, quality, procurement,
human resources, communications and risk management.
All management is concerned with these, of course. But
project management brings a unique focus shaped by the
goals, resources and schedule of each project. The value of
that focus is proved by the rapid, worldwide growth of
project management as a separate area of study and as a
mode of functioning.

Project management deals with planning,

scheduling, controlling and monitoring the complex
non-routine activities that must be completed to reach
the predetermined objectives of the project. On critical
examination, we see that each project has a feedback
mechanism. The elements of project management
control include programmed objectives, policy
restrictions, resource constraints, government
regulations, process implementation, review of output,
feedback, and revision of objectives. Thus, project
management involves the coordination of group
activity, wherein the manager plans, organizes staffs,
directs, and controls to achieve an objective, with
constraints on time, cost and performance, of the end
product. Network techniques are primarily used for
project planning and controlling. Planning is the
process of preparing for the commitment of resources
in the most economical manner. Controlling is the
process of making events conforms to schedules by
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coordinating the action of all parts of the project to
achieve the objective.

Importance of Project Management

Project management is the art of managing the

project and its deliverables with a view to produce
finished products or service. There are many ways in
which a project can be carried out and the way in which

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it is executed is project management. Project management
includes: identifying requirements, establishing clear and
achievable objectives, balancing the competing demands
from the different stakeholders and ensuring that a
commonality of purpose is achieved. It is clear that
unless there is a structured and scientific approach to the
practice of management, organizations would find
themselvesaimless and hence would be unable to meet
the myriad challenges that the modern era throws at
them. Hence, the importance of project management to
organizations cannot be emphasized more and several
reasons why project management is important is discussed
below.

a) Reduction in the Product Life Cycle

The product life cycle is one of the most significant

driving forces behind the demand for project
management. As the lives of the products are shortened,
time to market for new products with short life cycles has
become increasingly important. Innovation and invention
becomes the key for success and speed to innovate or
invent becomes a competitive advantage. More and more
organizations are depending on cross- functional project
teams to get new products and services to the market as
quickly as possible.

b) Global Competition

In the globally competitive today’s market,

customers want cheaper products and services with
better quality at cheaper prices. This had led to the
emergence of the quality movement across the world in
International Standards Organization certification
requirements for doing business. Quality management
and improvement essentially requires project
management. As the basic elements of project
management concentrate on time, cost and quality,
project management has become style of managing
business.

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c) Knowledge Explosion

The knowledge explosion world over has increased

the complexity of managing projects. Product complexities
have increased and demanded integration of divergent
technologies. To manage all this, project management is the
only way.

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d) Corporate Downsizing

Restructuring of organizations in the recent years

has resulted into the downsizing or rightsizing.
Downsizing and sticking to core competencies have
become essential for survival for many organizations.

e) Increased Customer Focus

Increased competition has increased the

expectation of customers. Customers expect customized
products and services instead of generic ones. The
customization of products and services required better
understanding of the customers’ needs by project team
members. The customers are more aware and their
changing needs are to be taken into account to survive in
the market.

f) Managing Small Projects

In today’s competitive world, a situation has

emerged in the organizations that many projects are run
concurrently. This resulted into the multi-project
environment and also plethora of new problems. Sharing
and prioritizing resources across a portfolio of projects is
a major challenge for top management. In the course of
managing many projects, large projects are given more
importance than the small projects. Small projects
typically carry the same or more risk as do large projects.
Small projects are perceived as having little impact on the
bottom line because they do not demand large amount of
scarce resources and/or money. Unfortunately, many small
projects soon add up to large sums of money and their
inefficiency would result into adverse impact.

g) Upsurge of Third World and Closed Economies

The gradual opening of emerging economies has

created an explosion of demand for goods and services
within these economies for their development. Thus,
new markets emerge in the scenario. The developed

3
5
Notes
markets have started introducing their products and
services into these markets. Many firms are using project
management techniques to establish distribution channels
and foreign bases of operations.

3
6
 Note
An Integrated Approach to Project Management s

Many project managers have tried many tools,

techniques and systems to manage projects. These
piecemeal systems fail to integrate the overall
strategies of the organizations and connect the selected
projects to resources. They also fail to balance the
application of project planning and control methods
with appropriate adjustments in the organization’s
culture to support project activities. Thus, today’s
project management environment requires an
integrated approach. Integrated project management
process focuses all project efforts towards the strategic
plan of the firm and reinforces mastery of both the
project management tools or techniques and
interpersonal skills necessary to achieve successful
project completion. Integration of project management
has two key areas.

a) Integration of Projects with Strategic Plan

Strategic plans are written by one group of

managers, projects are selected by another group and
the projects are implemented by another group. This
resulted in unsatisfied customer. Thus, integration of
projects with the strategic plans is very essential.
Strategies are implemented through projects. The key
is selecting from the many proposals those projects
that make the largest and most balanced contribution
to the objectives and strategies of the organization.
This means prioritizing projects so that scarce
resources are allocated to the right projects.

b) Integration within the Process of Managing Actual Projects

The integration within the process of managing

projects has two dimensions. The first dimension is the
technical side of the management process which
consists of the formal, disciplined, pure logic part of
the process. It relies on the formal information system
and it includes planning, scheduling and controlling of

3
7
Notes
projects. The second dimension is the socio-cultural
side and this centers on creating a temporary social
system within a larger organizational environment that
combines the talents of a divergent set of professionals
working to complete the project.

3
8
 Note
Conclusion s

Without a scientific approach to the task of

managing the projects and achieving objectives, it would
be very difficult for the organizations to successfully
execute the projects within the constraints of time, scope
and quality and deliver the required result. In other
words, there has to be a framework and a defined way of
doing things to ensure that there is a structure to the art
of project management. Thus, project management is
about creating structure and managing the project
commitments and the delivery of agreed upon results.
Thus, Project Management is both necessary and essential
to the success of the project. In conclusion, integrated
project management and the practice of the same have
become indispensable to the modern day project manager.
The technical side of the project represents the science of
project management and the socio- cultural side
represents the art of managing the project.

****

3
9
Notes

Lesson 1.2 - Project Portfolio Management System and Structure

Learning Objectives

➢ To understand the concept of Project Portfolio

Management System.
➢ To appreciate the need for Project Portfolio Management
System
➢ To understand the design of the Project Portfolio
Management System.
➢ To understand the various project management
structures.
➢ To know the considerations in choosing
appropriate project management structure
➢ To know about Project Management Office as a
modern business practice.

Project Portfolio Management System

Project Portfolio Management System (PPM) is a

term used by project managers and project management
(PM) organizations, (or PMO’s), to describe methods for
analyzing and collectively managing a group of current or
proposed projects based on numerous key
characteristics. The fundamental objective of PPM is to
determine the optimal mix and sequencing of proposed
projects to best achieve the organization’s overall goals -
typically expressed in terms of hard economic measures,
business strategy goals, or technical strategy goals - while
honoring constraints imposed by management or external
real-world factors. Typical attributes of projects being
analyzed in a PPM process include each project’s total
expected cost, consumption of scarce resources (human or
otherwise) expected timeline and schedule of investment,
expected nature, magnitude and timing of benefits to be
realized, and relationship or inter- dependencies with
other projects in the portfolio.

4
0
 Note
Thus, Project Portfolio Management is about more s
than running multiple projects. Each portfolio of projects
needs to be assessed by its business value and adherence to
strategy. The portfolio should be designed

4
1
Notes
to achieve a defined business objective or benefit. Project
management guru Bob Buttrick summarized it when he
said; “Directing the individual project correctly will
ensure it is done right. Directing ‘all the projects’
successfully will ensure we are doing the right projects.”
Project portfolio management organizes a series of
projects into a single portfolio of reports that capture
project objectives and other critical factors. While at
individual project level it is important to know how each
project is performing, the impact of each project on the
portfolio is also important. The following questions should
be asked:

➢ Does each project contribute to the overall

achievement of the portfolio?
➢ How well is each project performing?
➢ Will any project have a negative impact on other projects to come?
➢ What projects in the portfolio are dependent on others?
➢ Will the successful delivery of all projects deliver the
desired objective or benefit?

Working at portfolio level is about working with

summary or key data. It is important to avoid
information overload. The detail of each project should
be kept at the project team level, managed by the
individual project managers. Key information should be
rolled up and presented at each level within the
organization as appropriate. Within most project
portfolio management systems there is a project
evaluation process. This process is used to evaluate the
projects at various points during their life cycle. At the
beginning of each stage (often called a “gate”) the
responsible party evaluates the business case, asking
whether it is still relevant and able to deliver the
organizations’ objectives. If the answer is no, then the
project should be stopped. This way the organization
can ensure they stay focused on delivering a strategy,
goal or other benefit, and that resources are used
where they will offer the best return.

Project portfolio management asks the following questions:

4
2
 Note
s
➢ Are we doing the right things?
➢ Are we doing them the right way?
➢ Are we doing them well?
➢ Are we getting the benefits?

4
3
Notes
If the answer to any of these questions is no,
immediate action is needed to bring the portfolio back on
track.

Need for an Effective Project Portfolio Management System

There are three problems or reasons why we need

project portfolio management system. They are

a) Implementation Gap

In many organizations, top management

formulates strategy and functional management
implements. For implementation, the functional
managers develop objectives based on the strategies.
As the strategies and objectives are developed at
different levels by top management and executive
management respectively, implementation gap arises. It
may lead to frequent conflict among functional
managers, conduct of frequent meetings to establish or
renegotiate priorities, people frequently shifting from
one project to another, depending on current priority
and employees getting confusion about which projects
are important. As clear linkages do not exist, the
organizational environment becomes dysfunctional,
confused and ripe for ineffective implementation of
organization strategy and hence, projects. The
implementation gap refers to the lack of understanding
and consensus of organization strategy among top and
middle level managers. Hence, project portfolio
management system will help the organization to
minimize the implementation gap.

b) Organizational Politics

When criteria and processes for selecting projects

are ill-defined and non-aligned with the mission of the
firm, projects suffer from not getting priority and
resources. The term ‘sacred cow’ is used to refer to the
worthless projects which are advocated by higher
officials. Similarly, project sponsor can play a

4
4
 Note
significant role in the selection and successful s
implementation of projects. Politics can play a role not
only in project selection but also in the aspirations
behind the projects. Individuals can enhance their
powers within the organization by managing
extraordinary and critical projects. Thus, project
portfolio management system will help in reducing the
organizational politics.

4
5
Notes
c) Resource conflicts and multitasking

When more projects are carried out, it leads to

resource conflicts and multitasking. Resource sharing also
leads to multitasking. People working on several projects
concurrently are found to be inefficient. Mul- titasking adds
to delay and costs, i.e., both time and cost overruns. Thus,
project portfolio management system will help in optimum
allocation of scarce resources.

Design of Project Portfolio Management System

Design of project portfolio management system

should include the following:

a) Classification of Project

Most of the organizations may have three kinds of

projects in their portfolio, viz., compliance and
emergency projects, operations projects and strategic
projects. Compliance and emergency projects are
compulsory in nature to meet the regulatory conditions.
Operational projects are those that are needed to
support operations and are designed to improve
efficiency of delivery system, reduce product costs, and
improve performance. Strategic projects are those that
are directly support the organizations’ long run
mission. The strategic value of a project should be
determined before it is placed in the project portfolio.
However, compliance projects may also be undertaken
to avoid regulatory problems.

b) Selection Criteria

Selection criteria for projects may be divided into

financial and nonfinancial. Financial criteria are the most
preferred method to evaluate projects. Common financial
methods include payback method and net present value
method. Payback method is a method in which the projects
which pays back the original investment in a shorter period
are given priority.

4
6
 Note
s
In case of net present value method, the project which
gives positive NPV is selected. NPV is the excess of present
value of cash inflows over present value of cash outflows.
Non-financial criteria may include the

4
7
Notes
following: a) restoring corporate image or b) enhancing
brand image. Many organizations are committed to
corporate citizenship and support community
development projects. Thus, the social desirability of the
projects is also equally important as financial viability.

c) Sources of Project Proposals

Projects should originate from anyone who believes

their project will add value to the organization. Many
organizations restrict proposals from specific levels or
groups within the organization. This could be an
opportunity lost. Thus, project ideas should be solicited
from all internal and external sponsors.

d) Evaluation and Selection of Project Proposals

Evaluating many project proposals and selecting

the projects which add value to an organization is
important. Data and information are collected to assess
the value of the project to the organization. Given the
selection criteria and current portfolio of projects, the
priority team rejects or accepts the project. If the
project is accepted the priority team set implementation
in motion.

e) Managing the Project Portfolio System

Managing portfolio takes the selection system one

step higher in that the merits of a particular project are
assessed within the context of existing projects. At the
same time, it involves monitoring and adjusting selection
criteria to reflect the strategic focus of the organization.
The priority system can be managed by a small group of
key employees in a small organization or in a large
organizations, it can be managed by the project office or
enterprise management group. Management of a portfolio
system requires two major inputs from senior
management, viz.,
a) senior management must provide guidance in
establishing selection criteria that strongly align with

4
8
 Note
the current organizational strategies; and s
b) senior management must annual decide how they wish
to balance the available organizational resources among
the different types of projects. Given these inputs, the
priority team or project office can carry out its many
responsibilities, which include supporting project sponsors
and representing the interest of the total organization.

4
9
Notes
f) Balancing the portfolio for risks and types of projects

A major responsibility of the priority team is to

balance projects by type, risk and resource demand. This
requires a total organization per- spective. Hence, a
proposed project that ranks high on most criteria may not
be selected because the organizational portfolio already
includes too many projects with the same characteristics.
Balancing the portfolio is as important as project
selection. David and Jim Matheson developed a proj- ect
portfolio matrix for R&D Organizations, based on technical
feasibility and commercial potential, which contains four
quadrants, viz., bread and butter (high technical feasibility
with low NPV), pearl (high technical fea- sibility with high
NPV), oyster (low technical feasibility with high NPV) and
white elephants (Low technical feasibility with low NPV).
Organiza- tions often have too many white elephants and
too fee pearls and oysters.

Conclusion

Implementing PPM at the enterprise level faces a

challenge in gaining enterprise support because
investment decision criteria and weights must be
agreed to by the key stakeholders of the organization,
each of whom may be incentivized to meet specific
goals that may not necessarily align with those of the
entire organization. But if enterprise business
objectives can be manifested in and aligned with the
objectives of its distinct business unit sub-
organizations, portfolio criteria agreement can be
achieved more easily. In addition to managing the mix
of projects in a company, Project Portfolio Management
must also determine whether (and how) a set of
projects in the portfolio can be executed by a company
in a specified time, given finite development resources
in the company. This is called pipeline management.
Fundamental to pipeline management is the ability to
measure the planned allocation of development
resources according to some strategic plan. To do this,
a company must be able to estimate the effort planned
for each project in the portfolio, and then roll the
5
0
 Note
results up by one or more strategic project types. s

Project Management Structures

Organizational structure consists of activities such

as task allocation, coordination and supervision, which
are directed towards the achievement of
organizational aims. It can also be considered as

5
1
Notes
the viewing glass or perspective through which individuals
see their organization and its environment. An
organization can be structured in many different ways,
depending on their objectives. The structure of an
organization will determine the modes in which it operates
and performs. Organizational structure allows the
expressed allocation of responsibilities for different
functions and processes to different entities.
Organizational structure affects organizational action in
two big ways. First, it provides the foundation on which
standard operating procedures and routines rest.
Second, it determines which individuals get to participate
in which decision-making processes, and thus to what
extent their views shape the organization’s actions.

A project management structure provides a

framework for launching and implementing project
activities within a parent organization. A good structure
appropriately balances the needs of both the parent
organization and the project by defining the interface
between the project and parent organization in terms of
authority, allocation of resources, and eventual
integration of project outcomes into mainstream
operations. Many organizations have struggled with
creating a system for organizing projects while managing
ongoing operations. One of the major reasons for this
struggle is that projects contradict fundamental design
principles associated with traditional organizations as the
projects are unique in nature. Second reason is that most
projects are multidisciplinary in nature because they
require the coordinated efforts of a variety of specialists
to be completed. Let us understand how projects are
organized in different organizational structures.

a) Organizing Projects within the Functional Organization

Employees within the functional divisions of an

organization tend to perform a specialized set of tasks.
This leads to operational efficiencies within that group.
However it could also lead to a lack of communication
between the functional groups within an organization,
making the organization slow and inflexible. As a whole,
5
2
 Note
a functional organization is best suited as a producers of
standardized goods and services at large volume and
low cost. However, once management decides to
implement a project, the different segments of the
projects are delegated to the respective functional units
with each unit responsible for completing its segment
of the project. Coordination is maintained through
normal

5
3
Notes
management channels. The functional organization is also
commonly used when, given the nature of project, one
functional area plays a dominant role in completing the
project or has a dominant interest in the success of the
project. Under these circumstances, a high ranking
manager in that area is given the responsibility of
coordinating the project. The following figure shows how
project is managed within the functional organization.

The advantages in using the existing functional organization include

➢ No change in the design and operation of parent organization.

➢ Maximum flexibility in the use of staff.
➢ In-depth expertise of the functional department
can be used for projects
➢ Post-project transition is easy.
The disadvantages in using the existing functional organization include
➢ Lack of focus on the part of functional
departments as they have their own routine work.
➢ Integration across functional units is very difficult.
➢ Projects may take longer time due to slow response
by functional departments.
➢ Motivation level among the people assigned to the
project is very weak as they lack ownership.

5
4
 Note
s
b) Organizing Projects as Dedicated Teams

In this structure, a dedicated independent project

teams are created. These teams operate as separate
units from the rest of the parent organization. Usually,
a full time project manager is designated to pull
together a core group of specialists who work full time
on the project. The project manager recruits necessary
personnel from both within and outside the parent
company. Project managers get maximum freedom in
this structure. The following figure shows how projects
are organized with dedicated teams.

Managing Projects as dedicated teams

The advantages of dedicated team structure include

➢ It is very simple to establish.

➢ Fast completion of the projects is ensured.
➢ High level cohesiveness would emerge.
➢ Cross functional integration is possible.

The disadvantages of dedicated team structure include

➢ It is expensive

➢ It creates internal strife in the organization. It is

referred as Projectitis (a gap gets created between
the project teams and the people in the parent
organization and project members feel they are
only important for the organization).

5
5
Notes
➢ Sometimes, the technological expertise of the
specialized project teams may be very limited and
that will affect the project outcomes.

➢ Post project transition is very difficult as after the

completion of the project, a dilemma of what to do
with personnel arises.

c) Organizing Projects within a Matrix Structure

Matrix management is a hybrid organizational

form in which a horizontal project management
structure is overlaid on the normal functional hierarchy.
In matrix system, there are two chains of command, one
along functional lines and the other along project lines.
Instead of delegating segments of a project to
different units or creating an autonomous team, project
participants report simultaneously to both functional
and project managers. Matrix structure is designed to
optimally utilize resources by having individuals work
on multiple projects as well as being capable of
performing normal functional duties. At the same time,
the matrix approach attempts to achieve greater
integration by creating and legitimizing the authority of
a project manager. The following figure shows how
projects are managed in matrix structure.

Managing Projects within a Matrix Structure

There are different forms of matrix systems

depending on the relative authority of the project and
5
6
 Note
functional manager. Functional, lightweight or weak s
matrix is titles given to matrices in which the balance of
authority strongly favors the functional manager.
Balanced or middleweight matrix is used to describe the
traditional matrix

5
7
Notes
arrangement. Project, heavy weight, or strong matrix is
used to describe a matrix in which the balance of
authority is strongly on the side of the project manager.

Weak/Functional Matrix

A project manager with only limited authority is

assigned to oversee the cross- functional aspects of the
project. The functional managers maintain control over
their resources and project areas.

Balanced/Functional Matrix

A project manager is assigned to oversee the project.

Power is shared equally between the project manager and
the functional managers. It brings the best aspects of
functional and projective organizations. However, this is
the most difficult system to maintain as the sharing power
is delicate proposition.

Strong/Project Matrix

A project manager is primarily responsible for the

project. Functional managers provide technical expertise
and assign resources as needed.
Among these matrixes, there is no best format;
implementation success always depends on
organization’s purpose and function.

The advantages of matrix structure include

➢ Efficient allocation of resources to multiple projects is

possible
➢ Strong project focus can be ensured.
➢ Post project transition is relatively easier.
➢ Flexibility in utilization of resources and expertise is
possible.
The disadvantages of matrix structure include

➢ Dysfunctional conflict may arise between function

managers and project managers.
5
8
 Note
➢ Infighting may occur among project managers who s
are primarily interested in what is best for their
project.

5
9
Notes
➢ As the management principle unity of command is
violated, project participants have two bosses at the
least and hence it will create stressful situations.
➢ In case of balanced matrix form, the projects get slow down.

d) Organizing projects within network organizations

There have been a lot of changes in the

organizational structures and the recent one being the
network structure. Corporate downsizing and cost
control have combined to provide what we call network
organizations. Network organization is an alliance of
several organizations for the purpose of creating
products or services for customers. This collaborative
structure typically consists of several satellite
organizations bee hived around a hub or core firm. The
following figure shows the network structure of
Amazon.com, a networked organization.

Network of Amazo.com, a Networked Organization

Another example is the film industry where studios

such as MGM, Warner Brothers, and 20th Century Fox
owned large movie lots and employed thousands of full time
specialists. Today movies are made by a collection of
individuals and small companies who come together to
make films project by project. This structure allows each
6
0
 Note
project to be staffed with the talent most suited to its s
demands rather than choosing from only those people the
studio employs.

6
1
The advantages of networked organizations include

➢ It reduces cost as overhead costs are dramatically cut.

➢ High level of expertise and technology can be

brought by outsourcing and it will have positive
impact on the project.

➢ Lot of flexibility is there as the organizations are

no longer constrained by their own resources but
can pursue a wide range of projects by combining
their resources with talents of other companies.

The disadvantages of networked organizations include

➢ Coordinationbreakdownmay result when

coordinating professionals from different
organizations.

➢ Control may be lost on the projects as the core

team depends on other organizations on which
they do not have direct authority.

➢ Interpersonal conflicts may arise as project

participants do not share the same values,
priorities, and culture.

3
4
 Thus, managing projects has witnessed a lot of
changes depending on the changes in the organizational
structure from hierarchical to networkedorganizations
which are shown in above figure.

Thus, the project characteristics and organizational

structure can be related and the same is shown in the
following figure.

Project Characteristics and Organizational Structure

Choosing Appropriate Project Management Structure

Project success directly depends on the level of

autonomy and authority project managers have over their
projects. There are two types of considerations to be
taken into account while choosing the appropriate project
management structure. They are:

a) Organizational considerations and

b) Project considerations.

a) Organizational Considerations

Depending on how important the project

management is to the success of organization, it should
consider a fully projectized organization. If an
3
5
organization has both standard products and projects,
then a matrix arrangement would appear to be
appropriate.

3
6
Notes
➢ Number of Projects: If an organization has very few
projects, then a less formal arrangement is
sufficient. Temporary task forces can be created
on need based and the organization could
outsource project work also.

➢ Resource Availability: Another important consideration is

the resource availability. If matrix structure is used
for managing projects, resources are to be shared
across multiple projects and functional domains. If
organizations do not afford to tie up critical
personnel on individual projects, a matrix system
would appear to be appropriate. Alternatively, a
dedicated team can be created and outsourcing can
be done when resources are not available internally.

b) Project Considerations

Depending on the autonomy the project needs to

complete successfully, the project considerations include
the following:

➢ Size of the project

➢ Strategic importance
➢ Novelty and need for innovation.
➢ Need for integration (number of departments
involved)
➢ Environmental complexity (number of external
interfaces).
➢ Budget and time constraints.
➢ Stability of resource requirements.

Higher the levels of these seven factors, the more

autonomy and authority the project manager and project
team need to be successful. This would lead to using of
either a dedicated project team or a project matrix
structure.

Project Management Office

The Project Management Office (PMO) is widely

36
 Notes
recognized as one of the most effective business practices
used by successful organizations.

3
7
Notes
Understand the Impact of Culture on a PMO

Every organization has a unique culture, created

through years of leadership and staffed with individuals
who share common values and work ethics. Matching the
right project office structure with organizational culture is
critical for success. PMOs are not “one size fits all”
solutions. In fact, PMO structures include an entire
spectrum of options each with different structures, roles
and responsibilities, reporting lines, resources, and levels
of authority.

A successful project office can range from simple

project data reporting to a centralized structure that
takes the lead on every aspect of project management.
Deciding on your organization’s PMO requires evaluating
the characteristics of your organization, as well as
clarifying your expectations of the project office.

Key questions to ask include:

➢ What resources are you able to dedicate full or part

time to the project office?
➢ Do you currently follow a standard
project management methodology?
➢ How well do your different business units or
departments work together?
➢ How many projects does your organization
typically complete in a year?
➢ What problems is your organization facing when
managing projects?
➢ What are those problems costing your organization?

Expectations for the success of PMO need to match

the maturity of organization in each of these key areas.

Options for PMO Structures

In a decentralized structure, the PMO would provide

a valuable re- porting service for project status data.
Project managers typically contin- ue to report within their

38
 Notes
departmental units. There are roles in the project office for
more than just project managers, including schedulers who
can

3
9
Notes
implement and track quality project schedules, and facilitators,
who can help guide projects in conjunction with a project
manager.

Often these roles remain in the project office even in

a decentral- ized structure to provide consistency and
support for the individual de- partments. In this
decentralized role, the project office functions primar- ily
in an advisory role for project management methodology
standards and for project issue resolution.

A decentralized structure is often a lower cost

solution with lower headcount and fewer impacts on the
organizational structure. The heads of the departments
remain heavily involved in the projects, continue mak- ing
decisions, and keep their employees engaged in the
success of the work.

Many organizations begin with a decentralized

structure when implementing a PMO. However, under
this type of structure, organizations move slower to full
project management methodology adoption and do not
gain the full benefits of a project office. In a more highly
controlling, centralized PMO structure, project
managers typically report directly to the head of the
PMO, who facilitates project decisions and resolves
issues. Resources for projects are matrix-managed for
the duration of the project, and the PMO has the
authority to set and enforce standards. Schedulers and
facilitators would also report within the project office.

This centralized structure allows organizations to

more rapidly adopt project management
methodologies. Issue resolution is simplified with a
single escalation path to the top decision maker, and
project managers gain support from working closely
with each other. It is important to remember that while
this structure gives more responsibility and authority to
the PMO, it should not do so at the expense of teamwork
and communication. The project office needs to
maintain cooperative working relationships across all
40
 Notes
departments in order to be successful.

Managing all project work through the PMO provides

a single source for data and a complete picture of the
portfolio of projects. The downside of this structure is that
it can cause the leaders of the functional units to disengage
with key project work.

4
1
Notes
The PMO can also get a “project police”
reputation, which may not encourage good project
practices outside of the project office. This struc- ture is
effective when an organization is working with a large
number of complex projects and only if the culture of
the organization includes well- developed
communication and teamwork skills.

Two structures that every organization should try to

avoid: a de-centralized structure with highly controlling
responsibilities and a centralized structure with
responsibility only for status reporting. A de- centralized
PMO structure could have difficulty performing a
strong role when using matrix-managed resources, so limit
the level of central responsibility if you choose that
structure. A centralized structure that does nothing more
than report status will add too much overhead to your
organization, so if the role of your PMO will be limited,
leave the office de- centralized. The more responsibility
assigned to project office, the higher it should report in
the organization. The most robust structure usually
requires reporting directly to the President or CEO of the
organization for maximum effectiveness.

Conclusion

No matter what structure your organization chooses,

the implementation process itself is the key to the success
of your project office. A champion should be identified to
assist in promoting the benefits of good project
management and helping to clear roadblocks to change.
The champion will often create a cross functional steering
team to help with the PMO implementation steps.
Culturally, most organizations should begin with a less
controlling, de-centralized project office, at least until
the staff becomes comfortable working in a matrix-
managed environment. A well-defined, effective project
management office can be an important step to greater
success for your organization.

42
 Notes

****

4
3
Notes

Lesson 1.3 - Steps in Defining Project and Project Delays

Learning Objectives

➢ To understand the steps in defining project.

➢ To understand the process of creating work
breakdown structure (WBS)
➢ To know the pitfalls in creating WBS.
➢ To understand the role of Project Rollup and
Responsibility Matrices (RMs).
➢ To understand the external causes of project overruns.
➢ To understand the internal constraints of project
overruns

Steps in Defining Project

In this lesson, let us understand the steps in defining

the project. One of the best ways to meet the needs of the
customer and major project stakeholders is to use an
integrated project planning and control system that
requires selective information. Following are the steps in
defining projects.

Step 1: Defining the Project Scope

The first step in defining the project is defining its

scope. Project scope is a definition of the end result or
mission of the project – a product or service for the
customer or client. The primary objective is to define as
clearly as possible the deliverables for the end user and to
focus project plans. The scope should be developed under
the direction of the project manager and customer. The
project manager is responsible for seeing that there is
agreement with the owner on project objectives,
deliverables at each stage of the project and technical
requirements. The project scope definition is a document
that will be published and used by the project owner and

44
 Notes
project participants for planning and measuring project
success. Scope describes what the organization expects
to deliver to the

4
5
Notes
customer when the project is complete. The project scope
should define the results to be achieved in specific,
tangible and measurable terms.

To ensure that the scope definition is complete, the

following project scope checklist may be used:

a) Project Objectives: The first step of project definition is

to define the overall objective to meet the customers’
needs. The project objective answers the questions of
what, when and how much.

b) Deliverables: The next step is to define major

deliverables – the expected outputs over the life of
the project. For example, deliverables in the early
design phase of a project might be a list of
specifications.

c) Milestones: A milestone is a significant event in a

project that occurs at a point in time. The
milestone schedule show only major segment of
work. It represents first, rough estimates of time,
cost and resources for the project. The milestone
schedule is built using the deliverables as a
platform to identify major segments of work and
an end date. IT should ne natural, important
control points in the project and should be easy
for all the project participants to recognize.

d) Technical Requirements: Technical requirements to

complete the project successfully should be clearly
spelt out.

e) Limits and exclusions: The limits of scope should be

defined. Failure to define limits can lead to false
expectations and to expending resources and time on
the wrong problem. Exclusions further define the
boundary of the project by starting what is not
included.

f) Reviews with customer: Completion of the scope

checklist ends with a review with the customer –
internal and external. The main concern here is the

46
 Notes
understanding and agreement of expectations. The
main concern is the understanding and agreement of
expectations.

The above checklist is generic and different

industries and companies will develop unique checklists
and templates to fit their needs

4
7
Notes
and specific kinds of projects. Many projects suffer from
scope creep, which is the tendency for the project scope to
expand over time – usually by changing requirements,
specifications, and priorities.

Step 2: Establishing Project Priorities

Quality and the ultimate success of a project are

traditionally defined as meeting and/or exceeding the
expectations of the customer and/or upper management
in terms of cost (budget), time (schedule), and
performance (scope) of the project. The
interrelationship among these criteria varies. One of
the primary jobs of a project manager is to manage the
trade- offs among time, cost and performance. To do so,
project managers must define and understand the
nature of the priorities of the project. They need to
have a candid discussion with the project customer and
upper management to establish the relative importance
of each criterion. One technique that is useful for this
purpose is completing a priority matrix for the project
that identifies which criterion is constrained, which
should be enhanced and which can be accepted.

Constrain

The original parameter is fixed. The project must

meet the completion date, specification and scope of the
project or budget.

Enhance

Given the scope of the project, which criterion

should be optimized? In case of time and cost, this means
either reducing cost or shortening schedule. In case of
performance, enhancement means adding value to the
project.

Accept

When trade-offs have to be made, it will be decided

which will be accepted like slipping of schedule or reduce

48
 Notes
the scope and performance or go over budget.

The following figure shows the project priority matrix

in which performance is constrained with time optimization
and cost overrun is accepted.

4
9
Notes

Project Priority Matrix

Step 3: Creating the Work Breakdown Structure

The Work Breakdown Structure (WBS) is a tree

structure, which shows a subdivision of effort required to
achieve an objective; for example a program, project, and
contract. The WBS may be hardware, product, service, or
process oriented. A WBS can be developed by starting with
the end objective and successively subdividing it into
manageable components in terms of size, duration, and
responsibility (e.g., systems, subsystems, components,
tasks, subtasks, and work packages), which include all
steps necessary to achieve the objective. The WBS
provides a common framework for the natural
development of the overall planning and control of a
contract and is the basis for dividing work into definable
increments from which the statement of work can be
developed and technical, schedule, cost, and labor hour
reporting can be established. Work Breakdown Structure
(WBS) is defined by PMBOK Guide as: “A deliverable-
oriented hierarchical decomposition of the work to be
executed by the project team to accomplish the project
objectives and create the required deliverables.” The
following figure shows the hierarchical breakdown of the
WBS.

Purpose for Creating a WBS for Projects

There are three reasons to use a WBS in your projects.

a) The first is that is helps more accurately and

50
 Notes
specifically define and organize the scope of the
total project. The most common way this is done is by
using a hierarchical tree structure. Each level of this
structure breaks the project deliverables or
objectives down to more specific and measurable
chunks.

5
1
Notes

Hierarchical Breakdown of the WBS

b) The second reason for using a WBS in your projects

is to help with assigning responsibilities, resource
allocation, monitoring the project, and controlling
the project. The WBS makes the deliverables more
precise and concrete so that the project team knows
exactly what has to be accomplished within each
deliverable. This also allows for better estimating of
cost, risk, and time because you can work from the
smaller tasks back up to the level of the entire
project.

c) Finally, it allows you double check all the

deliverables’ specifics with the stakeholders and
make sure there is nothing missing or overlapping.

Process of Creating a WBS

There are several inputs you will need to get you off on the right
foot:

➢ The Project Scope Statement

➢ The Project Scope Management Plan
➢ Organizational Process Assets
➢ Approved Change Requests

These inputs should give you all the information

52
 Notes
you and your team needs to create your WBS. Along
with these inputs, you will use

5
3
Notes
certain tools as well. Finally, using these inputs and tools
you will create the following outputs:

➢ Work Breakdown Structure

➢ WBS Dictionary
➢ Scope Baseline
➢ Project Scope Statement (updates)
➢ Project Scope Management Plan (updates)
➢ Requested Changes

The first step to creating your WBS is to get all your

team, and possibly key stakeholders, together in one
room. Although your team is not listed as an input or tool
in the above sections, they are probably your most vital
asset to this process. Your team possesses all the
expertise, experience, and creative thinking that will be
needed to get down to the specifics of each deliverable.
Next, we have to get the first two levels setup. The first
level is the project title, and the second level is made up of
all the deliverables for the project. At this stage it is
important to function under the 100% Rule. This rule
basically states that the WBS (specifically the first two
levels) includes 100% of all the work defined in the project
scope statement and management plan. Also, it must
capture 100% of all the deliverables for the project
including internal, external, and interim. In reality the
WBS usually only captures between 90-95%, and 100% is
our goal. The following diagram shows the WBS.

54
 Notes
Work Breakdown Structure

5
5
Notes
Work Packages

Once we have completed the first two levels set, it is

time to launch into our decomposition. Decomposition is
the act of breaking down deliverables in to successively
smaller chunks of work to be completed in order to
achieve a level of work that can be both realistically
managed by the project manager and completed within a
given time frame by one or more team members. This level
of breakdown and detail is called the work package. Work
packages are the lowest level of the WBS and are pieces of
work that are specifically assigned to one person or one
team of people to be completed. This is also the level at
which the project manager has to monitor all project
work. Most project managers concur that the work
package can usually be measured using the 8/80 Rule. The
8/80 Rule says that no work package should be less than 8
hours or greater than 80 hours.

Most Project Management Offices (PMOs) have basic

WBS templates that can be used for starting. Another great
technique to make project easier is the Post-It Note
Technique. It actually works very well. In this technique
you simply write each deliverable on a post-it note and
stick them at the top of a wall. Then you and your team
start to break down each deliverable into components and
write each component on its own post-it note. This way, as
you place them on the wall and start to create your tree
structure, everyone can easily see what has been
accomplished and where you are headed. Also this
technique allows for easy movement of components
around within the WBS.

Many projects will also find it necessary to create a

WBS Dictionary to accompany their WBS. The WBS
Dictionary is simply a document that describes each
component in the WBS. This helps clarify any specifics
later on when team members completing the work or
stakeholders viewing the deliverables have questions.
Also, when creating the WBS for very large, lengthy, or
complex projects, all the deliverables’ specifics might not
be known up front and, therefore, it is difficult to create a
56
 Notes
full WBS. In cases such as these many people use what is
called Rolling Wave Planning. This is when you plan down to
the level of detail currently known and go back to plan
deeper once more information is acquired. Usually rolling
wave planning needs to stay as least 2-3 months ahead of
the actual work being done, but of course this varies
slightly by industry.

5
7
Notes
Pitfalls to Creating WBS

Let’s understand the five common pitfalls in creating

a WBS. If you can keep these few possible issues in mind
when you are creating your WBS, you and your team will
be much more successful at creating a useful and accurate
Work Breakdown Structure.

➢ Level of Work Package Detail: When deciding how

specific and detailed to make your work packages,
you must be careful to not get too detailed. This will
lead to the project manager to have to
micromanage the project and eventually slow down
project progress. On the other hand, work packages
whose details are too broad or large become
impossible for the project manager to manage as a
whole.

➢ Deliverables Not Activities or Tasks: The WBS should

contain a list of broken down deliverables. In other
words, what the customer/stakeholder will get when
the project is complete. It is NOT a list of specific
activities and tasks used to accomplish the
deliverables. How the work is completed (tasks and
activities) can vary and change throughout the
project, but deliverables cannot without a change
request, so you do not want to list activities and tasks
in the WBS.

➢ WBS is not a Plan or Schedule: The WBS cannot be used

as a replacement for the project plan or schedule. A
WBS is not required to be created in any type of
order or sequence. It is simply a visual breakdown of
deliverables.

➢ WBS Updates Require Change Control: The WBS is a

formal project document, and any changes to it
require the use of the project change control
process. Any changes to the WBS change the
deliverables and, therefore, the scope of the project.
This is an important point to help control scope
creep.

58
 Notes
➢ WBS is not an Organizational Hierarchy: The WBS and
Organizational Hierarchy chart is never the same
thing. Although often similar in appearance, these
two documents are very different. The
Organizational Hierarchy shows things like chain
of command and lines of communication, but the
WBS is restricted simply to a project and shows
only the deliverables and scope of that project.

5
9
Notes
The WBS is an extremely valuable tool to the
project management methodology. It can make or break
a project. It sets the foundation for the rest of the
project planning. A solid WBS helps ensure proper
project baselines, estimating, resource use, scheduling,
risk analysis, and procurement.

Step 4: Integrating the WBS with the organization

An integral part of WBS is to define the organizational

units responsible for performing the work. In practice, the
outcome of the process is the organization breakdown structure
(OBS). The OBS depicts how the firm has organized to
discharge work responsibility. The purpose of the OBS are
to provide a framework to summarize organization unit
work performance, identify organization units responsible
for work packages and tie the organizational unit to cost
control accounts. Cost accounts group similar work
packages. The OBS defines the organization sub-
deliverables in a hierarchical pattern in successively
smaller and smaller units.

As in the WBS, the OBS assigns the lowest

organizational unit the responsibility for work packages
within a cost account. The intersection of work packages
and the organizational unit creates a project control point
(cost account) that integrates work and responsibility.
Control can be checked from two directions – outcomes
and responsibility. In the execution phase of the project,
progress can be tracked vertically on deliverables (client’s
interest) and tracked horizontally by organizational
responsibility (management’s interest).

Step 5: Coding the WBS for the Information System

Coding system is very important to gain the

maximum benefit of a work breakdown system. The
codes are used to define levels and elements in the
WBS, organization elements, work packages, budget
and cost information. The codes allow reports to be
consolidated at any level in the structure. The most

60
 Notes
commonly used scheme is numeric indention. Some
organizations use alphabet letters and most of the
organizations use the combination of both.

6
1
Notes
Project Roll-Up

The intersection of WBS and OBS represents a

control point called cost account by project managers.
The work packages and cost accounts serve as a database
from which all other planning, scheduling and controlling
processes are coordinated. Cost accounts include one or
more work packages.

Each work package has time, budget, resource,

responsibility and control points that can be used to
track project progress. Starting with the work package,
costs and resources can be rolled up into higher elements
which are referred as project rollup. The ability to
consolidate and integrate using the rollup process
demonstrates the potential value of the WBS for managing
the project.

Role of Project Rollup in Identifying Project Cost and Schedule

Problems

A project rollup is a very complete breakdown of a

project’s cur- rent status as it illustrates results in terms of
deliverables, organizational units and cost accounts. This
allows a project manager to quickly deter- mine project
status at all levels of WBS and Organizational Breakdown
Structure.

Process Breakdown Structure

The WBS is best suited for design and builds projects

that have tangible outcomes. The project can be
decomposed or broken down into major deliverables, sub-
deliverables, and further sub-deliverables and ultimately to
work packages. It is more difficult to apply WBS to less
tangible, process-oriented projects in which the final
outcome is a project of a series of steps or phases.

Here, the difference is that the project evolves over

time with each phase affecting the next phase. IT project
typically fall in this category. Project projects are driven by
performance requirements, not by plan/ blueprints. The
62
 Notes
following figure shows the process breakdown structure.

6
3
Notes

Process Breakdown Structure

Responsibility Matrix

A Responsibility Matrix (RM) describes the

participation by various roles in completing tasks or
deliverables for a project or business process. It is
especially useful in clarifying roles and responsibilities in
cross-functional/departmental projects and processes.

Role Distinction: There is a distinction between a role

and individually identified people: a role is a descriptor of
an associated set of tasks; may be performed by many
people; and one person can perform many roles. For
example, an organization may have 10 people who can
perform the role of project manager, although traditionally
each project only has one project manager at any one
time; and a person who is able to perform the role of
project manager may also be able to perform the role of
business analyst.

Description of the Responsibility Matrix

Setting up a Responsibility Matrix is about

establishing “what”, “who”, and level of participation. The
following Figure, activities are listed on the rows and
resources are in the columns and note that resources may
be persons, roles, groups, or vendors.

64
 Notes

Resource 1 Resource 2 Resource 3 Resource 4

Activity
1
Activity
2
Activity
3
Activity
4

The intersection points are used to describe each

resource’s level of participation for the activity. The
participation type codes are inserted in these cells. A
legend is included to define the codes. The following figure
shows the example of a Responsibility Matrix with
Participation Codes.

Network
Person 1 Person 2 Person 3
Staff
Review Resumes R S
Interview I R S
Applicants
Hire Personnel R I I
Purchase A R
Equipment

R=Responsible, A=Approve, I=Inform, S=Support/Assist

As shown in the figure, resources might not have a

participation type code for every activity. Every activity
should have one resource designated as the one responsible
for the activity.

Also, it is recommended that each role for each

activity receive just one participation type code. When
more than one code is used, it implies that resource’s role
has not yet been fully resolved, which can impede the
value of this technique in clarifying the level of
responsibility for the task.

Because the purpose of the matrix is to gain clarity

and agreement on who does what, the columns and rows

6
5
Notes
can be defined with as much detail as makes sense.

For example, a high-level RM can identify what

project team group is responsible for each component of
the work breakdown structure, while lower-level RMs can
be used to designate the participation level of specific
group members for specific activities.

66
 Notes
RACI

There are a number of ways to create a

Responsibility Matrix using different participation
types. One common version is called the RACI matrix.
RACI is an acronym derived from the four key
responsibilities most typically used: Responsible,
Accountable, Consulted and Informed. It is used to
show the connections between work that needs to be
done and project team members. This is a highly
versatile tool that can be easily modified to suit multiple
project needs. RMs can be developed at various levels
of detail, from high to low. It can be used during any
project phase, including the post-implementation
support phase, and is especially useful when activities
require coordination between several different groups,
agencies, or vendors. Following Figure is a sample RACI
chart.

Person Person Person Person Person Person

Activity
1 2 3 4 5 6
Investigat R A I C C
e
Design
I A C R
Software
Develop
R A I C
UAT Plan
Obtain
R A I C C C
Signoff

R=Responsible, A=Accountable, C=Consulted,

I=Informed

Here is a detailed explanation of the participation

types used in the RACI matrix:

➢ Responsible - The person or role who is assigned to

achieve the task. There is only one resource given
this category type. Others may be required to assist
in the work but they are either given another
participation code, such as Assist, or are not
included as the RM may only list the key people for

6
7
Notes
the activities.

➢ Accountable – This person or role must sign off on

work that Responsible provides. They are ultimately
accountable for the correct and thorough completion
of the deliverable or task, and the one to whom
Responsible is accountable. There must be only one
Accountable specified for each task or deliverable.

68
 ➢ Consulted - Those whose opinions are sought and
with whom there is two-way communication.

➢ Informed - Those who are kept up-to-date on

progress, often only on completion of the task or
deliverable, and with whom there is just one-way
communication (informational only).

Following table is an example of a Responsibility

Matrix for the development of project deliverables.

Project Functional Project Project Steering

Sponsor Manager Manager Team Committee
Project Definition A A C R A
Communication A R C R A
Plan
Business A R R C A
Requirements
Status Reports R R C R R

A=Approve, R=Review, C=Create

It lists the deliverables as activities and uses roles

instead of specific individuals. It also uses different
participation types that may be more appropriate for this
activity.For this matrix, the participation codes used
are:“A” means that the person (or role) approves the
deliverable; ”R” means that the person (or role) reviews
the deliverable and ”C” means that the person (or role)
creates the deliverable. Usually there is only one
person who is responsible for creating a deliverable,
although many people may provide input. From the figure,
it is clear that the Project Definition is created by the
project manager; approved by the project sponsor,
functional manager and the Steering Committee; and
reviewed by the project team. The Business Requirements
are created by the project team; reviewed by the project
manager and the functional manager; and approved by the
project sponsor and Steering Committee.

Developing a Responsibility Matrix (RM)

Step One: Define Your Deliverables

5
3
Notes

A Work Breakdown Structure (WBS) is a project

planning tool used to break a project down into smaller,
more manageable pieces

5
4
 Notes
of work (deliverables). It’s not a list of every task: rather,
it’s a “tree” structure showing the meaningful groups of
activities that make up the main segments of the project.

Step Two: Identify the People Involved

Map out who is on your project team. By creating

a chart of individuals who are available, you can then
delegate work assignments based on expertise, and you
can recruit talent that you’re missing. This step is often
called an “Organization Breakdown Structure” because
it creates an organizational chart for your team.

Step Three: Create Your Responsibility Matrix

Draw a matrix. The deliverables are the column

headings, and the people are the row titles. Determine
responsibilities and levels of involvement for each
item/person in your Work Breakdown Structure.

Step Four: Assign Roles

For each group responsible for an activity, assign

roles and responsibility.

Step Five: Communicate

When your Responsibility Assignment Matrix is

complete, communicate it to all stakeholders. It’s a good
idea to post it in an area where people will see it. Used
effectively, the RM helps people understand what they
should be doing at all stages of the project..

Project Delays (Overruns)

The project delays happen when they take more

time than what is estimated and it is called as time
overrun. You may recall, this phe- nomenon is referred in
the first unit as white elephants, i.e., most of the
government projects are time overrun. When projects are
time overrun (i.e., delayed), cost overrun will be the
result. Cost overrun happen when the projects consumer
5
5
Notes
more resources than what is estimated. It is natu- ral
when the projects are delayed, more resources, in terms of
material, money, manpower, will be required and thus,
the cost overruns happen.

5
6
 Notes
Let us understand the external causes and internal
constraints of project delays.

External Causes of Delay

There are several reasons, including socio-political,

economic, technological, macro and micro-global reasons,
for the delay of several projects according to the response
of several project managers. Professional project
managers need to identify the real reasons in order to
prevent such delays in future. Some illustrative, not
exhaustive, causes of delay are given below, categorized
external and internal.

The external causes arise due to the following

reasons:global and macro-level government policies
influenced by social, economic, political, regional or global
pressures affecting currency fluctuations, trade relations,
foreign aid, etc. Typical examples: Indo-China
confrontation, Indo-Pakistan disputes, Arab-Israel crises,
Iran-Iraq war, Gulf crises, etc., Kudremuk Iron-ore project
and gas-based fertilizers are typical instances of such
projects.

The external factors include uncontrollable factors, such as:

➢ Government policies
➢ Import regulations
➢ Panic taxation
➢ Resource constraints
➢ Defense expenditure
➢ Political situation
➢ Inflation
➢ Non-development expenditure
➢ Budgetary deficits
➢ Economic stagnation
➢ Natural disasters, like earthquakes, floods, etc.
➢ Labour unrest
➢ Law and order problems

55
Notes
➢ Social turmoil like terrorists’ menace, communal vandalism, etc.
➢ Unscheduled mid-term elections

5
6
 Notes
➢ Global recession, or unrest, and
➢ Interference from unexpected quarters.

Internal Constraints

The internal constraints, which can be anticipated,

planned and controlled relate to the programmes and
policies of the company. Some of the important causes
for such restraints are listed below. These can be
broadly classified into people, funds, and organisation. The
corporate culture and the style of leadership are the key
areas, as the project manager is not appointed at the
conception of the project and is, therefore, not totally
involved in the formulation of objectives. Sufficient
authority is not delegated to the project team because it
does not have the total confidence of the top management,
and has to refer to the headquarters very often. The other
internal constraints may be listed as under:

➢ Inappropriate choice of site

➢ Disputes with local agencies
➢ Inadequacy of foreign collaboration agreements
➢ Monopoly of technology
➢ Technical incompetence
➢ Lack of skilled workers
➢ Inadequate project planning preparation
➢ Change of scope because of government regulations
➢ Resource constraints because of limitation of funds
➢ Vendor delivery problems
➢ Inferior quality of materials
➢ Foreign exchange curbs
➢ Lack of infrastructure of water and electricity
➢ Low motivation of the project team for want of job-
guarantee after completion
➢ Inadequacy of basic conceptual and technical inputs
➢ Zero date not being specified
➢ Lack of coordination/cohesion between team members
➢ Frequent transfers of the project manager and other key
personnel
57
Notes
➢ Late clearance of project schedules by different agencies

5
8
 Notes
➢ Price escalation because of change in exchange rates
➢ Delay in obtaining import licences
➢ Inadequate or improper liaison with customs, excise,
sales tax, police, octroi, etc.,
➢ Poor monitoring and control, and
➢ Infrequent monitoringand review
amongst members and contractors

The causes of delay can be summarised as being due

to site-selection, technology-choice, vendor difficulties,
transport bottlenecks, labour, resistance from local and
government authorities, lack of infrastructure and political
turbulence. Other causes include the following:

➢ Delays in receiving information on changes,

clarifications, etc., finalising tenders, modifications,
rework, and inspection results
➢ Unavoidable statutory controls
➢ Over ambitious scheduling targets
➢ Frequent changes in design, and technological up
gradation that hold-up project execution
➢ Inadequate consideration of the choice of
technology and design at planning and
development stages
➢ Weak monitoring and control
➢ Not being equipped with force majeure to operate in contingencies
➢ Resistance to the use of innovative techniques and
management principles
➢ Allowing project duration to expand, leading to
improper resource allocation and increased costs,
and
➢ Inability to distinguish between critical and non-
critical activities, and inadequate monitoring

Self Assessment Questions

1) Define ‘Project’. What are its characteristics and elements?

2) Explain the stages in project life cycle.
59
Notes
3) Explain the classification of projects on various bases.

6
0
 Notes
4) What is project management?
5) Explain the importance of project management.
6) Explain the integrated approach to project
management.
7) What is project portfolio management system?
8) Explain the need for project portfolio management
system.
9) Explain the design of project portfolio management
system.
10) What is pipeline management?
11) Write short notes on
a) White elephants
b) Pearls
c) Oysters
d) bread and butter projects
12) Explain the various organization structure used in
managing projects.
13) How to manage projects in functional organizations?
14) How to manage projects within matrix structure?
15) Explain the various forms of matrix organizational
structure for managing projects.
16) How to manage projects in networked structure?
17) How to manage projects using dedicated project
teams?
18) Explain the considerations used while choosing
appropriate project management structure.
19) Explain the options available for project
management office structure.
20) Explain the steps in defining project.
21) What is work breakdown structure?
22) What are work packages?
23) Explain the process of creating work breakdown
structure.
24) Explain the pitfalls to work breakdown structure.
25) What is responsibility matrix?
26) Explain the steps in developing the responsibility
matrix.
27) What is project roll up?
61
Notes
28) What are project overruns?
29) What is time overrun?

6
2
 Notes
30) What is cost overrun?
31) What are white elephants?
32) Explain the external causes of project delays.
33) Explain the internal constraints of project delays.

CASE STUDY
AmeriHealth Mercy Driving Results and Increasing Competitive
Advantage

Through Organization Project Management

In 2007, the AmeriHealth Mercy Family of

Companies sought to improve its ability to systematically
deliver its strategy. Facing new competition in the
managed health care industry and facing substantial
changes due to federal health care reform, the
organization determined that its existing results could not
sustain the growth needed to face an increasingly
competitive landscape. The new Project Management
Organisation (PMO) director, Ruth Anne Guerrero, was
familiar with the concept of organization project
management (OPM) and determined that the OPM
approach would serve as a roadmap for advancing the
organization. In September 2008, under Guerrero’s
direction, AmeriHealth Mercy conducted an
Organization Project Management Maturity Model
(OPM3)® assessment in conjunction with Project
Management Institute (PMI). The assessment helped the
organization map its existing organization project
management capabilities and identify improvements that
needed to be made in order for the organization to further
improve business performance. OPM3 is a global best
practice standard used to measure and improve an
organization’s ability to deliver its strategy with the use of
program, portfolio and project management. Created by
PMI, OPM3 assessments compare the existing capabilities
of the organization to the best practices of organization
project management. Once the team understood the
results of the AmeriHealth Mercy 2008 OPM3 assessment,
the PMO immediately built an improvement plan to

63
Notes
implement the changes that were most important to the
organization. Using a building block approach, the PMO
developed a high-level plan that detailed, quarter by
quarter, the expected accomplishments. The AmeriHealth
Mercy Family of Companies strives to continue to grow,
support operations and

6
4
 Notes
invest in its people. That’s what drives us,” says Ms.
Guerrero. She adds, “Since we’ve made the right
investments to improve organization project management,
we’ve seen the company meet its strategic and operating
plans. The benefits that we’re reaping from the enhanced
PMO are being used to fund additional project work,
including future improvements. The PMO has truly become
a strategic operations center for the organization.
According to Joanne McFall, Chief of Staff for AmeriHealth
Mercy’s Chief Operation Officer, “Our success in achieving
our strategic goals is directly linked to the effectiveness of
our overall portfolio management function. By continuing
to enhance our use of organization project management
practices, we expect to see even greater benefits in future
years.” Analyse the importance of PMO.

****

65
Notes

UNIT - II

The pre-investment phase is a crucial phase where

a series of studies and investigation, starting with the
project idea and progressively leading to elaborate
examination of all relevant details are undertaken
before the decision is taken to proceed with the
implementation of the project. These studies follow the
successive stages given below:

➢ Preliminary, initial or opportunity studies;

➢ Intermediate or pre-feasibility studies; and
➢ Ultimate or techno-economic feasibility studies.

While carrying out the above studies, with

progressive increase in depth, detail and analysis, a
number of supporting or functional studies should be
undertaken, depending upon the nature of the project.
Let us learn about these studies in this unit.

Unit Structure

Lesson 2.1 - Various Stages and Components of

Project Feasibility Studies
Lesson 2.2 - Phases of a Project, Stages in Project Life
Cycle and Project Constraints

6
6
 Notes

Lesson 2.1 - Various Stages and Components of

Project Feasibility Studies

Learning Objectives

➢ To know about opportunity studies.

➢ To know about pre-feasibility studies.
➢ To know about the functional or support studies.
➢ To understand the components of techno-economic
feasibility studies.
➢ To know about the detailed project report

Introduction

The various stages in the project feasibility studies include

a) Opportunity studies
b) Pre-feasibility studies
c) Techno-economic feasibility studies

Let us know the details of opportunity studies and

pre-feasibility studies in this lesson.

Opportunity Studies

Identifying suitable opportunities for investment

is an intricate and involved exercise in developing
countries. A variety of constraints, complexities, risks
and uncertainties have to be reckoned with, and their
implications on the project implementation and its
subsequent success in the operational phase have to be
carefully and thoroughly examined before the resources
are committed. Efforts in identifying these
opportunities pursued at different levels. The enterprise
management is expected to take all initiative to
convince itself about the prospects of the project that it
wishes to launch.
67
Notes
Governmental agencies, development financial
institutions and other industrial promotion or
development corporations are also continuously
engaged in identifying worthwhile investment
opportunities. For instance, the Industrial and
Technical Consultancy Organization of Tamil Nadu
Ltd. (ITCOT), a joint venture of national and state level
financial institutions, has brought out a collection of
papers presented by various central research
laboratories and other technology information and
financing sources, at two technology seminars, and a
guide book, providing information on technology and
project opportunities.

Where national economic planning is a fairly

organized effort, the planning process spell out national
and state priorities for development and investment,
and also provides the relevant economic and other
indicators. The promoters or concerned entrepreneurs
can then make their choices from among the priority
sectors or probable production gaps in commercially
attractive areas. The opportunity studies help in
spotting investment opportunities or project ideas,
which can be subjected to further detailed scrutiny, if
initially found viable. For this preliminary assessment,
a quick analysis of the following aspects is necessary:

➢ Availability of requisite natural resources suitable for

processing and manufacture;
➢ The pattern of agricultural activity and scope for
agro-based industries;
➢ Categories of consumer products that have
prospects of growing demand in response to
population growth or improvements in standard of
living;
➢ Scope and areas for import substitution;
➢ Manufacturing lines that have been found to be
successful by other entrepreneurs;
➢ Possible inter linkages with other industries in the
country or abroad;

6
8
 Notes
➢ Scope for forward or backward integration with
existing activities of the enterprise;
➢ Scope for diversification into related lines;
➢ Scope for expansion of existing capacity for
achieving economies of scale or for maintaining or
improving market share;

69
Notes
➢ The prevailing and expected investment climate in the
country;
➢ The industrial policies in vogue;
➢ The availability and the cost aspects of factors of
production;
➢ Opportunities for export.

Broad indications on these and other relevant

aspects are obtained with the help of the preliminary
studies. These rely on aggregate estimates that are
readily available. Rough cost data are obtained from
comparable projects, if any, or are estimated in broad
terms.

The opportunity studies can be general or specific in nature.

a) General Opportunity Studies

The government and development institutions carry

out these general studies for the benefit of potential
investors. These general studies could be:

Area Studies

Identifying locations that require development and

investment initiatives, such as backward areas, export
zones, etc.

Sub-Sectoral Studies

The focus of attention being sub sectoral areas, such

as consumer durables, construction materials, etc.

Resource-Based Studies

These involve a survey of the availability of natural

resources that can be processed for making immediate or
final products.

b) Specific Project Opportunity Studies

7
0
 Notes

After identification of general investment

opportunities, whereby products that have potential for
domestic manufacture get noted, the next step is to
prepare an investment profile for the chosen line.
Industrial

71
Notes
promotion and development agencies often provide this
information for prospective investors. The Gujarat
Industrial Development Corporation, the Gujarat
Industrial Investment Corporation and the Gujarat
State Financial Corporation have an appreciable
degree of coordination in extending all assistance to
prospective investors, in terms of information on
available locations, market situation, infrastructural
facilities, etc. and help in launching projects.

The specific opportunity study enables the project

idea to graduate into an investment proposition.
Government policies, incentives and other supports are
aspects on which information would be needed as they
have a bearing on the profitable functioning of the
project. A broad investment profile should be an output
of the study, in order to elicit investor response. Since
the study confines itself to aggregates and summary
data for a quick understanding of the investment
prospects, it should not be very expensive. At a
moderate cost it should be possible to get the salient
facts.

Pre-Feasibility Studies

The project idea requires to be expanded with the

help of a more detailed examination of all relevant
information, as also by gathering additional essential
information. A thorough techno-economic feasibility study
is very expensive and there is need to be convinced about
the worth of launching such an elaborate and costly
exercise. The pre-feasibility study is thus an intermediate
effort, following the identification of a project idea, to
determine whether the proposal deserves to be pursued
further for project formulation and implementation. The
following aspects come for consideration at this stage.

➢ Whether, on the basis of the elaborate information

obtained during the pre-feasibility study, the
investment prospect is promising enough to be
processed into an investment decision.

7
2
 Notes
➢ Whether, in the light of the information obtained, it is
found justifiable to go for a very comprehensive
scrutiny and analysis of the project prospects.

➢ There could be some critical aspects pertaining to

the specific project idea which require a very
thorough examination and in

73
Notes
depth analysis, through further support or functional
studies. Market surveys may be necessary, or
laboratory tests may have to be carried out to
establish the attributes that the product is claimed to
possess. The production process may have to be tried
out through pilot plant tests.

➢ The outcome of the pre-feasibility study might also be

the realization that the project idea is not with
pursuing further.

The conversion of the project idea into a commercial

reality could possibly be achieved through a variety of
choices in terms of plant size, location, technology, product
mix, marketing approaches, etc. Before the ultimate
feasibility study is taken up, there should be clarity about
the choices from among these possibilities or alternatives.
Alternatives will have to be considered in respect of the
following:

Market size and plant capacity: The market scope and

size have to be assessed, taking note of the prevailing
and prospective demand. The sales organization, the
marketing network and distribution channels that will be
appropriate, the plant capacity to be installed and the
production processes to be adopted are all aspects on
which a reasonable degree of clarity is needed before the
feasibility study can be taken up.

Material inputs: the raw materials and other critical

stores items that are needed and the alternatives or
substitutes in respect thereof, the different sources for their
procurement and the related economics of purchase should
be examined and suitable options chosen.

Location and site: Alternative locations available with

adequate infrastructure facilities, or with proximity to
supplies of materials or to the markets for outputs have
to be considered and a proper choice made.

Project engineering: Technology and equipment sources

have to be identified and compared before a decision is

7
4
 Notes
taken. Their suitability to the local or domestic conditions
have to be examined carefully and the availability of
requisite skills for their proper maintenance to be
ensured.

Overheads: The organization structure will

determine the nature and amount of overheads to be
incurred in respect of manufacturing, selling and
administrative functions. Building and equipment
layout, the

75
Notes
choice of having a sales network or distributing through
wholesale outlets, etc. are aspects on which, at least.
Tentative decisions should be taken to guide the
feasibility study.

Manpower: Ready availability of semi-skilled and

skilled labour as also casual or unskilled labour,
competent and qualified supervisory and general staff, the
training facilities that are needed and related matters
need to be considered and appropriate choices made.

Project implementation: Whether the implementation will

be departmentally carried out or whether it will be
entrusted entirely to specialist contractors are questions
that have to be resolved at the pre- feasibility stage.

Financial analysis: Fairly reliable, though aggregate,

estimates have to be made on the capital costs of
equipment, buildings, etc, and on the choices from among
alternative sources or modes of financing the project.
Reliable assessment of costs and revenues during operating
phase will have to be made at this stage and the
profitability examined.

Where the investment possibilities and prospects are

widely known to be good, because of the nature of the
product or very favourable market factors, there may be
no need for a pre-feasibility study. Even in such instances,
in order to decide on the location, size, etc., there may be
a need for pre-feasibility studies on related aspects, by
way of functional or support studies, before the eventual
decision on investment is taken.

Functional Studies or Support Studies

These are confined to selected aspects of the project

being contemplated, and may be found necessary by way of
support for pre- feasibility or feasibility studies, particularly
in the case of large projects with multi-division, multi-
product characteristics. The following types of studies are
found to be common:

7
6
 Notes

Market studies: The thrust is on examining the market

prospects of the products proposed to be manufactured.
Demand estimates have to be prepared and, in addition,
scope for market penetration or creation of a new
demand through suitable market strategies have to be
assessed.

77
Notes
Materials input studies: The ready availability of raw
materials and other essential inputs has to be examined,
and reliable sources for these supplies have to be
identified. Need for developing proximate sources of
supply for critical items or components through vendor
development initiatives have to be assessed, as this would
involve additional project outlays. The prevailing and
anticipated price trends for these items have also to be
studied.

Location studies: Where transportation costs are high

in relation to the high volume, low cost raw material
requirements (or finished products), or where transport
bottlenecks pose major constraints; location becomes a
critical decision factor, and special studies may be
required to arrive at optimal decision in this regard.

Capacity studies: Technology choice is often

motivated by the expectation of reaping economies of
scale. But these will have to be established with
reference to the market conditions, infrastructure
facilities available, government policies on duties and
levies, and the inflation effects on equipment and other
major input costs. Researchers on costs and prices of
manufactured products have questioned the belief that
higher volume or capacity means lower cost per unit. The
impact of inflation on capital costs and costs of
operational inputs have had the effect of cancelling out
the benefits that are expected to result from larger size.
Switching to high-capacity plants in cement and fertilizers
has not yielded us the benefit of lower unit costs. It is also
likely that different technologies have different optimal
capacities, and comparative studies of capacities and costs
specific to these technology alternatives are essential
before specific is taken.

Equipment selection studies: Very large projects with

multiple divisions and products have to procure equipment
from diverse sources. Certain common services like
central tool room or common annealing, heat treatment,
plating, metallurgical testing and other services can be
planned, if found feasible, with substantial savings on
7
8
 Notes
capital costs. These possibilities have to be examined
through special studies.

Laboratory and pilot plant tests: To prove the suitability of

raw materials or components or processes, laboratory tests
or pilot plant tests may have to be resorted to.

79
Notes
The functional or support are investigative in nature,
with reference to the specific areas of scrutiny and the
conclusions there from provide clear guidance for
proceeding with the subsequent stages of project
preparation. The support studies can precede or follow a
pre-feasibility study or a feasibility study. It is the outcome
of the felt need to examine, in depth, certain aspects that
are found to be critical, calling for closer investigation.
Such requirements may arise even after feasibility studies
have been completed.

Components of Project Feasibility Studies

Introduction

The United Nations Industrial Development

Organization (UNIDO) has published in the Manual for the
Preparation of Industrial Feasibility Studies to help the
standardization of industrial feasibility studies, which
have often found to be incomplete and inadequately
prepared. It will be useful to trace the components, or
contents, of the feasibility studies through the
framework provided by UNIDO.

Components of Techno-Economic Feasibility Studies

Following are the contents of techno-economic feasibility studies:

(a) Project background and history

(b) Demand and market study
(c) Demand projections
(d) Forecasting techniques
(e) Export projections
(f) Market penetration
(g) Sensitivity analysis
(h) Sales forecast and marketing
(i) Production programme
(j) Plant capacity
(k) Materials and inputs
(l) Supply programme
8
0
 Notes
(m) Project location

81
Notes
(n) Plant site, within the location
(o) Local conditions
(p) Layout and physical coverage of project
(q) Technology and equipment
(r) Civil engineering
(s) Plant organization
(t) Overhead costs
(u) Labour
(v) Staff
(w)Implementation scheduling
(x) Financial evaluation
(y) Economic evaluation

a) Executive Summary

The feasibility study, being the final scrutiny,

analysis, and projec- tions prior to the decision to
commit resources, has to provide definite conclusions
on all basic issues of the project. In the course of the
project opportunity study and the prefeasibility study,
various alternatives would have been considered and
precise decisions would have been arrived at on critical
aspects such as location, capacity, technology, etc. The
summary of the conclusions and recommendations
should be provided in the form of an executive summary
to facilitate a quick grasp of the essentials of the
project. The table of contents in feasibility study given
above provides the sequence of presentation of
information. On each aspect, a brief write-up on the
essential information should be given. At the end of the
technical, operational and financial data, the major
advantages of the project, the major drawbacks of the
project and the prospects of implementing the project
should be highlighted.

b) Project Background and History

The success of any project is dependent, among

other things, on its consonance with the country’s
economic setting and its state of industrial development.
8
2
 Notes
The economic, industrial, financial and other relevant
policies should be briefly described. There should also be
information on the project promoters or sponsors and
the reasons for their specific

83
Notes
interest in the project. The nature of preliminary and
subsequent studies that have proceeded from the
feasibility study should be mentioned, giving the
highlights and the costs incurred.

c) Demand and Market Study

After identifying the data requirements of the

demand and market study, an appropriate method of
data collection and evaluation will have to be chosen
from among the alternative approaches available. Then
the demand and market size for the products, and by-
products, if any, will have to be determined and
projected for the life time of the project. Esti- mations
about the extent of market penetration by products
should also be given.The proposed sales programme has
to be spelt out, indicating the progress expected during
the project life. The marketing strategy that has been
chosen should be elaborated, presenting its rationale.
Information on product pricing, promotional efforts
planned, the proposed pattern of organization structure
for distribution and sales, and decisions on the dis-
counts and commissions on sales, and the extent and
nature of after sales services intended to be provided
should be given.

Estimated revenue from sales and the estimated

costs of marketing and distribution need to be shown.
Taking note of the policy on stocks of finished goods to
be maintained, the production programme will have to
be drawn up. Details that go into these computations
include the inventory requirements, plant capacity
factors, quality specifications, annual production
targets, wastes and effluents, and the costs related
thereto.

In developing countries, where the projects are

geared to import substitution, the secondary or
published data on imports and consumptions provides
near-total information on the market demand for the
concerned products. But in the case of the other
categories of products, the secondary data may not be
8
4
 Notes
adequate, and it may be necessary to generate a fair
amount of primary data. This could mean additional
costs on preliminary and support studies.

The projected sales and income are critical factors

affecting the vi- ability of the project. Optimistic estimates
may help launching a project sooner, but it is an act of self-
deception, as the ambitious assumptions fail

85
Notes
to materialize and the project slides down to disaster. We
have innumer- able examples of such projects that had
looked splendid paper, but could either produce the
quantities promised, or failed to find the market antici-
pated.

The demand analysis should aim at providing the

following essential information:

➢ The geographical boundaries of the market for the

product and the size and composition of the present
demand.

➢ The market segments in terms of a) The end use (e.g.

consumers);
b) Consumer groups (e.g. high income, middle
income); and c) Geographical division (e.g. regional,
national, foreign);

➢ Demand projections of the overall market and of its

segments, covering, say, a ten year period of project
life;

➢ The market share that the project is likely to

achieve, taking note of the anticipated trends in
domestic and international competition and shifts
in consumer needs or preferences.

➢ The pricing structure that is being adopted which is

the basis for the expectations of market
penetrations.

d) Demand Projections

Demand projections should take note of domestic

potential as also export possibilities. These projections
should cover the following aspects:

➢ The estimate of the potential demand for the product

or products;
➢ The estimates of the potential supplies;
➢ The degree of market penetration that the project
is expected to achieve.

8
6
 Notes

While projecting domestic demand, the following logical

steps are involved:

➢ Gather and analyze available information on

current consumption and the rate of changes in
the past;
➢ Classify such consumption data by market segments;

87
Notes
➢ Identify the major factors that have influenced past
demand, and assess the extent of their influence;
➢ Project the expected impact of these factors on future demand; and
➢ Forecast the demand through extrapolation of the
influencing factors.

Growth in demand for consumer products may be

linked to expected increase in income levels. But if the
chances are that inflation or hikes in taxes will overtake
the income rises, the demand growth may not occur, or
even if it does, it may be marginal. Population growth is
another factor that is equally relevant. A careful
assessment of the counteracting influences of these
factors is a precondition for purposeful demand
projections.

e) Forecasting Techniques

There are different forecasting techniques that

can be adopted and an appropriate choice has to be
made depending on the nature of the products and
markets. The demand forecasting techniques that are
normally used are:

➢ The trend method, also referred to as extrapolation method;

➢ The consumption level method (taking note of the
income and price elasticities of demand);
➢ The end-use method, also known as the
consumption coefficient method;
➢ The leading indicator method;
➢ Regression models;
➢ Market survey

f) Exports Projections

The information requirements for assessing export market potential are:

➢ The present volume of export of the product or products;

➢ The unit export prices for these products;

8
8
 Notes
➢ Countries to which these products have been, or are being, exported;

89
Notes
➢ Special aspects concerning these products, such as
quality stipulations, special selling arrangements,
etc.
➢ Other countries with export assistance or export
incentive provided by the home country, and the
prospects of their being continued or improved.
➢ Risk of violent shifts in demand due to rapid
technological changes, or changes in political
situations.

g) Market Penetration

The market penetration that the proposed product

can achieve is assessed with reference to the following
factors:

➢ The degree of domestic and/or foreign competition;

➢ The consumer preferences or responses; and
➢ The scope for substitution that exists, or might
develop.

There are also strategic levers that can be employed

for achieving market penetration. These include:

➢ Product quality;
➢ Packaging;
➢ Marketing and distribution methods, and;
➢ The after-sales services provided.

h) Sensitivity Analysis

There are bound to be a large number of

assumptions on a variety of aspects relating to the
project. These assumptions can get vitiated by
unpredictable events or there could be inadequacies or
inherent errors in the project data inputs. The common
deviations that occur are:

➢ Errors in the base data;

➢ An analysis based on inadequate data;
9
0
 Notes
➢ Unforeseen economic and socio-political developments;
➢ Certain essential parameters being overlooked or
some relevant factors and relationships being
unknown or being suppressed;

91
Notes
➢ Unrealistic assumptions being made with no proper justifications;
➢ Rapid technical and technological changes.

The projections also have to reckon with a number of uncertainties.

Among them are:

➢ Unpredictable shifts in the rates of increase of

national and per capita incomes;
➢ Emergence or disappearance of a dominant competitor;
➢ Changes in transportation costs;
➢ Trade agreements within trade blocks;
➢ Introduction of new sources of raw materials or substitutes;
➢ Changes in tariff policies;
➢ New application possibilities for the product.

To reduce the uncertainties from these diverse

possibilities to a minimum, statistical sensitivity
analysis provides a systematic approach. This technique
can be used to assess the impact on costs and revenue,
when the factors influencing demand turn out to be less
or more favorable to demand than was assumed. Where
the sensitivity analysis has to take note of a
combination of changes of different factors, computer
facilities can be employed with advantage to provide a
range of forecasts in the categories, pessimistic and
realistic.

i) Sales Forecast and Marketing

The demand analysis gets transformed into sales

forecasts. Simultaneously, decisions are taken on the
modes of distribution, market promotion strategy, pricing
strategy etc. Analysis of sales and sales income is thus a
follow-up of market study and demand analysis. The
specific sales volumes, product by product, for the
periods of the operating phase has to be projected and the
corresponding sales income estimated.

Volume of production and sales have a critical

bearing on the production and selling costs and,

9
2
 Notes
therefore, these estimates have to be carefully
prepared, after considering possible interruptions,
delays, etc. that affects production volume. Choice of
promotional methods and distribution systems, have
significant implications for product costs and

93
Notes
these have to be clearly defined and properly estimated.
It is not uncommon to come across project estimates
where the sales quantities and prices are overstated
thereby boosting up the revenues, intentionally or
otherwise.

j) Production Programme

Having arrived at the sales projections for the

different stages of production in the operating phase of
the project, the feasibility study should spell out the
detailed production programme. The levels of output and
capacity utilization during the specified periods should be
clearly indicated. Within the available plant capacity, the
levels of output can vary substantially, from time to time,
for a variety of reasons, and prepare the materials flow
diagram to show the materials and utilities balances at
various stages of production. The costs on inputs have to
be worked out in detail for the different categories. The
production programme provides the basis on which the
cash flow projections for the production periods can be
drawn up.

k) Plant Capacity

For determination of costs and revenues, the

assumptions on plant capacity are very critical. The
UNIDO manual defines two capacity terms, as below:

Feasible Normal Capacity

This represents the capacity that is achievable under

normal working conditions taking into account not only
the installed equipment and technical conditions of the
plant, such as normal stoppages, downtime, holidays,
maintenance, tool changes, desired shift patterns and
indivisibilities of major machines to be combines, but also
the management system applied. Thus, the feasible normal
capacity is the number of units produced during one year
under the above conditions. This capacity figure should
correspond to the demand figure derived from the market

9
4
 Notes
study.

Nominal Maximum Capacity

This is technically feasible capacity and frequently

corresponds to the installed capacity as guaranteed by
the supplier of the plant. To

95
Notes
reach maximum output figure, overtime as well as
excessive consumption of factory supplies, utilities,
spare parts, and wear and tear, will inflate the normal
level of production costs. With reference to the nature
of operations, technology and also the resource and
input constraints, the feasible normal plant capacity
has to be determined and the production costs
computed on that basis.

Matching Projected Sales and Plant Capacity

In the case of products that have rapid growth

potential, the initial production capacity should be
higher than the initial demand and sales so as to be able
to cover subsequent demand growth. Care should,
however, be taken to see that the planned
underutilization of capacity does not fall below the
break-even level. Where expansion can be taken up fast
to meet the demand growth, the initial production
should match the demand and creation of idle capacity
should be avoided. In keeping with the feasible normal
capacity selected, the input requirements of materials,
manpower, services, etc. should be worked out in
detail.

l) Materials and Inputs

As for the requirements of material and other

inputs, detailed information has to be provided about
their nature, quantities, sources of procurement, and
their costs. Materials and inputs can be classified into:

➢ Raw materials;
➢ Processed industrial materials (intermediates or components);
➢ Manufactured (subassemblies):
➢ Auxiliary materials;
➢ Factory supplies;
➢ Utilities.

The major items of materials have to be described,

mentioning possible alternatives, and justifying the
9
6
 Notes
selection. Information should also be provided on their
qualitative aspects and quantities available, sources of
supplies, and the prevailing and projected costs.

97
Notes
m) Supply Programme

The procurement plan should be linked to the

anticipated production and inventory levels and the
annual costs of consumption determined for the
classified groups of materials and inputs. The utilities
required have to be assessed in detail, taking note of
the location, technology, and plant capacity. Their
availability and proximity of sources of supply are
critical for the success of the project. Supply
programmes for these should also be drawn up. The
general tendency is to take utilities or off-site facilities
for granted, and underestimate their significance, time
frame for installation and costs. Electricity, water,
steam, compressed air, fuel and effluent disposal are
project components that require planned and detailed
attention o avert project cost and time overruns and to
avoid capacity constraints during the operating phase
for want of support services.

n) Location

Specific requirements that the locations have to

fulfill for smooth plant operations have to be spelt out.
Alternatives locations that are likely to be suitable should
be identified. The reasons for the choice of the optimal
location from among considered alternatives should be
substantiated.

o) Plant Site

Choice of site, in a given location, for erecting the

plant involves selection from available alternatives, with
due consideration for the terrain, transport facilities,
water supply, power supply, manpower availability, etc.
Site preparation and development, in some instances, can
be a very expensive proposition and this aspect has to be
assessed carefully. The cost estimates should take note of
the magnitude of work involved in preparing the site for
plant erection.

9
8
 Notes
p) Local Conditions

A good understanding if the local conditions in terms

of infra- structure and socio-economic environment is very
essential and the rel- evant information has to be gathered
for the feasibility study. Infrastruc- tural investment is a
very essential precondition for the operation of any

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Notes
project. It is interesting to note that some of the State
Industrial Develop- ment Corporations, that build
international estates and invite promoters to set up
units, work on the premise that it is sufficient of the
land for the factory structure is made available initially
and that the infrastructure fa- cilities such as roads,
water, drainage, transports, etc., can be developed in
due course as the number of units in the estate
increases. The consequence has been that the earlier
units in these industrial estates were starved of
essential infrastructure facilities and had to struggle for
survival.

The socio-economic environment is another factor

that has to be considered. Waste disposal, if not properly
organized, will pose an environmental hazard and it is
essential that the location study determines the extent of
effluents and the possible manner of disposal in the
locational alternatives under consideration. There are
State legislations on effluent disposal, and the required
investments for effluent treatment and disposal have to be
planned and incorporated in the project estimates.

q) Layout and Physical Coverage of the Project

Just as it is important to determine the

composition and cost of equipment, materials,
services, land, etc., in great detail, it is also necessary
to consider the requirements or structures and civil
works for the considerable construction and erection
work that has to be undertaken during project
implantation. Such constructions/erections have to be
defined and their costs estimates prepared.

Project layouts have to be determined with reference to:

➢ The production programme;

➢ The procurement programme for materials, supplies and services;
➢ The technology chosen;
➢ The equipment selected;
➢ The civil work involved; and
1
0
 Notes
➢ Significant factors, if any, with reference to the local conditions.

Alternative project layouts should be considered,

and the optimal layout chosen. To highlight the scope of
the project and project components, the physical layout
drawings have to be drawn up.

10
1
Notes
r) Technology and Equipment

The feasibility study should also describe the

technologies considered and the rationale for the ultimate
choice of technology. The costs of technology in terms of
investments, or lump sum payment of technology fees, or
royalty or annualized payments have to be determined and
detailed. Equipment have to be categorized as belonging to
the production, infrastructure or other categories, the basis
of their choice elaborated and their costs estimated, with
appropriate details of quantities and rates.

s) Civil Engineering

Civil engineering includes the creation of

manufacturing facilities required for the project. Proper
blue print of the infrastructure required for the project
should be created.

t) Plant Organization

Organizational planning is as important as project

engineering. Effective implantation is difficult if the
organizational structure is vague; there is likely to be
overlap of functions and duplication of responsibilities,
causing delays and interruptions in project construction.
The consequences are cost and time overruns. There
should be a proper grasp of the types of operations
involved and the nature of services required for achieving
the production objective. Production cost centers and
service cost centers should be identified and defined in the
organizational framework. Similarly, administration and
finance cost centers should also be incorporated in the
structure.

u) Overhead Costs

If the plant is organized into production, service

and administrative cost centres,it should be possible to
obtain realistic assessment of overhead costs. The
tendency is generally, is to calculate overhead as

1
0
 Notes
percentage surcharge on material cost, or on direct
labor cost, or on the sum of the two. This is too broad
an approximation and is inadequate for a proper
assessment of project feasibility.The cost items
accruing in the different production, service and other
cost centers should be identified, listed

10
3
Notes
and the expenditure under the individual items
estimated. Depreciation charges and financing cost
should also be duly reckoned.

v) Labour

After deciding on the projected production

capacity and the layout, process, etc. The requisite
personnel at various levels of operations have to be
assessed. The cost of recruitment, training,
employment, and promotions have to be estimated and
reckoned for working out the economics of the project.

Keeping the organizational layout in view, the

labour requirements in the skilled, semi-skilled and
unskilled categories have to be assessed, and the
availability of work-force in the required categories are
examined. Depending on the number of production and
service cost centers and the organization pattern of the
selling and the distribution functions, the man- power
inventory should be planned, and grouped into direct
and indirect categories. The corresponding rates of
wages and salaries and perquisites have to be worked
out in detail and the direct and indirect labour costs
and variable and fixed costs classifications identified
and projected an- nually, for the project period.
Training and other personnel related costs, such as
provident fund contributions welfare expenditure
commitments, etc., also have to be estimated, year by
year, for the project period.

w) Staff

Lack of qualified and competent supervisory and

managerial staff has very often been a major handicap for
many a project. Advance planning and action is necessary
to determine the manpower needs for supervisory and
managerial positions, for the proposed organization
structure and plant layout, and for requiting, inducting
and training the key personnel in order to ensure
smooth and efficient operations from the commencement

1
0
 Notes
of commercial production. While determining the
manpower requirements during the production phase,
the necessity to requite operators and managerial staff
for certain operations and functions, well in advance, for
training and familiarization with technology and related
aspects even during the construction stage should not be
overlooked. At the same time,the size of such workforce
and stuff should be optimal, in order to avoid excessive
pre-production costs.

10
5
Notes
Where foreign collaboration is involved is
involved, the commitments on foreign experts as per
agreed terms and the cost of training of selected
employees at the collaborator’s plant have to be duly
reckoned and included in the estimates. The
arrangements for training should not be confined to
preproduction phase, but should be planned and
organized even during the operation phase, since the
upgrading of skills and management development is a
continuous process.

x) Implementation Scheduling

The implementation phase commences from the

time the decision to invest is taken, and extends upto
commencement of commercial production. From the
process plant initial concept, it proceeds through the
stages of design, quotations, bid analysis orders and
site contracts, scope variations work completion and
startup. If these stages are not properly planned and
managed, delays omissions and commissions will
proliferate and cause avoidable and substantial cost
and time overruns. Planning and executing project
construction is no less important than planning and
procuring equipment, facilities and services.

The feasibility study should spell out the project

implementation programme and time schedule and
describe the proposed action plans and time frames for
acquisition of technology, detailed engineering of
equipment, tendering, evaluation of bids and awards of
contact thereof. Similarly, the arrangements for
financing for project construction and the stages in
which will be organized to be available for smooth flow
of project work, the arrangements for phased
recruitment of personnel at different levels for varying
functions, for necessary and timely sanctions or
approvals, clearances, etc., from the government,
financial institutions or other agencies, for procurement
of supplies and for marketing will have to be
elaborated.

1
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 Notes

Though due attention is paid to the determination

of the periods required for the various implementation
activities, continued methodical and systematic review
is essential to ensure that the project schedule is well
knit and co-ordinate. Bar Charts, CPM, PERT
techniques can be of immense help in effective
implementation planning and management. Yet it is
necessary to review the implementation schedule from
time to time to initiate midcourse corrections or
revisions promptly.

10
7
Notes
y) Financial evaluation

The feasibility study elaborates, as we have seen,

element by element, from the project conception to the
terminal stage of the project life, the status, the prospects
the choices, the selection, the process, the specifications,
the quantum, the price, the time schedule, the costs and
the benefits. The building blocks should thus be well-
defined and established. Unfortunately, this is where we
seem to grossly underestimate the role of the techno-
economic feasibility study and its comprehensiveness and
credibility for the successful implementation and
subsequent functioning of the project. Experimentation
with pyrites and coal as feed stock for fertilizers after
confirming, in the Detailed Project Report and the Techno-
economic Feasibility Report, that they have been found
suitable, has cost the nation dearly in terms of costs.

Conceding that the estimates and projections have

been well and adequately prepared, the final acts in the
feasibly study are the financial and economic valuations
of the project. The inter-relationship between the
estimated capital costs, the estimated annual revenues
have to be analyzed to see whether the project is likely
to pay its keep and leave a reasonable surplus for further
growth. The discounted cash flow analysis and the
sensitivity analysis are very useful tools to be applied at
this stage of evaluation of financial and economic aspects
of the project.

z) Economic Evaluation

In the case of the projects, it is particularly

necessary to evaluate the contribution of the projects to
the national economy. Rising of aggregate consumption
could be one of the basic objectives in the project
evaluation. Redistribution of income could be another.
These different objectives will have to be weighted and
combined to establish the net contribution of the project to
the national economy.

Detailed Project Report (DPR)

1
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 Notes

Detailed Project Report is one which contains the

complete details of the project and it is required to be
submitted to banks and financial institutions for obtaining
the financial assistance. Usually, all the con- tents of
techno-economic feasibility studies will be covered in the
DPR.

10
9
Notes
Detailed project report is a complete document for
investment decision- making, approval. Detailed project
report is base document for planning the project and
implementing the project. Preparation of detailed project
report is a step in firming up the proposal. When an
investment propos- al has been approved on the basis of
functional report and the proposal is a major proposal, it
would be necessary for detailed project report to firm up
the proposal for the capital cost as well as the various
facilities. It includes:

➢ Examination of technological parameters.

➢ Description of the technology to be used.
➢ Broad technical specification.
➢ Evaluation of the existing resources.
➢ Schedule plan.
➢ General layout.
➢ Volume of work.

Feasibility-cum Detailed Project Report (FDPR)

The interested promoter should submit a Feasibility-

cum-Detailed Project Report (FDPR) covering following
aspects for getting financial assistance from banks and
financial institutions:

1. Availability of raw materials and tie up (MOU

document)/ willingness certification
2. Availability of land and tie up (Lease document)/
willingness certification
3. Organization type and structure like (Entrepreneur/
Proprietary, Private limited, Entrepreneur/ Public
limited, Co-operative, NGO etc.
4. Brief project description
5. Tie up with technology, equipment suppliers
6. Financial analysis and profitability study.
7. Incentives, concessions expected from other
Government and public bodies for demonstration
and future multiplications.
1
1
 Notes
8. Initial contribution in terms of finance, technology
development, technical and equipment tie up by the
promoter and user agency (mention separately).
9. Organizations to operate and maintain the demonstration project.
10. Organization to replicate the project in a specific
region or throughout India.
11. Fulfillment of statutory requirements (like PCB
clearance, environmental clearance/ safety, etc.

Conclusion

The Detailed Project Report (DPR) is an essential

building block for the projects and enabling sustainable
quality service delivery. The DPR is to be prepared carefully
and with sufficient details to ensure appraisal, approval,
and subsequent project implementation in a timely and
efficient manner. This document provides a reference
format for preparing DPRs/ Project Reports across sectors.

****

11
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Notes

Lesson 2.2 - Phases of Project, Project Life Cycle Stages and

Constraints

Learning Objectives

➢ To know the various investment phases from project

planning to project completion.
➢ To understand the various stages in Project Life Cycle
➢ To learn about project constraints.

Investment Phases of a Project

Project life cycle is a complex process consisting of

different steps arranged in a sequential order. Different
authors have described these steps in different sequential
manner but the concept of the cycle is almost similar in
each case. According to United Nations Guidelines for
Rural Centre Planning, there are 7 steps in the project life
cycle such as project identification and appraisal, pre-
feasibility study, feasibility study, detailed design project
implementation, operation maintenance, monitoring and
evaluation.

Rondineli, Dennis &ApsyPalia in their book—Project

Planning and implementation in Developing countries—
identified the following 12 steps in the project life cycle.
Project identification and definition, project formation,
preparation and feasibility analysis, project design, project
analysis, project selection, project activation and
organization, project implementation and operation,
project supervision (monitoring and control) project
completion or termination, output diffusion and transition
to normal administration, project evaluation, follow-up and
action.

World Bank Guidelines reveals the following six major

steps in the project life cycle. Conception (identification),

1
1
 Notes
Formation (preparation), Analysis (appraisal),
Implementation (Supervision), operation and evaluation.

11
3
Notes
All the steps given in different studies can be grouped
into three main phases viz.,

➢ Pre-investment phase
➢ Investment/Implementation phase and
➢ Operational phase

A brief description of each of these phases is given below:

a) Pre-investment Phase

The first phase of the cycle describes the

preliminary evaluation of an idea. It consists of
identification of investment opportunities, preliminary
project analysis, feasibility study and decision-making.
Project idea emanates from the following problems:

➢ Potential and the needs of the people of an area;

➢ Plan priorities when planning is done by the

government demand and supply projection of
various goods and services;

➢ Pattern of imports and exports over a period of time;

➢ Natural resource which can serve as the base for

potential manufacturing activity;

➢ Scope of extending existing lines of activity

consumption pattern in other countries at
comparable stages of economic stage of economic
development.

On the basis of the investment opportunities, it is

possible to conceive a number of projects out of which a
particular project may be consistent with development
objectives of the area. During this phase, the following
aspects of the project must be carefully designed so as to
enable implementation.

➢ Project infrastructure and enabling services

➢ System design and basic engineering package
➢ Organization and manpower
1
1
 Notes
➢ schedules and budgets

11
5
Notes
➢ Licensing and governmental clearances
➢ Finance
➢ Systems and procedure
➢ Identification of project manager
➢ Design basis, general condition for purchase and
contracts
➢ Construction resources and materials.
➢ Work packaging

This phase is involved with preparation for the project

to take out smoothly. Once a project opportunity is
conceived, it needs to be examined. Preliminary project
analysis concerns with marketing, technical financial and
economic aspects of the project. It seeks to determine
whether the project is prima facie worthwhile to justify a
feasibility study and what aspects of the projects are critical
to its viability and hence call for an in depth investigation.

More details, through and complete feasibility

study results in a reasonably adequate formulation of the
projects in terms of location, production capacity
production technology and material inputs. The feasibility
study contains fairly specific estimates of project cost,
means of financing sales revenues, production costs,
financial profitability and social profitability. Based on the
thorough feasibility study the project owner or sponsors or
financiers can decide whether to accept or reject a
particular project. In other words, the decisions whether
investment on the project should be made or not has to
be made at this stage.

b) Implementation Phase

The implementation phase of an industrial project

involves setting up of manufacturing facilities. After
judging the worthiness, project needs to be designed
for implementation. Drawings, blue prints and the
sequences in which the various activities concerning
the project need to be carried out. The main activities
under this phase are:

1
1
 Notes
Project and Engineering Design

It consists of site probing and prospecting;

preparation of blue prints, plant design, plant engineering,
selection of machinery, equipment.

11
7
Notes
Negotiations and Contractions

It covers the activities like project financing,

acquisition of technology, construction of building and
civil works, provision of utilities supply of machine and
equipment, marketing arrangement etc.

Construction

This step involves the activities like site preparation,

construction of building, erection and installation of
machinery and equipment. Training engineers, technicians
and workers.

c) Operation Phase

It is the longest phase in terms of time span. It

begins when the project is commissioned and ends when
the project is wound up. This is a transition phase in which
the hardware built with the active involvement of various
agencies is physically handed over for production. This
phase is basically a clean up phase for project personnel.
The main concern of this phase is on smooth and
uninterrupted operation of machinery and plant,
development of suitable norms of productivity,
establishment of a good quality for the product and
securing the market acceptance of the product. It aims to
realize the projections made in the project regarding
sales, production, and cost of profits. Project monitoring
and project evaluation are two vital activities under this
phase.

Project monitoring is a step towards achieving

properly identified objectives through a carefully laid down
strategy. Each activity in the project implementation should
be carefully watched so that, the progress may be measured
and any deviation from the expected progress be identified
in time.

Project evaluation refers to post-investment

analysis. It aims at finding out whether the project has

1
1
 Notes
achieved the objectives for which it was taken up and
whether it has created the anticipated or intended
impact. This helps in developing an insight for future
investment and better planning. Thus the life cycle of a
project narrates the methodology of developing
maintaining and controlling an investment proposal at
its various phases in the life cycle.

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9
Notes
Project Life Cycle

The project life cycle serves to define the

beginning and the end of a project. For example, when
an organization identifies an opportunity to which it
would like to respond, it will often authorize a needs
assessment and/or a feasibility study to decide if it
should undertake the project. The project life-cycle
definition will determine whether the feasibility study is
treated as the first project phase or as a separate,
standalone project.

The project life-cycle definition will also

determine which transitional actions at the beginning
and the end of the project are included and which are
not. In this manner, the project life-cycle definition can
be used to link the project to the ongoing operations of
the performing organization.

The phase sequence defined by most project life

cycles generally involves some form of technology transfer
or handoff such as requirements to design, construction to
operations, or design to manufacturing. Deliverables from
the preceding phase are usually approved before work
starts on the next phase. However, a subsequent phase is
sometimes begun prior to approval of the previous phase
deliverables when the risks involved are deemed
acceptable. This practice of overlapping phases is often
called fast tracking.

Project life cycles generally define:

➢ What technical work should be done in each phase

(e.g., is the work of the analyst part of the definition
phase or part of the execution phase)?
➢ Who should be involved in each phase (e.g.,
resources that need to be involved with
requirements and design)?

Project life-cycle descriptions may be very general or

very detailed. Highly detailed descriptions may have
numerous forms, charts, and checklists to provide structure
1
2
 Notes
and consistency. Such detailed approaches are often called
project management methodologies.

Most project life-cycle descriptions share a number of

common characteristics:

12
1
Notes
➢ Cost and staffing levels are low at the start, higher
toward the end, and drop rapidly as the project
draws to a conclusion. This pattern is illustrated in
the figure below:

➢ The probability of successfully completing the project

is lowest, and hence risk and uncertainty are
highest, at the start of the project. The probability of
successful completion generally gets progressively
higher as the project continues.

➢ The ability of the stakeholders to influence the final

characteristics of the project’s product and the final
cost of the project is highest at the start and gets
progressively lower as the project continues. A major
contributor to this phenomenon is that the cost of
changes and error correction generally increases as
the project continues.

➢ Project life cycle defines phases that connect

beginning and end of the project. After each phase
deliverables are reviewed for the completeness in
time, accuracy according to defined objectives and
their final approval (approval for acceptance) before
moving to the next phase.

➢ In the beginning, phases can be overlapped to save

time and to have fast tracking on the life cycle. This
technique is used to compress the whole schedule (if
required resources are available or manageable).

➢ There is no way to define Project Life Cycle ideally.

Because of this every project management team can
define its own way to work on the project. They can
use best common practices and can learn new ways
of dealing projects by their experiences in detail or in
general. Only three phases are always certain to be
performed; conceptualization, intermediate phase(s),
and closure.

➢ Cost and staffing level is defined for every single phase.

➢ Project may have sub-project(s) and sub-projects may

have their own project life cycle.

➢ The typical project life cycle – initiating,

1
2
 Notes
implementing and clos- ing – has critical decision
points where the project may continue, be
changed, or be abandoned.

Care should be taken to distinguish the project life

cycle from the product life cycle. For example, a project
undertaken to bring new banking software to market is but
one phase or stage of the product life cycle.

12
3
Notes
Stages of Project Life Cycle

The stages of project life cycle are detailed below:

a) Project Initiation

The first of a project is the initiation phase.

During this phase a business problem or opportunity is
identified and a business case providing various
solution options is defined. Next, a feasibility study is
conducted to investigate whether each option addresses
the business problem and a final recommended solution
is then put forward. Once the recommended solution is
approved, a project is initiated to deliver the approved
solution. Terms of reference are completed outlining
the objectives, scope and structure of the new project,
and a project manager is appointed.

The project manager begins recruiting a project

team and establishes a project office environment.
Approval is then sought to move into the detailed planning
phase.”Within the initiation phase, the business problem
or opportunity is identified, a solution is defined, a project
is formed and a project team is appointed to build and
deliver the solution to the customer. The following figure
shows the activities undertaken during the initiation
phase:

Develop a Undertake Establish Appoint Set up a Perform

business a Feasibility the terms of the Project stage
case Study reference project Office gate

The Project Initiation activities

Develop a business case: The trigger to initiating a

project is identifying a business problem or opportunity to
be addressed. A business case is created to define the
problem or opportunity in detail and identify a preferred
solution for implementation. The business case includes:

➢ A detailed description of the problem or opportunity;

1
2
 Notes
➢ The Project Management Life Cycle
➢ A list of the alternative solutions available;
➢ An analysis of the business benefits, costs, risks and
issues;

12
5
Notes
➢ A description of the preferred solution;
➢ A summarized plan for implementation.

“An identified project sponsor then approves the

business case and the required funding is allocated to
proceed with a feasibility study. Undertake a feasibility
study: At any stage during or after the creation of a
business case, a formal feasibility study may be
commissioned. The purpose of a feasibility study is to
assess the likelihood of each alternative solution option
achieving the benefits outlined in the business case.
The feasibility study will also investigate whether the
forecast costs are reasonable, the solution is achievable,
the risks are acceptable and the identified issues are
avoidable.

Establish the terms of reference: After the business case

and feasibility study have been approved, a new project is
formed. At this point, terms of reference are created. The
terms of reference define the vision, objectives, scope and
deliverables for the new project. They also describe the
organization structure and activities, resources and
funding required for undertaking the project. Any risks,
issues, planning assumptions and constraints are also
identified.

Appoint the project team: the project teams are now

ready to be appointed. Although a project manager may be
appointed at any stage during the life of the project, the
manager will ideally be appointed prior to recruiting the
project team. The project manager creates a detailed job
description for each role in the project team, and recruits
people into each role based on their relevant skills and
experience

Set up a project office: The project office is the physical

environment within which the team is based. Although it
is usual to have one central project office, it is possible
to have a virtual project office with project team
members located around the world. A project office
environment should include:

1
2
 Notes
➢ Equipment, such as office furniture, computer
equipment, station- ery and materials;
➢ Communications infrastructure, such as telephones,
computer network, e mail, Internet access, file
storage, database storage and backup facilities;

12
7
Notes
➢ Documentation, such as a project methodology,
standards, pro- cesses, forms and registers;
➢ Tools, such as accounting, project planning and risk
modeling software.

“Perform a phase review: At the end of the initiation

phase, per- form a phase review. This is basically a
checkpoint to ensure that the project has achieved its
objectives as planned.”

b) Project Planning

➢ Once the scope of the project has been defined in the

terms of reference, the project enters the planning
phase. This involves creating a:
➢ Project plan outlining the activities, tasks,
dependencies and timeframes;
➢ Resource plan listing the labor, equipment and
materials required;
➢ Financial plan identifying the labor, equipment and
materials costs;
➢ Quality plan providing quality targets, assurance
and control measures;
➢ Risk plan highlighting potential risks and actions
to be taken to mitigate those risks;
➢ Acceptance plan listing the criteria to be met to gain
customer acceptance;
➢ Communications plan describing the information
needed to inform stakeholders;
➢ Procurement plan identifying products to be sourced
from external suppliers.

At this point the project will be planned in some

detail and is ready to be executed. By now, the project
costs and benefits have been documented, the
objectives and scope have been defined, the project
team has been appointed and a formal project office
environment established. It is now time to undertake
detailed planning to ensure that the activities
performed during the execution phase of the project are
1
2
 Notes
properly sequenced, resourced, executed and
controlled. The activities shown in the following figure
are undertaken.

12
9
Notes

Create a Create a Create a Create a Perform

project plan Financial Quality Risk Plan stage gate
Plan Plan

Create an Create a Create a Contact the

Acceptance Communicati procuremen suppliers
Plan on plan tplan

Project Planning Activities

Create a project plan: The first step in the project

planning phase is to document the project plan. A ‘work
breakdown structure’ (WBS) is identified which includes a
hierarchical set of phases, activities and tasks to be
undertaken to complete the project. After the WBS has
been agreed, an assessment of the level of effort required
to undertake each activity and task is made. The activities
and tasks are then sequenced, resources are allocated and
a detailed project schedule is formed. This project plan is
the key tool used by the project manager to assess the
progress of the project throughout the project life cycle.
Create a resource plan: Immediately after the project plan
is formed, the level of resource required to undertake
each of the activities and tasks listed within the project
plan will need to be allocated. Although generic resource
may have already been allocated in the project plan, a
detailed resource plan is required to identify the:

➢ Type of resource required, such as labor, equipment and materials;

➢ Quantity of each type of resource required;
➢ Roles, responsibilities and skill sets of all human resource required;
➢ Specifications of all equipment resource required;
➢ Items and quantities of material resource required.

A schedule is assembled for each type of resource so

that the project manager can review the resource allocation
at each stage in the project.

Create a financial plan: A financial plan is created to

identify the total quantity of money required to undertake

1
3
 Notes
each phase in the project (in other words, the budget). The
total cost of labor, equipment and materials is calculated
and an expense schedule is defined which enables the
project manager to measure the forecast spend versus the
actual spend throughout

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Notes
the project. Detailed financial planning is an extremely
important activity within the project, as the customer will
expect the final solution to have been delivered within the
allocated budget.

Create a quality plan: Meeting the quality expectations of

the customer can be a challenging task. To ensure that the
quality expectations are clearly defined and can reasonably
be achieved, a quality plan is documented. The quality plan:

➢ Defines the term ‘quality’ for the project.

➢ Lists clear and unambiguous quality targets for each
deliverable. Each quality target provides a set of
criteria and standards to be achieved to meet the
expectations of the customer.
➢ Provides a plan of activities to assure the customer
that the quality targets will be met (in other words, a
quality assurance plan).
➢ Identifies the techniques used to control the actual
quality level of each deliverable as it is built (in
other words, a quality control plan).

Not only is it important to review the quality of the

deliverables produced by the project, it is also
important to review the quality of the management
processes that produced them. A quality plan will
summarize each of the management processes
undertaken during the project, including time, cost,
quality, change, risk, issue, procurement, acceptance
and communications management.

Create a risk plan: The next step is to document all

foreseeable project risks within a risk plan. This plan also
identifies the actions required to prevent each risk from
occurring, as well as reduce the impact of the risk should
it eventuate. Developing a clear risk plan is an important
activity within the planning phase, as it is necessary to
mitigate all critical project risks prior to entering the
execution phase of the project.

1
3
 Notes
Create an acceptance plan: To deliver the project
successfully, you will need to gain full acceptance from the
customer that the deliverables produced by the project
meet or exceed requirements. An acceptance plan is
created to help achieve this, by clarifying the completion
criteria for each deliverable and providing a schedule of
acceptance reviews. These reviews

13
3
Notes
provide the customer with the opportunity to assess each
deliverable and provide formal acceptance that it meets the
requirements as originally stated.

Create a communications plan: Prior to the execution

phase, it is also necessary to identify how each of the
stakeholders will be kept informed of the progress of the
project. The communications plan identifies the types of
information to be distributed to stakeholders, the methods
of distributing the information, the frequency of
distribution, and responsibilities of each person in the
project team for distributing the information.

Create a procurement plan: The last planning activity

within the planning phase is to identify the elements of the
project to be acquired from external suppliers. The
procurement plan provides a detailed description of the
products (that is, goods and services) to be acquired from
suppliers, the justification for acquiring each product
externally as opposed to from within the business, and the
schedule for product deliv- ery. It also describes the
process for the selection of a preferred supplier (the
tender process), and the ordering and delivery of the
products (the procurement process).

Contract the suppliers: Although external suppliers may

be ap- pointed at any stage of the project, it is usual to
appoint suppliers after the project plans have been
documented but prior to the execution phase of the
project. Only at this point will the project manager have a
clear idea of the role of suppliers and the expectations for
their delivery. A formal ten- der process is undertaken to
identify a short list of capable suppliers and select a
preferred supplier to initiate contractual discussions with.
The tender process involves creating a statement of work,
a request for infor- mation and request for proposal
document to obtain sufficient informa- tion from each
potential supplier and select the preferred supplier. Once
a preferred supplier has been chosen, a contract is agreed
between the project team and the supplier for the delivery
of the requisite products.

1
3
 Notes

Perform a phase review: At the end of the planning phase,

a phase review is performed. This is a checkpoint to ensure
that the project has achieved its objectives as planned.

13
5
Notes
c) Project Execution

This phase involves implementing the plans

created during the project planning phase. While each
plan is being executed, a series of management
processes are undertaken to monitor and control the
deliverables being output by the project. This includes
identifying change, risks and issues, reviewing
deliverable quality and measuring each deliverable
produced against the acceptance criteria. Once all of
the deliverables have been produced and the customer
has accepted the final solution, the project is ready for
closure. The activities of this phase are shown in the
Build Deliverables
following figure.

Perform stage gate

Monitor & Control

Perform time mgt. Perform risk mgt.

Perform cost mgt. Perform issue mgt.

Perform quality mgt. Perform procurement mgt.

Perform change mgt. Perform acceptance mgt.

Perform
communications management

Project Execution activities

1
3
 Notes
The execution phase is typically the longest phase of
the project in terms of duration. It is the phase within
which the deliverables are physically constructed and
presented to the customer for acceptance.

To ensure that the customer’s requirements are

met, the project manager monitors and controls the
activities, resources and expenditure required to build
each deliverable. A number of management processes as
shown are undertaken to ensure that the project
proceeds as planned.

Build the deliverables: This phase involves physically

constructing each deliverable for acceptance by the
customer. The activities undertak- en to construct each
deliverable will vary depending on the type of project being
undertaken.

Activities may be undertaken in a ‘waterfall’ fashion,

where each activity is completed in sequence until the final
deliverable is produced, or in an ‘iterative’ fashion, where
iterations of each deliverable are construct- ed until the
deliverable meets the requirements of the customer.
Regard- less of the method used to construct each
deliverable, careful monitoring and control processes
should be employed to ensure that the quality of the final
deliverable meets the acceptance criteria set by the
customer.

Monitor and control: While the project team is physically

produc- ing each deliverable, the project manager
implements a series of manage- ment processes to monitor
and control the activities being undertaken by the project
team. An overview of each management process follows.

Time Management: Time management is the process of

recording and controlling time spent by staff on the
project. As time is a scarce resource within projects, each
team member should record time spent undertaking
project activities on a timesheet form. This will enable
the project manager to control the amount of time spent
undertaking each activity within the project. A timesheet
13
7
Notes
register is also completed, providing a summary of the
time spent on the project in total so that the project plan
can always be kept fully up to date.

Cost management: Cost management is the process by

which costs/expenses incurred on the project are formally
identified, approved and paid. Expense forms are completed
for each set of related project

1
3
 Notes
expenses such as labor, equipment and materials costs.
Expense forms are approved by the project manager and
recorded within an expense register for auditing purposes.

Quality management: Quality is defined as the extent to

which the final deliverable conforms to the customer
requirements. Quality management is the process by
which quality is assured and controlled for the project,
using quality assurance and quality control techniques.
Quality reviews are undertaken frequently and the results
recorded on a quality review form.

Change management: Change management is the

process by which changes to the project scope,
deliverables, timescales or resources are formally
requested, evaluated and approved prior to
implementation. A core aspect of the project manager’s
role is to manage change within the project. This is
achieved by understanding the business and system
drivers requiring the change, identifying the costs and
benefits of adopting the change, and formulating a
structured plan for implementing the change. To
formally request a change to the project, a change form
is completed. The status of all active change forms
should he recorded within a change register.

Risk management: Risk management is the process by

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

Issue management: Issue management is the method by

which issues currently affecting the ability of the project
to produce the required deliverable are formally managed.
After an issue form has been completed and the details
logged in the issue register, each issue is evaluated by
the project manager and a set of actions undertaken to
resolve the issue identified.

Procurement management: Procurement management is

the process of sourcing products from an external
13
9
Notes
supplier. Purchase orders are used to purchase products
from suppliers, and a procurement register is maintained
to track each purchase request through to its
completion.

1
4
 Notes
Acceptance management: Acceptance management is the
process of gaining customer acceptance for deliverables
produced by the project. Acceptance forms are used to
enable project staff to request acceptance for a
deliverable, once complete. Each acceptance form
identifies the acceptance criteria, review methods and
results of the acceptance reviews undertaken.

Communications management: Communications

management is the process by which formal
communications messages are identified, created,
reviewed and communicated within a project. The most
common method of communicating the status of the
project is via a project status report. Each
communications message released is captured in a
communications register.

Perform a phase review: At the end of the execution phase,

a phase review is performed. This is a checkpoint to ensure
that the project has achieved its objectives as planned.”

d) Project Closure

Project closure involves releasing the final

deliverables to the customer, handing over project
documentation to the business, terminating supplier
contracts, releasing project resources and
communicating the closure of the project to all
stakeholders. The last remaining step is to undertake a
post implementation review to quantify the level of
project success and identify any lessons learnt for
future projects. Following the acceptance of all project
deliverables by the customer, the project will have met
its objectives and be ready for closure. Project closure
is the last phase in the project life cycle, and must be
conducted formally so that the business benefits
delivered by the project are fully realized by the
customer.

The activities outlined in the following figure are undertaken.

Perform Project Closure Review Project Completion

14
1
Notes

The project closure activities

1
4
 Notes
Perform project closure: Project closure, or ‘close out’,
essentially involves winding up the project. This includes:

➢ Determining whether all of the project completion

criteria have been met;
➢ Identifying any outstanding project activities, risks or
issues;
➢ Handing over all project deliverables and
documentation to the customer;
➢ Canceling supplier contracts and releasing project
resources to the business;
➢ Communicating the closure of the project to all
stakeholders and interested parties.

A project closure report is documented and

submitted to the customer and/or project sponsor for
approval. The project manager is responsible for
undertaking each of the activities identified in the project
closure report, and the project is closed only when all the
activities listed in the project closure report have been
completed.

Review project completion: The final activity within a

project is the review of its success by an independent
party. Success is determined by how well it performed
against the defined objectives and conformed to the
management processes outlined in the planning phase. To
determine how well it performed, the following types of
questions are answered:

➢ Did it result in the benefits defined in the business case?

➢ Did it achieve the objectives outlined in the terms of
reference?
➢ Did it operate within the scope of the terms of
reference? 0 Did the deliverables meet the criteria
defined in the quality plan?
➢ Was it delivered within the schedule outlined in the
project plan?
➢ Was it delivered within the budget outlined in the
financial plan?

14
3
Notes

To determine how well the project conformed, an

assessment is made of the level of conformity to the
management processes outlined in the quality plan.
These results, as well as a list of the key achievements
and lessons learnt, are documented within a post-
implementation review and presented to the customer
and/or project sponsor for approval.

1
4
 Notes
Project Constraints

Defining Project Constraints

To prioritize and define the scope of the application

deployment project, gather information about the
constraints of your project. Constraints often include:

Resources: Identify the equipment, software, staff, and

space that are available for the project.

Time: Identify the date by which the application

deployment project must be completed, and how the
application testing process fits into the larger deployment
project.

Organizational issues: If the project will not involve the

entire organization, identify which groups in your
organization will be affected by it. Additionally, determine
if a particular group in the organization needs the new
operating system sooner than others. If so, you might
decide to perform a staged rollout.

Access to developers: Identify applications that were

developed in-house or especially for your organization.
Access to the developers of these applications is critical
during the testing and issue resolution phases of the
project. Such access also can be an invaluable aid with
retail applications. The primary impact of project
constraints is the likelihood of delaying the completion of
the project. There are three types of project constraints:
technological, resource and physical.

The technological constraints relate to the sequence in

which individual project activities must be completed. For
example, in constructing a house, pouring the foundation
must occur before building the frame.

Resource constraints relate to the lack of adequate

resources which may force parallel activities to be
performed in sequence. The consequence of such a change
in network relationships is delay in the completion date of
14
5
Notes
the project. We will examine the nature of resource
constraints in much greater detail in the next section.

1
4
 Notes
Physical constraints are caused by contractual or
environmental conditions. For example, due to space
limitations an activity such as painting a wall may have
to be performed by only one person (Gray and Larson,
2003).

In general, from a scheduling perspective,

projects can be classified as either time constrained or
resource constrained. A project is classified as time
constrained in situations where the critical path is
delayed and the addition of resources can bring the
project back on schedule and the project completed by
the required date. However, the additional resource
usage should be no more than what is absolutely
necessary. The primary focus, for purposes of
scheduling, in time constrained projects is resource
utilization. On the other hand, a project is resource
constrained if the level of resource availability cannot
be exceeded. In those situations where resources are
inadequate, project delay is acceptable, but the delay
should be minimal. The focus of scheduling in these
situations is to prioritize and allocate resources in such
a manner that there is minimal project delay. However,
it is also important to ensure that the resource limit is
not exceeded and the technical relationships in the
project network are not altered.

Identifying Risk Factors

By identifying risk factors, you can identify the

potential barriers to a successful deployment and assess
the cost of failure for each potential blocking issue.
With this information in hand, you can create contingency
plans to help mitigate or avoid blocking issues. For
application compatibility testing, it is important to think
about the project risks early in the project rather than
later, during the test planning phase. The main risk for
any application testing and deployment project is the
business impact of application failure. For business-
critical applications, a failure in deployment could have
severe financial repercussions for the organization,
whereas the failure to properly deploy an application that
14
7
Notes
is used infrequently by a few users might have very little
effect. Assess the financial impact that could be caused by
a failure at any time during the deployment project.

1
4
 Notes
Self Assessment Questions

1) What are opportunity studies? Explain.

2) What are the various types of opportunity studies?
3) What are general opportunity studies?
4) What are specific opportunity studies?
5) What are pre-feasibility studies?
6) What are the various types of information for which
the pre- feasibility studies are undertaken?
7) List and explain the components of techno-economic
feasibility studies.
8) What is DPR? How does it differ from feasibility report?
9) What is FDPR?
10) Explain the various investment phases from project
planning to project completion.
11) Explain the various stages in Project Life Cycle.
12) What are project constraints? Explain its types.

CASE STUDY
Feasibility Study on Hainan Project

The idea of this project is to conduct a feasibility

study for client Lippo Group. Lingshai, Hainan is located in
South-west China, a small island with its tropical location
advantage, it is one of the fastest growing economic city in
China as well as the high level growing of tourist visited in
recent years. Client Lippo Group has been working with
Licon (Holdings) Limited for several years.

Lippo is one of the fastest growing multinational

companies. Lippo has several branches in Indonesia,
Singapore, China and Philippine and it headquarter is
located in Hong Kong. Lippo is an Asian conglomerate with
decades of experience in capturing and profiting from
investment opportunities in the region and the company is
focusing on 2 key sectors: Property and Retail.

14
9
Notes
More about the company, Lippo is one of the major
business conglomerates in Asia with businesses
geographically diversified in Hong Kong, Singapore, China,
Korea, Macau, Philippines, Malaysia, Thailand, and other
countries. Property and retailing are the key focus. Lippo
also has interests in other businesses, e.g., hotels, food
business, securities broking and banking. The Client
proposes is to build a unique mixed use development in a
landmark building in Lingshui area. The project focused on
four main property markets: Residential; Serviced
apartment; Hotel and Retail (Shopping malls including
dining and retail facilities).

Submit feasibility report which will give client a

complete understanding more about the project
background and conditions as well as provide a
repositioning analysis for the subject site, based on
market feasibility studies.

****

1
5
 Notes

UNIT - III

Project Evaluation

The main purpose of project evaluation or

investment appraisal procedure is simply the comparison
of uncertain future cash inflows with cash outflows which
might also be uncertain. The basic techniques used by
economists and financial analysts for this comparison
purpose are most often internal rate of return and net
present value techniques. This practice has been so
generally accepted that the whole procedure of evaluating
the profitability of an investment based on the concept of
discounting is often referred to as the discounted cash
flow techniques. In this chapter, let us understand the
tradition and sophisticated (or discounted cash flow)
techniques used for evaluating the projects under
certainty; techniques used for evaluating projects under
uncertainty; and Project Evaluation methodology including
Social Cost Benefit Analysis.

Unit Structure

Lesson 3.1 - Project Evaluation under Certainty and Uncertainty

Lesson 3.2 - Project Evaluation, Commercial and
Social Cost Benefit Analysis

15
1
Notes

Lesson 3.1 - Project Evaluation under Certainty and Uncertainty

Learning Objectives

➢ To understand the tradition techniques of evaluating

projects financially.
➢ To understand the sophisticated techniques of
evaluating projects financially.
➢ To understand the general techniques of
evaluating projects under risky conditions.
➢ To understand the quantitative techniques of
evaluating projects under risky conditions.

Method of Project Evaluation under Certainty

There are several methods for evaluating and

ranking the capital investment proposals. In case of all
these methods the main emphasis is on the return which
will be derived on the capital invested in the project. In
other words, the basic approach is to compare the
investment in the project with the benefits derives there
from.

Following are the main methods generally used:

1) Traditional Methods

a) Pay-back Period Method

b) Accounting Rate of Return Method.

2) Sophisticated/Discounted Cash Flow Methods

a) The Net Present Value Method

b) Present Value Index Method/Benefit-Cost Ratio
Method
c) Internal Rate of Return (IRR)

1
5
 Notes
1) Traditional Methods

a) Pay-back Period Method

In Case of Even Cash Flows

The term pay-back (or pay-out or pay-off) refers to the

period in which the project will generate the necessary cash
to recoup the original investment.

For example, if a project need ` 40,000 as initial

investment and it will generate an even annual cash inflow
of ` 10,000 for ten years, the pay- back period will be 4
years, calculated as follows:

Pay-back period = Initial Investment

Annual Cash Inflow
= ` 40,000
` 10,000

The annual cash inflow is calculated by taking

into account the amount of net income on account of the
asset (or Project) before depreciation but after taxation.
The income so earned, if expressed as a percentage of
initial investment, is termed as “unadjusted rate of
return”. In the above case, it will be calculated as follows:

Unadjusted rate of Return = Annual Return x 100

Initial Investment

= ` 10,000
x 100 = 25%
` 40,000

In Case of Uneven Cash Inflows

In case the cash flow is not even, i.e., if each year’s

cash inflows are different, cumulative cash inflows will be
calculated and by interpolation, the exact pay-back-period
can be calculated. For example, if the project needs an
original investment of ` 1,00,000 and the annual cash
inflows for 5 years are ` 30,000, ` 40,000, ` 25,000, `
20,000 and ` 20,000 respectively, the pay-back-period will
be calculated as follows:
15
3
Notes

Year Cash Inflows (`) Cumulative Cash Inflows

(`)
1 30,000 30,000
2 40,000 70,000
3 25,000 95,000
4 20,000 1,15,000
5 20,000 135,000

The above table shows that in three years ` 95,000

has been recovered. ` 5,000 is left out of initial investment.
In the fourth year the cash inflow is ` 20,000. It means the
pay-back period is between three to four years, which is
calculated as below:

5,000
Pay-back period = 3 years + = 3.25 years
20,000
Decision Criterion

The decision rule is

a) Shorter the payback Period – Accept the project

b) Longer the payback period – Reject the project

The pay-back period can be used as a criterion to

accept or reject an investment proposal. A project whose
actual pay-back period is more than what has been pre-
determined by the management will be straight- away
rejected. The fixation of the maximum acceptable pay-back
period is generally done by taking into account the
reciprocal of the cost of capital.

The pay-back period can also be used as a method of

ranking in case of mutually exclusive projects. The
projects can be arranged in an ascending order according
to the length of their pay-back periods. The project having
the shortest pay-back period or highest unadjusted rate of
return will be preferred provided it meets the minimum
standard that has been established.

Example: A company is considering purchase of a new

machine. There are two alternative models X and Y. Prepare
1
5
 Notes
a statement of profit- ability showing the pay-back period
from the following information:

15
5
Notes

Details Machine X Machine Y

Estimated life of machine 4 years 5 years
(`) (`)
Cost of machine 18,000 36,000
Estimated saving in scrap 1,000 1,600
Estimated saving in Direct 12,000 16,000
Wages
Additional cost of 1,600 2,000
maintenance
Additional cost of 2,400 3,600
supervision

Ignore taxation.

Solution

Statement Showing Annual Cash Inflows

Machine X (`) Machine Y (`)

Estimated saving in scrap 1,000 1,600

Estimated saving in Direct 12,000 16,000

Wages
Total Savings (1) 13,000 17,600

Additional cost of 1,600 2,000

maintenance
Additional cost of 2,400 3,600
supervision
Total additional costs (2) 4,000 5,600

Net cash inflow (1 – 2) 9,000 12,000

Pay-back period = Initial Investment

Annual Cash Inflow

Machine X Machine Y
= 18,000 = 36,000
9,000 12,000
= 2 years = 3 years

1
5
 Notes
Machine X has a shorter pay-back period; hence it
should be preferred to Machine Y.

15
7
Notes
Advantages of Payback Method

The pay-back method has the following advantages:

➢ The method is very useful in evaluation of those

projects which involve high uncertainty. Political
instability, rapid technological development of cheap
substitutes, etc., are some of the reasons which
discourage one to take up projects having long
gestation period. Pay-back method is useful in such
cases.
➢ The method makes it clear that no profit arises till
the pay-back period is over. This helps new
companies in deciding when they should start paying
dividends.
➢ The method is simple to understand and easy to work
out.
➢ The method reduces the possibility of loss on account
of obsolescence as the method prefers investment in
short-term projects.

Disadvantages of Payback Method

The pay-back method has the following disadvantages:

➢ The method ignores the returns generated by a

project after its pay- back period. Projects having
longer gestation period will never be taken up if this
method is followed though they may yield high
returns for a long period.
➢ The method does not take into account the time value
of money.

Suitability of Payback Method

In spite of the above limitations, the pay-back method

can profit- ably be used in each of the following cases:

➢ Firms having to take up projects in uncertain

situations will prefer payback method.
➢ Firms suffering from liquidity crisis will consider
1
5
 Notes
payback method more appropriate as it gives
importance for recouping the original investment.
➢ Firms which aim at short term earning performance
will prefer pay back method.

15
9
Notes
b) Accounting or Average rate of Return (ARR) Method

In this method, the capital investment proposals are

judged on the basis of their relative profitability. For this
purpose, capital employed and related income is
determined according to commonly accepted accounting
principles and practices over their entire economic life of
the project and then the average yield is calculated. Such a
rate is termed as Accounting Rate of Return. It may be
calculated according to any of the following methods:

Annual Average Net Earnings x 100

Original Investment
Or

Annual Average Net Earnings x 100

Average Investment

The term “average annual net earnings” is the

average of the earnings (after depreciation and tax) over
the whole of the economic life of the project and is
calculated by using the formula
Increase in expected future annual net earnings x 100
Initial increase in required investment

The amount of “average investment” can be

calculated according to any of the following methods.
a)Original Investment
2 x 100

Original Investment – Scrap value of the asset

2
Original Investment – Scrap value of the asset
2
+ Addl. Net Working Capital + Scrap value

1
6
 Notes
Decision Criterion

The Decision Rule is

➢ Higher the ARR or ARR above minimum expected

rate of return – Accept the project
➢ Lower the ARR or ARR below minimum expected rate
of return – Reject the project

Normally, business enterprises fix a minimum rate

of return. Any project expected to give a return below the
rate will be straightaway rejected. In case of several
projects, where a choice has to be made, the different
projects may be ranked in the ascending or descending
order of their rate of return. Projects below the minimum
rate will be rejected. In case of projects giving rates of
return higher than the minimum rate, obviously projects
giving a higher rate of return will be preferred over those
giving a lower rate of return.

Advantages of ARR Method

The following are the advantages of ARR method:

➢ The method takes into account savings over the

entire economic life of the asset. Hence, it
provides a better comparison of the projects as
compared to the pay-back method.
➢ The method embodies the concept of ‘net earnings’
while evaluating capital investment projects, which
is absent in case of all other methods.

Disadvantages of ARR Method

The following are the disadvantages of this method:

➢ The method does not take into account the time

value of money. Thus, it has the same fundamental
defect as that of pay-back method.

➢ There are different methods for calculating the

16
1
Notes
Accounting Rate of Return due to diverse concepts of
investments as well as earnings.

1
6
 Notes
Each method gives different results. This reduces the
reliability of the method.

On account of the above disadvantages, the

Accounting Rate of Return Method is not much in use these
days.

2. Sophisticated or Discounted Cash Flow Methods

The discounted cash flow technique is an

improvement on the pay-back period method. This
method considers the time value of money. It takes into
account both the interest factor as well as the return
after the pay-back period. The method involves three
stages:

➢ Calculation of cash flows, i.e., both inflows and

outflows (preferably after tax) over the full life of the
asset.
➢ Discounting the cash flows so calculated by a discount factor.
➢ Aggregating of discounted cash inflows and
comparing the total with the discounted cash
outflows.

Discounted cash flow technique thus recognizes that `

1 of today (the cash outflow) is worth more than ` 1
received at a future date (cash inflow).

Discounted cash flow methods for evaluating capital

investment proposals are of three types.

a) The Net Present Value (NPV) Method.

This method is considered to be the best method

for evaluating the capital investment proposals. In this
method, cash inflows and cash outflows associated with
each project are first worked out. The present value of
these cash inflows and outflows are then calculated at
the rate of return acceptable to the management. This
rate of return is considered as the cut-off rate and is
16
3
Notes
generally determined on the basis of cost of capital
suitably adjusted to allow for the risk element involved
in the project. Cash outflows represent the investment
and commitments of cash in the project at various
points of time. The working capital is taken as a cash

1
6
 Notes
outflow in the year the project starts commercial
production. Profit after tax before depreciation represents
cash inflows. The Net Present Value (NPV) is the difference
between the total present value of future cash inflows and
the total present value of future cash outflows.

The formula for calculating the NPV in case of

conventional cash flows can be put as follows:

In case of non-conventional cash inflows (i.e., where

there are a series of cash inflows as well cash outflows)
the equation for calculating NPV is as follows:

Where: NPV = Net Present Value, NCF = Cash

Inflows at different time periods, k = Cost of Capital or Cut-
off Rate, I = Cash Outflows at different time periods.

Decision Criterion

The Decision Rule is

➢ NPV is Positive – Accept the project

➢ NPV is Zero or Negative – Reject the project

The Net Present Value can be used as an ‘accept or

reject’ criterion. In case the NPV is positive (i.e., present
value of cash inflows is more than present value of cash
outflows) the project should be accepted. However, if the
NPV is negative (i.e., present-value of cash inflows is less
than the present value of cash outflows) the project should
be rejected.

Example

A company is considering the purchase of a new

16
5
Notes
machine. Two alternative machines (X and Y) have been
suggested, each having an initial

1
6
 Notes
cost of ` 20,00,000 and requiring ` 1,00,000 as additional
working capital at the end of 1st year. Earnings after
taxation are expected to be as follows:

Cash flows (`)

Year
Machine Machine
X Y
1 2,00,000 6,00,000
2 6,00,000 8,00,000
3 8,00,000 10,00,000
4 12,00,00 6,00,000
0
5 8,00,000 4,00,000

The company has target of return of capital of 10%

and on this basis, you are required to prepare the
profitability of the machines and state which alternative
you consider financially preferable using NPV method.

Note: the following table gives the present value of `

1 due in ‘n’ number of years.

Year 1 2 3 4 5
PV of ` 1 at .9 .8 .7 .6 .6
20% 1 3 5 8 2

Solution

Statement Showing the Profitability of the Two Machines

Machine X (`) Machine Y (`)
Discount
Year Cash Present Cash Present
Factor
Inflow Value Inflow Value
1 .91 200000 182000 600000 546000
2 .83 600000 498000 800000 664000
3 .75 800000 600000 100000 750000
0
4 .68 120000 816000 600000 408000
0
5 .62 800000 496000 400000 248000
Total PV of Cash 360000 259200 340000 2616000
inflows 0 0 0

16
7
Notes
Total PV of cash outflows 209100 2091000
(` 2000000 + ` 100000*.91) 0
Net Present Value 501000 525000

1
6
 Notes
Recommendations

Machine Y is preferable to Machine X. Though total cash

inflow of Machine X is more than that of Machine Y by `
2,00,000, the net pres- ent value of the cash inflows of
machine Y is more that of Machine X. Moreover, in case of
Machine Y cash inflow in the earlier years is com- paratively
higher than that in case of Machine X.

b) Benefit Cost Ratio or Excess present Value Index

This is a refinement of the net present value method.

Instead of working out the net present value, a present
value index is found out by comparing the total of present
value of future cash inflows and the total of the present
value of future cash outflows. This can be put in the form
of the following formula:

Excess Present Value Index (Or Benefits Cost (B/C) Ratio)

= PV of future cash inflows
x 100
PV of future cash
outflows

Excess Present Value Index provides ready

comparison between investment proposals of different
magnitudes.

Decision Criterion

The Decision Rule is

➢ PI or NPV Index or BC Ratio is greater than 1 – Accept

the project
➢ PI or NPV Index or BC Ratio is lesser than 1 – Reject the
project

Example: A company has ` 30,00,000 allocated for

capital budgeting purposes. The following proposals and
associated profitability indices have been determined:

Project Amount Profitability Index

1 9,00,000 1.22
16
9
Notes
2 4,50,000 0.95
3 10,50,00 1.2
0

1
7
 Notes

Project Amount Profitability Index

4 1350000 1.18
5 600000 1.2
6 1200000 1.05

Which of the above investments should be

undertaken? Assume that projects are indivisible and
there is no alternative use of money allocated for capital
budgeting.

Solution

Statement of Ranking of Projects on the

Basis of Profitability Index
Project Amount Profitability Index Rank
1 900000 1.22 1
2 450000 0.95 5
3 105000 1.2 2
0
4 135000 1.18 3
0
5 600000 1.2 2

Since projects are indivisible and there is no

alternative use of the money allocated for capital
budgeting on the basis of Profitability Index, the company
is advised to undertake investment in projects 1, 3 and 5.
However, in case of alternative projects, the allocation
should be made to the project which, adds the most to the
shareholder’ wealth. The NPV method in such a case will
give the best results.
Calculation of NPV
Amount Profitability Cash inflows NPV of Project
Project
(in `) Index of project (`) (in `)
A B C D=A* E= D - B
B
1 9,00,00 1.22 10,98,0 1,98,000
0 00
2 4,50,00 0.95 4,27,500 -22,500
0
3 10,50,0 1.2 12,60,0 2,10,000
00 00
17
1
Notes
4 13,50,0 1.18 15,93,0 2,43,000
00 00

1
7
 Notes

Amount Profitability Cash inflows NPV of Project

Project
(in `) Index of project (`) (in `)
A B C D=A*B E= D - B
5 6,00,000 1.2 7,20,000 1,20,000
6 12,00,000 1.05 12,60,000 60,000

The above table shows that the allocation of funds to

the projects 1, 3 and 5 (as selected according to P.I.) will
give NPV of ` 5,28,000 (198000 + 210000 + 120000) and `
4,50,000 [3000000 - (900000 + 1050000
+ 600000) will remain unspent. However, the NPV of the
project 3, 4 and 5 is ` 573000which is more than the NPV
of projects 1, 3 and 5. Moreover, by undertaking projects
3, 4 and 5 no money will remain unspent. Hence, the
company is advised to undertake investment in projects 3,
4 and 5.

c) Internal Rate of Return

Internal Rate of Return is that rate at which the

sum of discounted cash inflows equals the sum of
discounted cash outflows. In other words, it is the rate
which discounts the cash flows to zero. It can be stated
in the form of a ratio as follows:

Cash Inflows=1
Thus, in case of Cash
this method the discount rate is not
Outflo
known but the cash outflowsws and cash inflows are known.
Rate of Return is calculated as follows:

I = R i.e.,
Where I = Cash Outflow / I Initial Investment,
+r
R = Cash Inflow, r = Rate of return yielded by the
Investment (or IRR).

17
3
Notes
Decision Criterion

The Decision Rule is

➢ IRR is greater than the cut-off rate – Accept the project

➢ IRR is lesser than the cut-off rate – Reject the project

Internal Rate of return is the maximum rate of

interest which an organization can afford to pay on the
capital invested in a project. A project would qualify to
be accepted if IRR exceeds the cut-off rate. While
evaluating two or more projects, a project giving a
higher internal rate of return would be preferred. This
is because the higher rate of return, the more profitable
is the investment.

Where cash inflows are uniform

In the case of those projects which result in uniform

cash inflows, the internal rate return can be calculated by
locating the factor in Annuity The factor is calculated is as
follows:

F=I/C

Where F = Factor to be located, I = Original

Investment and C = Cash inflow per year.

Where cash inflows are not uniform

When cash inflows are not uniform, the internal rate

of return is calculated by making trial calculations in
an attempt to compute the correct interest rate which
equates the present value of cash inflows with the present
value of cash outflows. In the process, cash inflows are to
be discounted by a number of trial rates. The first trial
rate may be calculated on the basis of the same formula
which is used for determining the internal rate of return
when cash inflows are uniform, as explained above.
However, in this case ‘C’ stands for ‘annual average cash
inflow’, in place of ‘annual cash inflow’.

1
7
 Notes

After applying the first trial rate the second trial rate
is determined when the total present value of the cash
inflows is greater or less than the

17
5
Notes
total present value of cash outflows. In case the total
present value of cash inflows is less than the total present
value of cash outflows. In case the total present value of
cash inflows is less than the total present value of cash
outflows, the second trial rate taken will be lower than the
first rate. In case the present total value of cash inflows
exceeds the present total value of cash outflows, a trial
rate higher than first trial rate will be used. This process
will continue till the two flows more or less set off each
other. This will be the ‘internal rate of return’.

Example

A company has to select one of the following two projects:

Project A (`) Project B (`)

Cost 22,000 20,000
Cash
inflows:
Year 1 12,000 2,000
Year 2 4,000 2,000
Year 3 2,000 4,000
Year 4 10,000 20,000

Using the Internal Rate of Return method suggests

which project is preferable.

Solution

The cash flows are not uniform and hence the

Internal Rate of Return will have to be calculated by the
Trial and Error Method. In order to have an approximate
idea about such rate, it will be better to find out the
“Factor”. The factor reflects the same relationship of
investment and ‘cash inflows’ as in case of pay-back
calculations. Thus,

F=I/C

Where F = Factor to be located, I = Original

1
7
 Notes
Investment and C = Average cash inflow per year.

17
7
Notes
The factor in case of Project A would be:

22000
F=
7000
= 3.14; [where the average cash inflow
= (12000+4000+2000+10000)/4]

The factor in case of Project B would be:

22000
F=
7000
= 2.86; [where the average cash inflow
= (2000+2000+4000+20000)/4]

The factor thus calculated will be located in

Present Value Table on the line representing number of
years corresponding to estimated useful life of the
asset. This would give the estimated rate of return to be
applied for discounting the cash inflows for the internal
rate of return.

In case of Project A, the rate comes to 10% while in

case of Project B it comes to 15%.

Project A

Discounting
Year Cash inflow (`) Present Value (`)
Factor at 10%
1 12,000 .90 10,908
9
2 4,000 .82 3,304
6
3 2,000 .75 1,502
1
4 10,000 .68 6,830
3
Total Present Value 22,544
Cash outflow 22,000
Net Present Value +544

1
7
 Notes
The present value at 10% comes to ` 22,544. The
initial investment is ` 22,000. Internal rate of Return may
be taken approximately at 10%.

17
9
Notes
In case more exactness is required another trial
rate which is slightly higher than 10% (since at this rate
the present value is more than initial investment) may be
taken. Taking a rate of 12%, the following results would
emerge:

Discounting
Year Cash inflow (`) Present Value (`)
Factor at 12%
1 12,000 .893 10,716
2 4,000 .797 3,188
3 2,000 .712 1,424
4 10,000 .636 6,360
Total Present Value 21,688
Cash outflow 22,000
Net Present Value -312

The internal rate of return is thus more than 10% but

less than 12%. The exact rate may be calculated as
follows:

IRR = Lower Rate +

PV of lower % - Required Net cash
outlay x Difference in rate
Difference between the present values of
both rates

22544 -22000
= 10% + x2
22544 - 21688

544
= 10% + x 2 = 10% + 1.27% =
11.27%
856

Alternatively, the exact internal rate of return can

also be calculated as follows:

NPV of lower rate

IRR = Lower Rate + x
Difference in rate NPV of both rates
At 10% the Net present value
is + 544. At 12% the Net

1
8
 Notes
present value is - 312.

The internal rate would, therefore, be between 10%

and 12% calculated as follows:

18
1
Notes
544
= 10 + x2
544+312
= 10 + 1.3 = 11.27%

Project B

Discounting
Year Cash inflow (`) Present Value (`)
Factor at 15%
1 2,000 .870 1,740
2 2,000 .756 1,512
3 4,000 .658 2,632
4 20,000 .572 11,440
Total Present Value 17,324
Cash outflow 20,000
Net Present Value -2676

Since present value at 15% comes only to ` 17,324, a

lower rate of discount should be tried. Taking a rate of 10%,
the following will be the results:

Discounting
Year Cash inflow (`) Present Value (`)
Factor at 10%
1 2,000 .909 1,818
2 2,000 .826 1,652
3 4,000 .751 3,004
4 20,000 .683 13,660
Total Present Value 20,134
Cash outflow 20,000
Net Present Value +134

The present value at 10% comes to ` 20,134 which is

more or less equal to the initial investment. Hence, the
internal rate of return may be taken as 10%.

In order to have more exactness, the internal ret of

return can be interpolated as done in case of Project A.

1
8
 Notes
At 10% the present value is
+ 134 At 15% the present
value is – 2,676 10% +
134 x 5
134 + 2676
= 10 + 0.24 = 10.24%
IRR of Project A is
11.27% IRR of
Project B is 10.24%

Thus, Internal Rate of Return in case of Project A is

higher as compared to Project B. Hence Project A is
preferable.

Advantages of Discounted Cash Flow Method

The advantages of discounted cash flow method are as follows:

➢ Discounted cash flow technique takes into account

time value of money.
➢ The method takes into account directly the amount of
expenses and revenues over the project’s life.
➢ The method automatically gives more weight to those
money values which are nearer to the present period
than those which are farther from it.
➢ The method makes possible comparison of projects
requiring different capital outlays, having different
lives and different timings of cash flows, at a
particular moment of time because of discounting of
all cash flows.

Disadvantages of Discounted Cash Flow Method

The disadvantages of discounted cash flow method are as

follows:

➢ The method is difficult to understand and work out.

➢ The method takes into account only the cash inflows

on account of a capital investment decisions. As a
18
3
Notes
matter of fact, the profitability or otherwise of a
capital investment proposal can be judged only when
the net income (and not the cash inflow) on account
of operations is considered.

1
8
 Notes
➢ The method is based on the presumption that cash
inflow can be invested at the discounting rate in
the new projects. However, this presumption does
not always hold well because it all depends upon
the available investment opportunities.

Project Evaluation under Uncertainty

Incorporation of Risk Factor

The firm must take into consideration the risk

factor while determining return/cash flows from a
project or taking capital budgeting decisions. However,
incorporation of risk factor in capital budgeting
decisions is a difficult task. Some of the popular
techniques used for the purpose are as follows:

1) General techniques
➢ Risk Adjusted Discount Rate
➢ Certainty equivalent coefficient
2) Quantitative techniques
➢ Sensitivity analysis
➢ Probability assignment
➢ Standard Deviation
➢ Coefficient of variation
➢ Decision Tree

General Techniques

a) Risk Adjusted Discount Rate

The risk adjusted discount rate is based on the

presumption that investors expect a higher rate of return
on risky projects as compared to less risky projects. The
rate requires determination of:

(i) Risk-free rate and

(ii) Risk premium rate. Risk-free rate is the rate at
which the future cash inflows should be discounted
had there been no risk.
18
5
Notes
Risk premium rate is the extra return expected by the
investor over the normal rate (i.e., the risk-free rate) on
account of the project being risky. Thus, risk adjusted
discounted rate is a composite discount rate that takes into
account both the time and risk factors. A higher discount
rate will be used for more risky projects and lower rate for
less risky projects.

Advantages of Risk Adjusted Discount Rate Method

➢ It is simple to calculate and easy to understand.

➢ It incorporates the risk-averse attitude of investors.

Disadvantages of Risk Adjusted Discount Rate Method

➢ The determination of appropriate discount rates

keeping in view the differing degrees of risk is
arbitrary. It may, therefore, not give objective
results.

➢ The method results in compounding of risk over

time, since the premium is added to the discount
rate. This means that the method presumes that
the risk necessarily increases with time which may
not be correct in all cases.

➢ The method presumes that the investors are averse

to risk. Of course, this is true in most of the cases.
However, there are investors who are risk-seekers
and are prepared to pay premium for taking risk. In
their case the discount rate should be reduced rather
than increased with increase in degrees of risk.

In spite of these disadvantages the method is most

widely used on account of its simplicity.

b) Certainty Equivalent Coefficient

According to this method the estimated cash flows

are reduced to conservative level by applying a
correction factor termed as certainty equivalent
coefficient. The correction factor is the ratio of riskless (or

1
8
 Notes
certain) cash flows to risky cash flows.

Riskless cash flow

Certainty equivalent coefficient =
Risky cash flow

18
7
Notes
Riskless cash flow means the cash flow which the
management is prepared to accept in case there is no risk
involved. Naturally, this will be lower than the cash flow
which will be there in case the project is risky. Certainty
equivalent coefficients can be calculated for estimated cash
flows of each year. They are then multiplied with the cash
flows to ascertain cash flows which may be used for the
purpose for determining IRR or NPV for capital budgeting
decisions.

Quantitative Techniques
a) Sensitivity Analysis

While using general techniques, since only cash flows

for each year are considered, there are chances of
estimation errors. The sensitivity analysis approach takes
care of this aspect by providing more than one estimate of
the future return of a project. It is thus, superior to one
figure forecast since it gives a more precise idea about the
variability of the return. Usually sensitivity analysis
provides information about cash flows under three
assumptions:

➢ Pessimistic,
➢ Most likely, and
➢ Optimistic out-comes associated with the project.

It explains how sensitive the cash flows are under

these different situations. The larger is the difference
between the pessimistic and optimistic cash flows, the more
risky is the project and vice versa.

b) Probability Assignment

Sensitivity analysis suffers from a limitation. No

doubt it provides different cash flow estimates under the
three assumptions; it however does not provide chances
of occurrence of each of these estimates. Probability
means the likelihood of happening of an event. Probability
may be objective or subjective. An objective probability is
based on a large number of observations under
1
8
 Notes
independent and identical conditions repeated over a
period of time. A subjective probability is based on
personal judgment since there are no large numbers of
independent and identical observations. In capital
budgeting decisions, the probabilities are of a subjective
type since they are based on a single event.

18
9
Notes
c) Standard Deviation

The probability assignment approach for risk analysis

in capital budgeting does not provide the decision maker
with a precise value indicating about the variability of cash
flows and therefore the risk. This limitation is overcome by
adoption of standard deviation approach. Standard
deviation is a measure of dispersion. It may be defined as
the square root of squared deviations calculated from the
mean. In case of capital budgeting, this measure is used to
compare the variability of possible cash flows of different
projects from their respective mean or expected values. A
project having a larger standard deviation will be more
risky as compared to a project having a smaller standard
deviation.

The following steps are taken for calculating the

standard deviation of the possible cash flows associated
with a project:

➢ Mean value of possible cash flows is computed;

➢ Deviations between the mean value and the possible
cash flows are found out;
➢ Deviations are squared;
➢ Squared deviations are multiplied by the assigned
probabilities which give weighted squared
deviations;
➢ The weighted squared deviations are totaled and
their square root is found out. The resulting figure
is the standard deviation;

d) Coefficient of Variation

Standard deviation is an absolute measure. It is unfit

for comparison particularly where projects involve different
cash outlays or different expected (or mean) values. In such
a case, relative measure of dispersion should be calculated.
Coefficient of variation is one of such measures. It is
calculated as follows:

1
9
 Notes
Standard
Coefficient of variation =
Deviation

Expected (or Mean) Cash flow

19
1
Notes
(e) Decision Tree Analysis

Decision Tree Analysis is another technique which is

helpful in tackling risky capital investment proposals.
Decision tree is a graphic display of relationship between a
present decision and possible future events, future
decisions and their consequences.

The sequence of event is mapped out over time in a

format resem- bling branches of a tree. In other words, it
is pictorial representation in tree form which indicates
the magnitude, probability and interrelation- ship of all
possible outcomes.

An outstanding feature of decision tree analysis

technique is that it links events chronologically with
forecasted probabilities and thus gives systematic
appearance of decisions and their forecasted results.

Constructing a Decision Tree

The following steps are taken for constructing a decision tree:

a) Definition of the proposal: The proposal is defined, i.e.,

what is exactly required under the proposal, e.g.,
entering a new market, introducing a new product
line, etc.

b) Identification of Alternatives: Every proposal will have at

least two alternatives – accept or reject. However,
there may be more than two alternatives also.

c) Graphing the Decision Tree: The decision tree is then laid

down showing decision point (i.e., the cash outlay),
decision branches (i.e., alternatives available and
other data).

d) Forecasting Cash Flows: The forecasted cash flows

regarding each decision branch are also shown along
with the branch. Probabilities are also assigned to
each cash flow. Expected values of future returns are
calculated and the total expected value for the
decision is determined.
1
9
 Notes
e) Evaluating Results: Having determined the expected
value for each decision, the results are analysed.
Some alternatives may look

19
3
Notes
to be acceptable while others may be weak or
unacceptable. The firm may proceed with the
profitable alternative or alternatives or may decide to
reconsider them because of incomplete data or other
reasons.

The technique of decision tree analysis has the

advantages of giving an overall view of all the possibilities
associated with a project. The management can take a
decision keeping the entire picture in mind. However, it
has one big disadvantage. Its format may become
unwieldy and complex if the project has a long life with
different possibilities of cash flows. In such a situation, it
becomes almost impossible to understand and derive a
proper conclusion from the decision tree analysis.

****

1
9
 Notes

Lesson 3.2 - Appraisal of Project Evaluation, Commercial and

Social Cost Benefit Analysis

Learning Objectives

➢ To know the parameters of technical evaluation of projects.

➢ To know the parameters of commercial evaluation of projects.
➢ To know the parameters of financial evaluation of projects.
➢ To know the parameters of economic evaluation of projects.
➢ To know the parameters of management evaluation of projects.
➢ To understand the difference between commercial
vs. national profitability of projects.
➢ To get insight into the Social Cost Benefit Analysis Method.

Project Evaluation Methodology

The financial institutions have a detailed appraisal

of the project proposal in the following components:

➢ Technical Evaluation
➢ Commercial Evaluation
➢ Financial Evaluation
➢ Economic Evaluation
➢ Management Evaluation
➢ Government Consents

a) Technical Evaluation

The financial institutions have a closer look at the

various technical parameters concerning the project.

➢ The proposed product range and the technical

specifications per- taining to them, the extent of
scrap generation and disposal, etc, should have been
spelt out.

19
5
Notes
➢ It is essential to get information on the process
know how and that is available, as also the basic
engineering package and the associated technical
services covering the quality control, pollution
control effluent and wastage disposal,
collaboration arrangements for the process licence
and the consultant services for detail engineering.

➢ Plant locational aspects also deserve detailed

attention, and include soil testing with reference to
housing, education, health, recreation, etc.,
infrastructural facilities for power, water, transport
and communication.

➢ Proper scrutiny is needed in respect of the source of

supply of plant and machinery, their quotations,
prices, delivery schedules, payment terms,
performance guarantee terms, inspection, post
supply services, spares, import licenses, installed
and production capacities, phasing of production,
etc,.

➢ Raw material requirements, availability, cost, items

to imported, consumables needed and availability of
alternative materials are also factors that have to be
ascertained.

➢ Detailed information is also sort on the requirements

of building for factory and office, and arrangements
for architecture, service and supplies.

The project team of the financial institution may

consult specialist on the technical matters. Site visits and
detailed discussions with the key technical personnel
connected with the project are essential steps in the
technical evaluation process.

b) Commercial Evaluation

The projected market demands for the products

proposed to be manufactured have to be reviewed and
verified for reliability, as they have a critical influence
on the projects viability. The action plans in respect of
advertising, sales promotion, warehousing, and
1
9
 Notes
distribution and other relative marketing aspects to be
examined.

The market projections in the project could also be cross

checked with

➢ Demand forecast of industry associations;

➢ The capacity licensed and utilised in the industry;

19
7
Notes
➢ Market surveys done on the specific products;
➢ Forecast of the planning commission
➢ Projections of the directorate of technical
development and other specialised bodies

Where the review establishes the need, the promoter

may be asked to revise the estimates of the cost, time and
other technical significant parameters.

c) Financial Evaluation

Financial evaluation has the objective of ascertaining

the financial viability of the project by close scrutiny of the
capital cost, operating cost and revenue projections.
Following are the parameters of the financial evaluation of
the project:

Debt-equity ratio: the equity shareholding in the total

capital structure of the company is determined by the
agreed debt equity ratio. While the institutions have the
stipulated norms for the debt equity compositions for
different categories of industries, these are not very
rigid.

Promoters’ contribution: The promoter is expected to

bring in his share of cost, representative his financial stake
in the project. This is re- ferred to as the promoters’
contribution. The financial institutions stipu- late the
quantum of such contributions as a precondition to their
project financing. Industries located in the specified
categories of backward areas are eligible for central
investment subsidies which get reckoned as part of equity.

Debt-service coverage: The cash flow represented but

the profit after tax but before depreciation and interest on
terms of loans is related to the sum of the instalment due
on the principal and the interest on the term loan
outstanding. If the cash flow is 1.5 to 2 times the total
amount due as above, the project is deemed to be sound
and viable.

Repayment schedule: Usually, the institutions allow a

1
9
 Notes
moratorium of 2 years from the commencement of
commercial production before the repayment of the loan
starts. The loan repayment is generally expected to be
completed in 8 – 10 years of the commencement of the
commercial production.

19
9
Notes
Syndication: where a group of institutions
participate in financing the project, they come to an
understanding on the proportion in which they will be
providing funds. IDBI is generally expected to take a
substantial share in such joint financing.

Conversion: The financial institutions stipulate that

they will have a discretion or option to convert term
loan and/or debentures into equity on agreed terms.
However, such conversion will not lead to equity
holding of the institutions being in excess of 40% of the
companies issued capital and conversion option will be
available only after three years of commencement of
production.

Nominee directors: Nominee directors should be

appointed on the boards of all the MRTP companies
assisted by the institutions in respect of the non MRTP
companies, the nominee directors are to be appointed on
the selective basis. One or more of the following
conditions should be found to exist for having their
nominee directors appointed in such instances

➢ The unit has run into rough weather and is likely to

become sick.
➢ The financial institution holds more than 26% of the
share capital.
➢ Where the stake of the financial institution by way
of loan/ investments exceeds ` crores.

Operating Costs and Revenue: Projects of operating costs

and revenues, on an annual basis have to be made for a 10
year period, which is scrutinised by the project team of the
financial institution. The assumption pertaining to
quantities, rates, availability of inputs and services, market
demands, price realisation and expectation of capacity
utilisation are all subjected to close review.

Extent of financing: The amount and modes of

financing depend on the nature and size of the project,
the accepted norms in respect of promoter’s
contribution, debt-equity ratio, debt service coverage,
2
0
 Notes
etc. besides factors such as the resources of the
financial institution and requirement in respect of
listing of securities in the Stock Exchanges

Returns: Financial institution use the different

techniques of financial evaluation including pay-back
period, internal rate of return,

20
1
Notes
return on investment etc. depending on the nature of
projects being reviewed. It is expected that the project will
have a debt service ratio ranging from 1.5 to 2 and will be
able to pay a dividend on equity of not less than 10 %
within three years of commencement of production

Risks: Careful assessment of the risk is associated with

the project is a prime necessity associated may be industry-
specific, particular project, its product, the concerned
market conditions, the company’s capital structure and the
nature securities offered by it.

Eventually financial evaluation of project has 4 important aspects

➢ The appropriateness of the capital cost estimate;

➢ The reliability of the estimates of the operating costs,
revenues and surpluses;
➢ The adequacy of return on investment to service
equity and debt; and
➢ The matching of financing pattern to the project’s requirements.

d) Economic Evaluation

The acceptability of the project from a national

perspective also has to be ascertained. From this stand
point, the economic evaluation carries out the social cost
benefit analysis of the project. The financial costs of the
various inputs into the project get converted into social
costs with the use of appropriate shadow prices, border
prices (international prices), and so also the financial
revenues get restated in terms of social gains or border
prices. While the above bases are adopted for tradable
inputs and outputs, prescribed conversion factors are used
for non-tradable items.

Applying the stipulated social rate of discount, the

NPV is determined, and if it is positive, the project is
considered to be socially desirable. The commonly used
method of economic analysis is known as partial Little-
Mirrleesmethod. Discounted cash flow analysis with
reference to social cause and social benefits and

2
0
 Notes
determination for the internal rate of return on these
values will give the economic rate of return. If this is in
excess of the social rate of discount, the project merits
acceptance.

20
3
Notes
e) Management Evaluation

Management capabilities that will guide the project

need also to be assessed, as this constitutes the core
requirement for project success. Promoter’s past
experience in managing enterprises, financial soundness,
technical background, etc., are the factors to be examined
for getting an appreciation of how effective the project
management may be. His/her stake in the project in terms
of the capital contributed and commitment to its
immediate and long term goals have to be ascertained.
The competence and capabilities of key management
personnel are to be closely looked at. The specific
development plans for improving and sustaining the
technical and managerial skills have tobe studied and the
assignment of project construction and administrative
responsibilities to key project personnel have to be
reviewed and approved. Financial institutions also decide
on having their nominee directors on the company board.

Government Consents

The financial institutions would also insist on

confirmation that the various licences are consents
required for the projects have been obtained, among them
being:

➢ Letter of intent
➢ Industrial licence
➢ Capital goods clearance
➢ Import licence
➢ Foreign exchange permission
➢ Approval of technical/financial collaboration
➢ Clearance under MRTP Act
➢ Consent of the controller of capital issues (SEBI)

Commercial Vs. National Profitability

Public projects like road, railway, bridge and other

transport projects, irrigation, projects, power projects, etc

2
0
 Notes
for which socio-economic considerations play a significant
part, rather than mere commercial profitability. Such
projects are analyzed for their net socio-economic benefits
and the profitability analysis of such projects is known as
social

20
5
Notes
or national profitability analysis which is nothing but the
socio-economic cost benefit analysis done at the national
level.

Steps Involved in Determination of Social or National Profitability

1) Real Direct Cost and Real Direct Benefits

National/Social profitability analysis takes into

account the real cost of direct costs and real benefit of
direct benefits. For instance, some of the inputs may be
subsidized. Only the subsidized prices of input is what is
relevant for assessing commercial profitability. However,
the national profitability analysis takes into account the
real cost of inputs i.e. cost of input had they not been
subsidized. Accordingly the required adjustment to direct
cost of input are made for national profitability analysis.

2) Indirect Costs and Indirect Benefits

National/Social profitability analysis takes into

account the indirect costs and indirect benefits to the
nation. While a nation bears the indirect cost, the people
of the nation enjoy the indirect benefit. Hence, indirect
costs and benefits are given due recognition and
accounted for in social cost benefit analysis. It is however
difficult to assess exactly the quantum of indirect costs
and indirect benefits.

Suppose construction of a bridge over a river is

taken up. Its indirect benefits may include improved
communication facilities reduction in transportation
costs, reduction in traveling time, etc., while the
indirect cost may include acquisition of private land by
the state, removal of industrial, commercial,
agricultural activities that prevailed in the land that
was acquired, disturbance of ecological balance etc.

National/Social profitability analysis can thus be

regarded as a refinement over commercial appraisal
taking the hidden factors into account. National/Social

2
0
 Notes
profitability analysis is mainly used for evaluating public
investment projects. From the society’s standpoint, the
project should maximize the aggregate consumption or
the addition to the flow of goods and services in the
economy. While the individual investor looks for
maximization on his individual basis, the society’s
interest should look for maximization of the total output
of the economy. The need thus

20
7
Notes
arises to have an analysis done of social costs and social
benefits. The various inputs required for the project are
drawn out of the resources of the economy and
constitute social costs. The outputs of the project
represent the social benefits. The inputs of goods and
services and the outputs should be valued with reference
to their relative value to society.

Commercial or Financial Profitability

From the national development point of view, there

are always more projects compared to the availability of
resources and hence the necessity to appraise projects for
selection arises. While the obvious choice will be the
projects with higher returns, the complexity arises
because of the need to appraise projected outcome based
on forecasts in a world of uncertainly, particularly in the
context of endemic inflation. In the case of large projects,
particularly public sector projects involving the building
up of infrastructure it is essential to assess the social
merits of the investment proposals.

Projects emanate from diverse and dispersed

sources, such as individuals firms or institutions, and
government at the state and central levels. In situations
where the state government is not the owner of the
business, the traditional yard stick of commercial or
financial profitability is used for selection of projects for
implementation. The financial benefits get related to
the financial costs of the project and if there is a net
surplus the project merit choice. While the process of
selection of individual projects thus meets the profit
criteria of the individual investors or promoters, the
combination of choices may not necessarily result in the
most socials profitable allocation of resources. For
developing economies this is the very important factor
but it cannot be ignored.

Commercial or financial profitability as the sole

deciding factor has two major limitations viz.

a) Financial or market values seldom match with social

2
0
 Notes
values and
b) What is beneficial to one segment of society may not
necessary be so to the entire society.

In financial analysis the market values of input

and outputs are reckoned and compared. And since
market distortions are many, these

20
9
Notes
values fail to reflect the relative worth on the society’s
value scale. From society’s stand point, goods and
services should be valued in terms of relative
contributions to consumption. In the same manner the
social value of resource should be reckoned in terms of
its opportunity cost, represented by the output or
consumption value that it is capable of yielding in its
next best alternative use.

In a free market economy the dominance of the forces

of demand and supply has the effect of the market prices
being kept close to social valuation. In a developing
economy however there are several distortions entering
into the market prices and they are far removed from their
social valuation. The distortions arise from the monopolistic
status of many large enterprises a system of administered
prices in a controlled economy and from various
government policy measures such as taxes, duties, controls
and foreign exchange regulations.

A project may confer considerable good to society

that does not get reflected in financial projections.
Others though financially very rewarding may have
some harmful effects on society that the financial
results fail to interpret. These effects that are outside
the purview of financial projections are known as
externalities and are essential ingredients in the social
profitability computations. The emphasis in social cost
benefit analysis is the import on the whole society and
not one segment.

Social Cost Benefit Analysis (SCBA)

Cost-benefit analysis is a process for evaluating

the merits of a particular project or course of action in a
systematic and rigorous way. Social cost-benefit
analysis refers to cases where the project has a broad
impact across society and, as such, is usually carried
out by the government. While the cost and benefits may
relate to goods and services that have a simple and
transparent measure in a convenient unit (e.g. money),
this is frequently not so, especially in the social case. In
2
1
 Notes
its essence cost-benefit analysis is extremely, indeed
trivially, simple: evaluate costs C and benefits B for the
project under consideration and proceed with it if, and
only if, benefits match or exceed the costs.

Social Cost Benefits Analysis means to analyze the

social cost and total social benefits if we accept any
project. We all know that for

21
1
Notes
completing the big project, we need big investment. In
social cost benefit analysis (SCBA), we see whether return
or benefits on this investment are more than its cost from
point of view of society in which we are living. In public
investment, we analyze and compare government
expenditure with total benefits to society through SCBA. It
is also a good technique of financial evaluation of a
project because we reject those projects whose benefits to
society are less than their total cost because all the
resources are drawn from the society.

The market prices, in the case of developing countries

particularly, are substantially at variance with their
appropriate social prices. The social costs and benefits will
be presented in terms of the domestic currency equivalent
of the foreign exchange value, also referred to as unit of
account or numeral.

Rationale for SCBA

a) Market imperfection: The following factors are to be

considered to understand the market imperfection.

➢ Rationing factor: It means some of raw material

prices are controlled by Government and
hence, project cost may increase but its social
benefits will go to poor community.

➢ Regulation for providing minimum wage factor: It also

affects social cost and benefits of any project.

➢ Foreign Exchange Regulations factor: Sometime,

projects involve foreign currency transactions.
Hence, we should analyze this point also.

b) Externalities: Externalities are non-cash or benefits

which an organization suffer or get if it starts the
project. For example, if government lays road near
your project plant, you can get this facility without
any payment. On the other side, if any other
organization is polluting and spreading diseases, it
will create adverse impact due to absence of
employee because they go to hospitals.

2
1
 Notes
c) Tax and Subsidies: Tax is levied on the earning of the
project and it will reduce the overall benefits. On
the other hand, if government gives us subsidy for
operating any project, it will count for our cost
benefit analysis.

21
3
Notes
Arriving Net Benefit of Project to Society

With United Nations Development Organization

(UNIDO) approach, we can evaluate net benefit from any
project. Formula is given below:

Factors which Complicate SCBA

There are a variety of factors which make SCBA complicate:

➢ Benefits and costs may accrue to different sets of

people. If this is so we need some way to aggregate
and compare different benefits and costs across
people.

➢ Benefits and costs may occur at different points in

time. In this case we need to compare the value of
outcomes at different points in time.

➢ Benefits and costs may relate to different types of

goods and it may be difficult to compare their
relative values. This usually occurs when one of
the goods does not have an obvious and agreed
upon price. For example, we may be spending
standard capital goods today in order to obtain
environmental benefits tomorrow.

➢ Benefits and costs may be uncertain.

➢ Benefits and costs may be difficult to calculate and,

2
1
 Notes
as a result, there may be widely differing views
about their sizes. One might

21
5
Notes
think this could be considered under uncertainty,
however the two points are rather different: two
people agreeing that an outcome follows some
probability distribution are different from them
arguing about its mean and variance.

The Basic Model

We are considering a project with known (though

perhaps uncertain) benefit B and cost C. Our task is to
decide whether it is worthwhile. As already discussed, if B
and C were denominated in exactly the same terms (i.e.
the same good, at the same time) for a single person and
with no uncertainty, things would be straightforward. To
check whether B is more than C, it involves converting
benefits and costs into values that can be easily compared.
Equivalently we need to have benefits and costs
denominated in terms of some standard good or measure
of value. We shall term this good or measure of value as
‘numeraire’. In theory, this numeraire could be anything:
apples, years of life, acres of rainforest etc. However,
given that many (though by no means all) goods are
already denominated in terms of money, it is often natural
to use a numeraire that is money-metric. We also need to
specify money in whose hands. For the purposes of
social cost benefit analysis a very natural numeraire is
(uncommitted) government funds, i.e., the money the
government has but is not yet allocated to any given
project. This is a natural numeraire, since it is likely to be
government funds which are used for financing the project
being considered.

Importance of Social Cost-Benefit Analysis

The elements of costs and benefits are identified

both from the point of view of undertaking,
implementation and managing the project, and from the
point of view of the society. The Project Appraisal Division
of the Planning Commission is the main agency that
scrutinizes and evaluates all projects after the Public
Investment Board has carried out the scrutiny from the

2
1
 Notes
financial angle. Together, these two agencies have the
responsibility for the planned and the coordinated
development of the country.

Maximization of social welfare is the national

objective. Public Enterprises constitute an instrument for
achieving this objective and, as

21
7
Notes
such, the selection of their projects requires to be
synchronized with the national plan. This
synchronization process has two stages.

➢ First, the sectoral allocation of the resources has to

be effected on the basis of approved sectoral plans.
➢ Then, within the sectoral plans, appropriate projects
have to be identified for funding.

Projects are the building blocks of the sectoral

investment plans. Social Cost Benefit Analysis is an
important method of synchronization of the project’s aims
with national objectives.

Government investments aim at:

➢ Growth
➢ Equitable distribution of gains
➢ Self-reliance

Social cost benefit analysis enables the qualification

of the gains of these objectives and aggregates them into
a common numeraire or composite index for determining
the acceptability of projects and for assigning priority to
any given project in relation to acceptable projects.

The Methodologies used for SCBA

The most favoured among the methods of Social Cost-

Benefit Analysis (SCBA) are:

➢ Little and Mirrlees (L-M) method;

➢ UNIDO method.

a) Little and Mirrlees (L-M) Method

The Project Appraisal Division (PAD) has adopted a

modified simpler version of the Little and Mirrlees
method. The focus in Little and Mirrlees method is in
identifying the forces which distort the market prices and
carrying out the necessary corrections. It defines the

2
1
 Notes
numeraire in terms of savings in foreign exchange.

21
9
Notes
b) UNIDO Method

The UNIDO approach has emphasis in

incorporating non- economic objectives in SCBA, and
defines the numeraire in terms of Shadow Exchange
Rate. Shadow pricing is a technique used when market
prices are not available for any good or service.

SCBA Considerations for Various Categories of Investments/Projects

The investment could be in any of three categories:

➢ Capital intensive industrial investment;

➢ Infrastructural investment;
➢ Agriculture, rural development and related projects.

a) Capital Intensive Industrial Projects

The prime consideration in appraising industrial

projects in this category is efficiency. The Little and
Mirrlees method gives equal weightage to the principle of
equity, but with the thrust on efficiency, a modified
version is used in evaluating industrial projects. The
steps involved are:

➢ Eliminate all transfer cost items, i.e., taxes and duties,

including indirect taxes;

➢ Value all tradable inputs and outputs at border prices or

international resource costs. This is based on the logic that
domestic prices are distorted.

➢ All non-tradable items, such as power, transport, etc., are to be

evaluated on the basis of marginal cost. The aim is to
eliminate the distortion between the market tariffs
and the marginal costs.

➢ Foreign exchange involved in the inputs or outputs are valued at

specific premia and there should also be a sensitivity analysis
carried out to assess the impact of variations in the
premium on foreign exchange.

➢ The average social return on capital or the Social Discount rate

2
2
 Notes
(SDR) to be used for evaluation is 12 per cent and the
costs and the benefits are to be discounted at this
rate.

22
1
Notes
b) Infrastructural Investment

In the case of infrastructure projects, the classical

SCBA is adopted with due emphasis on externalities. The
gains to the users of the facilities and the gains to the
project are assessed. In enumerating the gains to the
users, the attempt is made to understand the gains to
society accruing from the project on a multiplier basis.

c) Agriculture, Rural Development and Related Projects

As distinct from the ‘growth’ projects referred to

above, these constitute the ‘equity’ projects. Though the
economic factor is the main consideration in the choice of
agricultural projects, importance is also given to the
identification of external or consequential benefits
accruing from the project to the consumers and other
sections of society. A functional distribution of gains is
attempted, classifying by occupational and income
categories. Priorities for projects with gains to the lowest
income strata can thus be determined.

The Social Rate of Discount

The choice of the social rate of discount is a

matter of debate. A high rate of discount will favour
projects with immediate net benefits, the emphasis
being on present consumption. On the other hand, a low
rate of discount will favour present saving and future
consumption. There is a subjective element in the
choice of the discount rate.

Conclusion

SCBA has equal validity for large private sector

projects too. It should be a discipline that applies to all
major investments, in the public or the private sector, to
make the system of national planning systematic and
effective. There is the need to create the awareness in the
private sector of the logical necessity for using SCBA in
project appraisal.

2
2
 Notes

Self Assessment Questions

1) What are the traditional methods of evaluating projects financially?

2) Explain the method of evaluating projects financially.

22
3
Notes
3) What are the sophisticated methods of evaluating
projects financially?
4) What is Payback method? What
are its advantages and
disadvantages?
5) What is ARR method? What are its advantages and
disadvantages?
6) What is NPV method?
7) What is PI or BC ratio?
8) What is IRR method?
9) Evaluate the discounted cash flow methods.
10) The initial cost of the project is ` 5000. What is the
payback period for this investment if the projected
cash flows from a proposed investment are ` 1000, `
2000 and ` 5000 in the 1st, 2nd and 3rd years
respectively.
11) Following are the details of two projects, calculate
NPV and PI at 10% and rank them using both the
methods. Also calculate IRR of both the projects and
rank them.

Project A (`) Project B (`)

Cost 1,10,000 1,00,000
Cash inflows:
Year 1 60,000 10,000
Year 2 20,000 10,000
Year 3 10,000 20,000
Year 4 50,000 1,00,000

12) What is risk adjusted discount rate?

13) What is certainty equivalent coefficient?
14) What is sensitivity analysis?
15) What is probability assignment?
16) What is standard deviation?
17) What is coefficient of variation?
18) What is decision tree analysis?

2
2
 Notes
19) What are the steps in decision tree analysis?

22
5
Notes
20) Explain the project evaluation methodology followed
by financial institutions.
21) What are the dimensions of technical evaluation of projects?
22) What are the dimensions of financial evaluation of projects?
23) What are the dimensions of economic evaluation of projects?
24) What are the dimensions of management evaluation of projects?
25) What is commercial/financial profitability?
26) What are the steps involved in determination of
social or national profitability?
27) What are externalities?
28) What is social cost benefit analysis?
29) Explain the rationale for SCBA?
30) How to arrive at net benefit of project to the society?
31) Explain the factors which complicate SCBA.
32) Explain the importance of SCBA.
33) Explain the methodologies used for SCBA.
34) Explain the SCBA considerations used for
appraising various categories of
investments/projects.

CASE STUDY
Financial Evaluation of Projects

The following information belongs to four investment opportunities:

1 2 3 4
Funds (960,00 (720,000 (540,00 (900,000
needed 0) ) 0) )
Present 1,134,5 866,80 672,280 1,045,94
value 40 0 0
of cash
inflows
Net $174,54 $146,80 $132,28 $145,94
present 0 0 0 0
value
Project life 6 years 12 years 6 years 3 years
Internal 16% 14% 18% 19
rate of %
2
2
 Notes
return
(IRR)
Due to limited funds, all projects cannot be accepted.

22
7
Notes
Required

1. Compute profitability index (present value index) for

all the projects.
2. Rank the four investment projects according to (a).
net present value (b). profitability index (c). internal
rate of return

****

2
2
 Notes

UNIT - IV

The project network tool is used for planning,

scheduling and monitoring project progress. The network
is developed from the information collected for the WBS
and is a graphic flowchart of the project job plan. The
network shows the project activities that must be
completed, the sequences (steps), the interdependencies
(how individual steps rely on other steps for completion),
and in most cases the times for the activities to start and
finish along the longest path through the network – the
critical path. In this unit let us understand how to a)
develop and construct network for projects using
Programme Evaluation and Review Technique (PERT) and
Critical Path Method (CPM); b) crash project network; do
resource leveling and allocation; and how to avoid cost
and time overruns. This unit also explains the steps in the
project appraisal process, project control process and
project audit process besides evaluation of team, team
members and project manager.

Unit Structure

Lesson 4.1 - Developing Project Network using PERT

and CPM Lesson 4.2 - Crashing Of Projects and
Resource Leveling
Lesson 4.3 - Project Appraisal
Process Lesson 4.4 - Project
Control Process
Lesson 4.5 - Project Audit and Evaluation of Project
Team its Project Manager

22
9
Notes

Lesson 4.1 - Developing Project Network Using PERT and

CPM

Learning Objectives

➢ To learn how to develop the project networks

➢ To know the basic rules of constructing network
diagrams.
➢ To know how to construct project networks using
PERT
➢ To learn how to construct project network using CPM

Developing the Project Network

The project network is the tool used for planning,

scheduling, and monitoring project progress. The network
is developed from the information collected for the WBS
and is a graphic flow chart of the project job plan. The
network depicts the project activities that must be
completed, the logical sequences, the inter dependencies
of the activities to be completed, and in most cases the
times for the activities to start and finish along with the
longest path(s) through the network—the critical path.
The network is the framework for the project information
system that will be used by the project managers to make
decisions concerning project time, cost, and performance.

The network is the framework that will be used by

the project managers to make decisions concerning
project time, cost and performance. Once the network is
developed, it is very easy to modify or change when
unexpected events occur as the project progresses.
Developing the project networks takes time for someone
or some group to develop; therefore, they cost money. Are
networks really worth the struggle? The answer is
definitely yes, except in cases where the project is
considered trivial or very short in duration. The network is
easily understood by others because the network presents
2
3
 Notes
a graphic display of the flow and sequence of work
through the project. Once the network is developed, it is
very easy to modify or change when unexpected events
occur as the project progresses. For example, if materials
for an activity are delayed, the impact can be quickly
assessed and the whole project revised in only a few
minutes

23
1
Notes
with the computer. These revisions can be communicated
to all project participants quickly (for example, via e-mail or
project Web site).

Objectives of Project Network

The project network provides invaluable information

and insights above the following:

➢ Basis for scheduling labour and equipment;

➢ Enhances communication that brings together all
managers and groups in meeting the time, cost,
and performance objectives of the project;
➢ Provides an estimate of the time the project will take (duration);
➢ gives the times when activities can start or finish and
when they can be delayed;
➢ Provides the starting point for budgeting the cash
flow (when money needs to be received and spent on
various elements) of the project.
➢ Identifies which activities are “critical” and,
therefore, should not be delayed if the project is to
be completed as planned.
➢ Highlights which activities to consider if the project
needs to be compressed to meet a deadline.

Basically, project networks minimize surprises by

getting the plan out early and allowing corrective
feedback. A commonly heard statement from practitioners
is that the project network represents three-quarters of
the planning process. Perhaps this is an exaggeration,
but it signals the perceived importance of the network to
project managers in the field. Project networks are
developed from the WBS. The project network is a visual flow
diagram of the sequence, interrelationships, and dependencies of all the
activities that must be accomplished to complete the project. An activity
is an element in the project that consumes time—for
example, work or waiting. Work packages from the WBS
are used to build the activities found in the project
network. An activity can include one or more work
packages. The activities are placed in a sequence that
2
3
 Notes
provides for orderly completion of the project. Networks
are built using nodes (boxes) and arrows (lines). The node
depicts an activity, and the arrow

23
3
Notes
shows dependency and project flow. The following diagram
shows the WBS/ Work packages to network for a software
project:

WBS/Work packages to Network

The figure shows a segment of the WBS example and

how the information is used to develop a project network.
The lowest level deliverable in the figure is “circuit
board.” The cost accounts (design, production, test,
software) denote project work, organization unit
responsible, and time phased budgets for the work
packages. Each cost account represents one or more work
packages. For example, the design cost account has two
work packages (D-1-1 and D-1-2)—specifications and
2
3
 Notes
documentation. The software and production accounts
also have two

23
5
Notes
work packages. Developing a network requires sequencing
tasks from all work packages that have measurable work.

The figure also traces how work packages are used to

develop a project net work. You can trace the use of work
packages by the coding scheme. For example, activity A
uses work packages D-1-1 and D-1-2 (specifications and
documentation),while activity C uses work package S-22-1.
This methodology of selecting work packages to describe
activities is used to develop the project network, which
sequences and fix times for the project activities. Care must
be taken to include all work packages. The manager derives
activity time estimates from the task times in the work
package. For example, activity B (proto 1) requires five
weeks to complete; activity K (test) requires three weeks to
complete. After computing the activity’s early and late times,
the manager can schedule resources and time-phase
budgets(with dates).

Integrating the work packages and the network

represents a point where the management process often
fails in practice. The primary explanations for this failure
are that

(1) Different groups (people) are used to define work

packages and activities and
(2) The WBS is poorly constructed and not
deliverable/output- oriented.

Integration of the WBS and project network is crucial

to effective project management. The project manager must
be careful to guarantee continuity by having some of the
same people who defined the WBS and work packages
develop the network activities.

Networks provide the project schedule by identifying

dependencies, sequencing, and timing of activities, which
the WBS is not designed to do. The primary inputs for
developing a project network plan are work packages.
Remember, a work package is defined independently of
other work packages, has definite start and finish points,

2
3
 Notes
requires specific resources, includes technical
specifications, and has cost estimates for the package.
However, dependency, sequencing, and timing of each of
these factors are not included in the work package. A
network activity can include one or more work packages.

23
7
Notes
Constructing a Project Network

Terminology

Every field has its jargon that allows colleagues to

communicate comfortably with each other about the
techniques they use. Project managers are no exception.
Here are some terms used in building project networks.

Activity: For project managers, an activity is an

element of the project that requires time. It may or may
not require resources. Typically an activity consumes time
—either while people work or while people wait.
Examples of the latter are time waiting for contracts to be
signed, materials to arrive, drug approval by the
government, budget clearance, etc. Activities usually
represent one or more tasks from a work package.
Descriptions of activities should use verb/noun format: for
example, develop product specifications.

Merge activity: This is an activity that has more than

one activity immediately preceding it (more than one
dependency arrow flowing to it).

Parallel activities: These are activities that can take

place at the same time, if the manager wishes. However,
the manager may choose to have parallel activities not
occur simultaneously.

Path: A sequence of connected, dependent activities.

Critical path: When this term is used, it means the

path(s) with the longest duration through the network; if
an activity on the path is delayed, the project is delayed
the same amount of time.

Event: This term is used to represent a point in time

when an activity is started or completed. It does not
consume time.

Burst activity: This activity has more than one activity

immediately following it (more than one dependency
2
3
 Notes
arrow flowing from it).

23
9
Notes
Two Approaches

The two approaches used to develop project

networks are known as Activity-On-Node(AON) and Activity-
On-Arrow (AOA). Both methods use two building blocks—
the arrow and the node. Their names derive from the fact
that the former uses anode to depict an activity, while
the second uses an arrow to depict an activity. From the
first use of these two approaches in the late 1950s,
practitioners have offered many enhancements; however,
the basic models have withstood the test of time and
still prevail with only minor variations in form. In practice,
the Activity-On-Node (AON) method has come to dominate
most projects. Hence, this lesson will deal primarily with
AON.

There are good reasons for students of project

management to be proficient in both methods. Different
departments and organizations have their “favorite”
approaches and are frequently loyal to software that is
already purchased and being used. New employees or
outsiders are seldom in a position to govern choice of
method. If subcontractors are used, it is unreasonable
to ask them to change their whole project management
system to conform to the approach you are using. The
points that a project manager should feel comfortable
moving among projects that use either AON or AOA.

Basic Rules in Developing Project Networks

The following eight rules apply in general when

developing a project network:

1. Networks flow typically from left to right.

2. An activity cannot begin until all preceding
connected activities have been completed.
3. Arrows on networks indicate precedence and flow.
Arrows can cross over each other.
4. Each activity should have a unique identification number.
5. An activity identification number must be larger than

2
4
 Notes
that of any activities that precede it.
6. Looping is not allowed (in other words, recycling
through a set of activities cannot take place).

24
1
Notes
7. Conditional statements are not allowed (that is,
this type of statement should not appear: If
successful, do something; if not, do nothing).
8. Experience suggests that when there are multiple
starts, a common start node can be used to indicate a
clear project beginning on the network. Similarly, a
single project end node can be used to indicate a
clear ending.

Activity-on-Node (AON) Fundamentals

The wide availability of personal computers and

graphics programs has served as an impetus for use of
the activity-on-node (AON) method (sometimes called the
precedence diagram method). An activity is represented
by a node (box). The node can take many forms, but in
recent years the node represented as a rectangle(box)
has dominated. The dependencies among activities are
depicted by arrows between the rectangles (boxes) on
the AON network.

The arrows indicate how the activities are related

and the sequence in which things must be accomplished.
The length and slope of the arrow are arbitrary and set
for convenience of drawing the network. The letters in the
boxes serve here to identify the activities while you learn
the fundamentals of network construction and analysis. In
practice, activities have identification numbers and
descriptions.

The following figure shows a few typical uses of

building blocks for the AON network construction.

There are three basic relationships that must be

established for activities included in a project network.
The relationships can be found by answering the
following three questions for each activity:

1) Which activities must be completed immediately

before this activity? These activities are called
predecessor activities.

2
4
 Notes
2) Which activities must immediately follow this
activity? These activities are called successor
activities.
3) Which activities can occur while this activity is
taking place? This is known as a concurrent or
parallel relationship.

24
3
Notes

Activity-on-Node Network Fundamentals

Sometimes a manager can use only questions 1 and

3 to establish relationships. This information allows the
network analyst to construct a graphic flow chart of the
sequence and logical interdependencies of project
activities.

Part A of the figure is analogous to a list of things to

do where you complete the task at the top of the list first
and then move to the second task, etc. This figure tells the
project manager that activity A must be completed before
activity B can begin, and activity B must be completed
before activity C can begin. Part B of the figure tells us that
activities Y and Z cannot begin until activity X is completed.
This figure also indicates that activities Y and Z can occur

2
4
 Notes
concurrently or simultaneously if the project manager
wishes; however, it is not a necessary condition. For
example,

24
5
Notes
pouring a concrete driveway (activity Y) can take place
while landscape planting (activity Z) is being accomplished,
but land clearing (activity X) must be completed before
activities Y and Z can start. Activities Y and Z are
considered parallel activities. Parallel paths allow
concurrent effort, which may shorten time to do a series of
activities. Activity X is sometimes referred to as a burst
activity because more than one arrow bursts from the node.
The number of arrows indicates how many activities
immediately follow activity X.

Part C of the figure shows the activities J, K, and L

can occur simultaneously if desired, and activity M
cannot begin until activities J, K, and L are all completed.
Activities J, K, and L are parallel activities. Activity M is
called a Merge activity because more than one activity
must be completed before M can begin. Activity M could
also be called a milestone—a significant accomplishment.

In Part D of the figure, activities X and Y are parallel

activities that can take place at the same time; activities
Z and AA are also parallel activities. But activities Z and
AA cannot begin until activities X and Y are both
completed.

Network Analysis Techniques

A convenient analytical and visual technique of PERT

and CPM prove extremely valuable in assisting the
managers in managing the projects.

PERT stands for Project Evaluation and Review Technique and

developed during 1950’s.The technique was developed and
used in conjunction with the planning and designing of the
Polaris missile project.

CPM stands for Critical Path Method which was

developed by DuPont Company and applied first to the
construction projects in the chemical industry.

Though both PERT and CPM techniques have

similarity in terms of concepts, the basic difference is that
2
4
 Notes
the CPM has single time estimate and PERT has three
time estimates for activities and uses probability theory to
find the chance of reaching the scheduled time.

24
7
Notes
Components of PERT/CPM Network

PERT / CPM networks contain two major components:

➢ Activities, and
➢ Events

Activity: An activity represents an action and

consumption of resources (time, money, energy) required to
complete a portion of a project. Activity is represented by
an arrow.

Event: An event (or node) will always occur at the

beginning and end of an activity. The event has no
resources and is represented by a circle. The i th event and jth
event are the tail event and head event respectively.

Merge and Burst Events: One or more activities can start

and end simultaneously at an event.

Preceding and Succeeding Activities: Activities performed

before given events are known as preceding activities, and
activities performed after given events are known as
succeeding activities.

In the following figure, Activities A and B precede

activities C and D respectively.

2
4
 Notes

Dummy Activity: An imaginary activity which does not

consume any resource and time is called a dummy activity.
Dummy activities are simply used to represent a connection
between events in order to maintain logic in the network. It
is represented by a dotted line in a network, see the
following figure:

Critical Path Analysis

The critical path for any network is the longest

path through the entire network. Since all activities
must be completed to complete the entire project, the
length of the critical path is also the shortest time
allowable for completion of the project. Thus, if the
project is to be completed in that shortest time, all
activities on the critical path must be started as soon as
possible. These activities are called critical activities.

If the project has to be completed ahead of the

schedule, then the time required for at least one of the
critical activity must be reduced. Further, any delay in
completing the critical activities will increase the project
duration. The activity, which does not lie on the critical
path, is called non-critical activity. These non-critical
activities may have some slack time. The slack is the

24
9
Notes
amount of time by which the start of an activity may be
delayed without affecting the overall completion time of the
project. But a critical activity has no slack. To reduce the
overall project

2
5
 Notes
time, it would require more resources (at extra cost) to
reduce the time taken by the critical activities to complete.

c) Scheduling of Activities: Earliest Time (TE) and Latest Time (TL)

Before the critical path in a network is

determined, it is necessary to find the earliest and
latest time of each event to know the earliest expected
time (TE) at which the activities originating from the
event can be started and to know the latest allowable
time (TL) at which activities terminating at the event
can be completed.

➢ Procedure for Forward Pass Computations (to

calculate Earliest Time - TE)

Step 1: Begin from the start event and move towards the end event.
Step 2: Put TE = 0 for the start event.
Step 3: Go to the next event (i.e., node 2) if there is an
incoming activity for event 2, add to calculate TE of
previous event (i.e., event 1) and activity time.

Note: If there are more than one incoming activities,

calculate TE for all incoming activities and take the
maximum value. This value is the TE for event 2.

Step 4: Repeat the same procedure from step 3 till the end event.

➢ Procedure for Backward Pass Computations (to

calculate Latest Time TL)

Step 1: Begin from end event and move towards the start
event. Assume that the direction of arrows is
reversed.
Step 2: Latest Time TL for the last event is the earliest time,
TE of the last event.
Step 3: Go to the next event, if there is an incoming
activity, subtract the value of TL of previous event
from the activity duration time. They arrived value is
TL for that event. If there are more than one
incoming activities, take the minimum TE value.
25
1
Notes
Step 4: Repeat the same procedure from step 2 till the start event.

2
5
 Notes
d) Determination of Float and Slack Times

As discussed earlier, the non-critical activities have

some slack or float. The float of an activity is the amount of
time available by which it is possible to delay its completion
time without extending the overall project completion time.
Consider,

tij = duration of activity

TE = earliest expected
time TL = latest
allowable time
ESij = earliest start time of the
activity EFij = earliest finish
time of the activity LSij = latest
start time of the activity
LFij = latest finish time of the activity

Total Float TFij: The total float of an activity is the

difference between the latest start time and the earliest
start time of that activity.

TFij = LS ij – ESij..................(1)
or
TFij = (TL – TE) – tij................(2)

Free Float FFij: The time by which the completion of an

activity can be delayed from its earliest finish time without
affecting the earliest start time of the succeeding activity is
called free float.

FF ij
= (Ej – Ei) – tij.................(3)
FFij= Total float – Head event slack

Independent Float IFij: The amount of time by which the

start of an activity can be delayed without affecting the
earliest start time of any immediately following activities,
assuming that the preceding activity has finished at its
latest finish time.

IF ij
= (Ej – Li) – tij..................(4)
25
3
Notes
IFij= Free float – Tail event
slack Where tail event slack =
Li – Ei

The negative value of independent float is considered to be

zero.

2
5
 Notes
Critical Path: After determining the earliest and the
latest scheduled times for various activities, the
minimum time required to complete the project is
calculated. In a network, among various paths, the
longest path which determines the total time duration
of the project is called the critical path. The following
conditions must be satisfied in locating the critical path
of a network.

An activity is said to be critical only if both the conditions are satisfied.

1.TL – TE = 0
2.TLj – tij – TEj = 0

Example: A project schedule has the following

characteristics as shown in Table below:

a) Construct PERT network.

b) Compute TE and TL for each activity.
c) Find the critical path.

a) From the data given in the problem, the activity

network is constructed as shown in Figure given below

25
5
Notes
b) To determine the critical path, compute the earliest
time TE and latest time TL for each of the activity of
the project. The calculations of TE and TL are as
follows:,

To calculate TE for all activities

TE1 = 0
TE2 = TE1 + t1, 2 = 0 + 4 = 4
TE3 = TE1 + t1, 3 = 0 + 1 =1
TE4 = max (TE2 + t2, 4 and TE3 + t3, 4)
= max (4 + 1 and 1 + 1) = max (5, 2)
= 5 days
TE5 = TE3 + t3, 6 = 1 + 6 = 7
TE6 = TE5 + t5, 6 = 7 + 4 = 11
TE7 = TE5 + t5, 7 = 7 + 8 = 15
TE8 = max (TE6 + t6, 8 and TE7 + t7, 8)
= max (11 + 1 and 15 + 2) = max (12, 17)
= 17 days
TE9 = TE4 + t4, 9 = 5 + 5 = 10
TE10 = max (TE9 + t9, 10 and TE8 + t8, 10)
= max (10 + 7 and 17 + 5) = max (17, 22)
= 22 days

To calculate TL for all activities

TL10 = TE10 = 22
TL9 = TE10 – t9,10 = 22 – 7
= 15 TL8 = TE10 – t8, 10 =
22 – 5 = 17
TL7 = TE8 – t7, 8 = 17 – 2 = 15
TL6 = TE8 – t6, 8 = 17 – 1 = 16
TL5 = min (TE6 – t5, 6 and TE7 – t5, 7)
= min (16 – 4 and 15 –8) = min (12, 7)
= 7 days
TL4 = TL9 – t4, 9 = 15 – 5 =10

2
5
 TL3 = min (TL4 – t3, 4 and TL5 – t3, 5 )
= min (10 – 1 and 7 – 6) = min (9, 1)
= 1 day
TL2 = TL4 – t2, 4 = 10 – 1 = 9
TL1 = Min (TL2 – t1, 2 and TL3 – t1, 3)
= Min (9 – 4 and 1 – 1) = 0

Activity Normal Earliest Time (TE) Latest Time (TL) Total

Activity
Name Time (tij) Start(ES) Finish(EF) Start(LS) Finish(LF) Float
1-2 A 4 0 4 5 9 5
1-3 B 1 0 1 0 1 0
2-4 C 1 4 5 9 1 5
0
3-4 D 1 1 2 9 1 8
0
3-5 E 6 1 7 1 7 0
4-9 F 5 5 10 1 1 5
0 5
5-6 G 4 7 11 1 1 5
2 6
5-7 H 8 7 15 7 1 0
5
6-8 I 1 1 12 1 1 5
1 6 7
7-8 J 2 1 17 1 1 0
5 5 7
8- K 5 1 22 1 2 0
10 7 7 2
9- L 7 1 17 1 2 5
10 0 5 2

c) From the Table, we observe that the activities 1 – 3, 3 –

5, 5 – 7, 7– 8 and 8 – 10 are critical activities as their
floats are zero.

16
7
Notes

16
8
 Notes
Project Evaluation Review Technique (PERT)

In the critical path method, the time estimates are

assumed to be known with certainty. In certain projects like
research and development, new product introductions, it is
difficult to estimate the time of various activities. Hence,
PERT is used in such projects with a probabilistic method
using three time estimates for an activity, rather than a
single estimate, as shown in the following figure.

Optimistic time (tO): It is the shortest time taken to

complete the activity. It means that if everything goes well
then there is more chance of completing the activity within
this time.

Most likely time (t m):It is the normal time taken to

complete an activity, if the activity were frequently
repeated under the same conditions.

Pessimistic time (t p):It is the longest time that an

activity would take to complete. It is the worst time
estimate that an activity would take if unexpected
problems are faced.

Taking all these time estimates into consideration, the

16
9
Notes
expected time of an activity is arrived at. The average or
mean (Ta) value of the activity duration is given by,

17
0
 Notes

The variance of the activity time is calculated using the formula,

Probability for Project Duration

The probability of completing the project within the

scheduled time (Ts) or contracted time may be obtained by
using the standard normal deviate where Te is the
expected time of project completion.

Probability of completing the project within the scheduled time is,

Example

An R & D project has a list of tasks to be performed

whose time estimates are given in the Table as follows.

a) Draw the project network.

b) Find the critical path.
c) Find the probability that the project is completed in
19 days. If the probability is lessthan20%, find the
probability of completing it in 24 days.

16
9
Notes

Solution

Time expected for each activity is calculated using the formula

(5):

Similarly, the expected time is calculated for all the activities.

The variance of activity time is calculated using the formula:

Similarly, variances of all the activities are calculated.

17
0
 Notes

The Network Diagram:

Calculate the time earliest (TE) and time Latest (TL) for all the activities.

From the network diagram Figure, the critical path is

identified as1-4, 4-6, 6-7, with project duration of 22 days.

The probability of completing the project within 19 days is given by, P

(Z<Z0):

To find Z0,

17
1
Notes

We know, P (Z <Z Network Model 0) = 0.5 – z (1.3416)

(from normal tables, z (1.3416) = 0.4099)= 0.5 – 0.4099

= 0.0901
= 9.01%

Thus, the probability of completing the R & D project

in 19 days is 9.01%.

Since the probability of completing the project in 19

days is less than 20% as in question, we find the
probability of completing it in 24 days.

****

17
2
 Notes

Lesson 4.2 - Crashing and Resource Levelling of Projects

Learning Objectives

➢ To learn how to crash project networks

➢ To learn the technique of resource leveling
➢ To learn the technique of resource allocation.

Crashing of Project Network

Crashing refers to a particular variety of project

schedule compression which is performed for the purposes
of decreasing total period of time (also known as the total
project schedule duration). The diminishing of the project
duration typically take place after a careful and thorough
analysis of all possible project duration minimization
alternatives in which any and all methods to attain the
maximum schedule duration for the least additional
cost.The objective of crashing a network is to determine
the optimum project schedule. Crashing may also be
required to expedite the execution of a project,
irrespective of the increase in cost. Each phase of the
project consumes some resources and hence has cost
associated with it. In most of the cases cost will vary to
some extent with the amount of time consumed by the
design of each phase. The total cost of project, which is
aggregate of the activities costs will also depends upon
the project duration, can be cut down to some extent. The
aim is always to strike a balance between the cost and
time and to obtain an optimum project schedule. An
optimum minimum cost project schedule implies lowest
possible cost and the associated time for the project
management.

Activity Time-Cost Relationship

17
3
Notes
A simple representation of the possible
relationship between the duration of an activity and its
direct costs appears in the following figure. Shortening
the duration on an activity will normally increase its
direct cost. A duration which implies minimum direct
cost is called the normal duration and the minimum
possible time to complete an activity is called

17
4
 Notes
crash duration, but at a maximum cost. The linear
relationship shown above between these two points
implies that any intermediate duration could also be
chosen.

Linear time and cost trade-off for an activity

It is possible that some intermediate point may

represent the ideal or optimal trade-off between time and
cost for this activity. The slope of the line connecting the
normal point (lower point) and the crash point (upper
point) is called the cost slope of the activity. The slope of
this line can be calculated mathematically by knowing the
coordinates of the normal and crash points:

Cost slope = (crash cost-normal cost)/ (normal

duration crash duration)

As the activity duration is reduced, there is an

increase in direct cost. A simple case arises in the use of
overtime work and premium wages to be paid for such
overtime.

Also overtime work is more prone to accidents and

quality problems that must be corrected, so indirect
costs may also increase. So, do not expect a linear
relationship between duration and direct cost but convex
function as shown in the following figure.

17
5
Notes

Non-linear time and cost trade-off for an activity

Project Time-Cost Relationship

Total project costs include both direct costs and

indirect costs of performing the activities of the project. If
each activity of the project is scheduled for the duration
that results in the minimum direct cost (normal duration)
then the time to complete the entire project might be too
long and substantial penalties associated with the late
project completion might be incurred. At the other
extreme, a manager might choose to complete the activity
in the minimum possible time, called crash duration, but
at a maximum cost.

Thus, planners perform what is called time cost

trade-off analysis to shorten the project duration. This can
be done by selecting some activities on the critical path to
shorten their duration. As the direct cost for the project
equals the sum of the direct costs of its activities, then the
project direct cost will increase by decreasing its duration.
On the other hand, the indirect cost will decrease by
decreasing the project duration, as the indirect cost are
almost a linear function with the project duration.

The below figure shows the direct and indirect cost

relationships with the project duration. The project total
time-cost relationship can be determined by adding up the

17
6
 Notes
direct cost and indirect cost values together. The optimum
project duration can be determined as the project duration
that results in the least project total cost.

17
7
Notes

Project time-cost relationship

Materials and Method:

Step1: Calculate Earliest time Estimates for all the activities.

It is calcu- lated as

Step 2: Calculate Latest time Estimates for all the activities.

It is calcu- lated as

Step 3: After knowing the TE and TL values for the various

events in the network, the critical path activities can
be identified by applying the following conditions:

17
8
 Notes
Step 4: Find the project cost by the formula

Project cost = (Direct cost + (Indirect cost*project

duration)
Step 5: Find the minimum cost slope by the formula

Cost slope = (Crash cost - Normal cost)/(Normal time - Crash time)

Step 6: Identify the activity with the minimum cost slope and
crash that activity by one day. Identify the new
critical path and find the cost of the project by
formula
Project Cost = ((Project Direct Cost + Crashing cost of
crashed activity)
+ (Indirect Cost*project duration))

Iteration Step

Step 7: In the new Critical path select the activity with the
next minimum cost slope, and crash by one day, and
repeat this step until all the activities along the
critical path are crashed up to desired time.
Step 8: At this point all the activities are crashed and
further crashing is not possible. The crashing of non
critical activities does not alter the project duration
time and is of no use.
Step 9: To determine optimum project duration, the total
project cost is plotted against the duration time given
by figure.

Further Modification: Un-Crashing

Step10: Now see if the project cost can be further

reduced without affect- ing the project duration
time. This can be done by un-crashing the
activities which do not lie along the critical path.
Un-crashing should start with an activity having
the maximum cost slope. An activity is to be
expanded only to the extent that it itself may be-
come critical, but should not affect the original
critical path.

17
9
Notes
Proposed Work

Step 1: Find earliest time estimates for all the activities, it

is denoted as TE
Step 2: Find latest time estimates for all the activities, it is
denoted as TL
Step 3: Determine the Critical Path.

18
0
 Notes
Step 4: Compute the cost slope (i.e., cost per unit time) for
each activity according to the following formula:Cost
slope = (Crash cost- Normal cost)/(Normal time-
Crash time)
Step 5: Among the critical path identify the activity with the
minimum cost slope, and crash the activity by 1
day.
Step 6: Calculate the project cost. Identify new critical path.
Project Cost= [(Project Direct Cost + Crashing
cost of crashed activity)
+ (Indirect Cost*project duration)]
Step 7: Now in the new critical path select the activity with
the next minimum cost slope, and crash by one day.
Step 8: Repeat this process until all the activities in the
critical path have been crashed by 1 day.
Step 9: Once all the activities along the critical path are
crashed by one day, repeat the process again i.e.,
goes tostep5.
Step 10: Find the minimum project cost and identify the
activities which do not lie along the critical path
Step 11: Now perform un crashing, i.e., un crash the
activities which do not lie along the critical path.

Crashing Example: The network and durations given

below shows the normal schedule for a project. You can
decrease (crash) the durations at an additional expense.

The Table given below summarizes the time-cost

information for the activities. The owner wants you to
finish the project in 110 days. Find the minimum possible
cost for the project if you want to finish it on 110 days.
(Assume that for each activity there is a single linear,
continuous function between the crash duration and
normal duration points).

18
1
Notes

Solution

Assume that the duration-cost relationship for

each activity is a single linear, continuous function
between the crash duration and normal duration points.
Using the normal duration (ND), crash duration (CD),
normal cost (NC), and crash cost (CC), the crash cost
slope for each activity can be determined as follows:

SA = CC – NC
ND – CD

14000 – 12000
SA = 120 - 100 = ` 100/day
SB = `
200/day
SC= `
600/day
SD= `
60/day SE =
` 120/day
SF = `
300/day

The normal cost for the project is the sum of a

normal cost for each activity. The normal cost for the
project is ` 48300 and the normal duration is 140 days.
The activity which should be crashed is the one on the
critical path which will add the least amount to the overall
project cost. This will be the activity with the flattest or
least-cost slope. The duration can be reduced as long as
the critical path is not changed or a new critical path is

18
2
 Notes
created. In addition, the activity duration cannot be less
than the crash duration.SD = ` 60/day (least-cost slope)
Maximum of 10 days can be cut from this schedule by
reducing the duration of activity D to the crash duration of
20 days.

18
3
Notes

Overall duration is 130 days and there are multiple

critical paths (B-F-E and B-C-D-E). Total project cost at
this duration is the normal cost of ` 48300 plus the cost of
crashing the activity D by 10 days (60 * 10 =` 600) for a
total of ` 48900.The next activity to be crashed would be
the activity E, since it has the least-cost slope (` 120per
day) of any of the activities on the critical path. Activity E
can be crashed by a total of 10 days. Crashing the activity
E by 10 days will cost an additional ` 120 per day or `
1200.

The project duration is now 120 days and the total

project cost is ` 50100. There are now three critical paths
(A, B-C-D-E, and B-F-E). The next stage of crashing
requires a more thorough analysis since it is impossible to
crash one activity alone and achieve a reduction in the
overall project duration. Activity A is paired with each of
the other activities to determine which has the least
overall cost slope for those activities which have
remaining days to be crashed.

18
4
 Notes
Activity A (` 100) + activity B (` 200)
Activity A (` 100) + activity C (` 600) + activity F (` 300)

18
5
Notes
The least-cost slope will be activity A + activity B for
a cost increase of ` 300 per day. Reducing the project
duration by 5 days will add 5*300
= ` 1500 dollar crashing cost and the total project cost
would be ` 51600. Activity B cannot be crashed any more.

Final step in crashing the project to 110 days would

be accomplished by reducing the duration of activity A by
5 days to 110 days, reducing activity C by 5 days to 35
days, and reducing activity F by 5 days to 55 days. The
combined cost slope for the simultaneous reduction of
activity A, activity C, and activity F would be ` 1000 per
day. For 5 days of reduction this would be an additional `
5000 in total project cost. The total project cost for the
crashed schedule to 110 days of duration would be `
56600.

Resource Leveling and Resource Allocation

Resource Leveling

Resource Leveling is a project management technique

used to examine unbalanced use of resources (usually
18
6
 Notes
people or equipment) over time, and for resolving over-
allocations or conflicts. When performing project planning
activities, the manager will attempt to schedule certain

18
7
Notes
tasks simultaneously. When more resources such as
machines or people are needed than are available, or
perhaps a specific person is needed in both tasks, the
tasks will have to be rescheduled concurrently or even
sequentially to manage the constraint. Project planning
resource leveling is the process of resolving these
conflicts. It can also be used to balance the workload of
primary resources over the course of the project[s],
usually at the expense of one of the traditional triple
constraints (time, cost, scope). When using specially
designed project software, leveling typically means
resolving conflicts or over allocations in the project plan
by allowing the software to calculate delays and update
tasks automatically. Project management software
leveling requires delaying tasks until resources are
available. In more complex environments, resources could
be allocated across multiple, concurrent projects thus
requiring the process of resource leveling to be performed
at company level. In either definition, leveling could result
in a later project finish date if the tasks affected are in the
critical path.

Resource Leveling is also useful in the world of

maintenance management. Many organizations have
maintenance backlogs. These backlogs consist of work
orders. In a “planned state” these work orders have
estimates such as 2 electricians for 8 hours. These work
orders have other attributes such as report date, priority,
asset operational requirements, and safety concerns.
These same organizations have a need to create weekly
schedules. Resource-leveling can take the “work demand”
and balance it against the resource pool availability for the
given week. The goal is to create this weekly schedule in
advance of performing the work. Without resource-
leveling the organization (planner, scheduler, supervisor)
is most likely performing subjective selection. For the
most part, when it comes to maintenance scheduling,
there are very few logic ties and therefore no need to
calculate critical path and total float.

Resource Allocation

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 Notes

Resource allocation is used to assign the available

resources in an economic way. It is part of resource
management. In project management, resource
allocation is the scheduling of activities and the
resources required by those activities while taking into
consideration both the resource availability and the
project time. In strategic planning, resource allocation
is a plan for using available resources, for example
human

18
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Notes
resources, especially in the near term, to achieve goals for
the future. It is the process of allocating resources among
the various projects or business units. The plan has two
parts: Firstly, there is the basic allocation decision and
secondly there are contingency mechanisms. The basic
allocation decision is the choice of which items to fund in
the plan, and what level of funding it should receive, and
which to leave unfunded: the resources are allocated to
some items, not to others. There are two contingency
mechanisms. There is a priority ranking of items excluded
from the plan, showing which items to fund if more
resources should become available; and there is a priority
ranking of some items included in the plan, showing which
items should be sacrificed if total funding must be
reduced.

Ways to Avoid Time and Cost Overruns

Correct identification of the causes of delays can

help the project team to eliminate the same, as per the
adage, a problem well formulated is half solved. The most
important reason for delay in cost and time overrun:
planning, organising and monitoring; hence, the need to
plan the resources adequately and estimate the need
scientifically. Right choice of project manager, project
oriented organisation, project team and delegation of
authority commensurate with responsibility will go a long
way to reduce the overruns. Proper project management
information system and effective coordination with all
concerned will ensure timely project completion. The
other reasons that help completing the project without
delay are listed hereunder. These are:

➢ Detailed planning and implementation schedule

➢ Sound monitoring
➢ Resource-planning based on time schedules and
anticipated progress
➢ Ensuring safety measures while preparing contracts
➢ Reward and incentive schemes for the project staff
➢ Selection of appropriate, feasible technology

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 Notes
➢ Listing engineering parameters and designs
➢ Mobilising community participation in planning
and implementa- tion
➢ Decentralised decision-making for fast implementation

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➢ Continuity of the project manager, at least till the
start of the plant
➢ Adequate training of the workers, supervisors involved
➢ Anticipating omissions, mistakes and preparing the
organisation to face crisis
➢ Minimising managerial lapses
➢ Identifying transport bottlenecks by proper liaison
➢ Communication, and following-up with vendors
and subcontractors to know the latest status and
location of project material
➢ Regular follow-up with local, national and
international financial agencies
➢ Innovative attitude and skills of the project team
➢ Adequate project information system
➢ Maintaining ecological balance and avoiding
environmental pollution
➢ Clarity of scope on project objectives
➢ Lucid description of team and sub-team tasks
➢ Lucid financial cost estimates
➢ Milestone charts and project audit reports, and
➢ Minutes of the co-ordination committees’ meetings
with contractors and government agencies

Conclusion

The completion of projects without overruns and

delays is probably the most important current problem
area for cost engineers and project managers as well as
for the image of the whole professional area of Cost
Engineering / Project Cost Control not to mention the
owners/contractors and users themselves. Commercial
Risk Analysis is therefore one of the basic sub-
procedures used by cost engineers.

****

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 Notes

Lesson 4.3 - Project Appraisal and Control Process

Learning Objectives

➢ To understand the meaning of project appraisal.

➢ To know the steps in project appraisal process by
banks and financial institutions
➢ To know the steps in project control process.
➢ To know the various types of key programme/project
monitors, controls and reports.
➢ To appreciate the project control issues.

Project Appraisal

Project appraisal management is an essential stage

of any project, regardless of its nature, type and size. This
stage represents the first point of the pre-planning or
initiation phase. Without having appraised a project, it is
financial and technically unreasonable to proceed with
further planning and development. No matter whether you
are going to purchase a new car (e.g. my neighbour’s
project), constructing a building, improving a business
process, updating a network system, conducting a
marketing campaign, building a garage, or any other
initiative, you should make a preliminary assessment and
appraisal of your undertaking in order to be sure that that
you will do a required and necessary change to your
environment.

Project Appraisal Process by Banks and Financial Institutions

Banks and Financial institutions such as IDBI

Bank, ICICI Bank, and the Industrial Finance Corporation
of India (IFCI), and the State Industrial Development
Corporations (SIDCs) and State Financial Corporations
(SFCs) of different States, as also Investment Finance
Institutions such as the Life Insurance Corporation (LIC),

19
3
Notes
the General Insurance Corporation (GIC) and the Unit
Trust of India (UTI) have for long been actively involved
in promoting industrial projects and

19
4
 Notes
participating in their operational phases and have
emerged as major stockholders in most enterprises. They
participate in and underwrite equity and debentures and
provide medium and long-term loans, often accounting for
the major part of funds employed in enterprises. Before
they commit their funds, they have to necessarily satisfy
themselves about the feasibility of the projects to be
assisted.

The Application

The applicant for institutional finance has to

provide a com- prehensive statement of the nature and
purpose of the assistance being sought the cost of the
project, the financing mix contemplated the market
prospects for the product or products, the expected
profitability and the managerial and technical
arrangements effected for operating the project. Over
the years, the leading financial institutions, IDBI, ICICI
and IFCI, have evolved a common format for the
application form, which is being used by most State level
industrial development and financial institutions.

The application form provides for very elaborate

information to be given on all relevant aspects of the
project, and the delay in furnishing the requisite details
can cause delay in appraisal.

The Appraisal Process

Small projects get assistance from a single institution,

and in the case of larger projects, the institutions extend
assistance jointly through syndication.

Single Institution Assistance - The Process

The evaluation proceeds in the following sequence,

where a single financial institution is involved:

➢ Application is received from the promoter.

➢ The institution deputes a financial expert and

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Notes
technical expert to carry out the project appraisal;

➢ After a preliminary review, the team submits its

report to the management, recommending
acceptance or rejection. If accepted

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 Notes
in principle, further details for closer scrutiny are
obtained from the promoter.

➢ The crucial aspects of the project proposal are

subjected to in- depth study. Elaborate discussions
are held with the promoter, and the underlying
assumptions get certified and substantiated.
Comparisons with similar projects, assessment of the
technical suitability of the basic engineering
package, verification of the collaboration
agreements, scrutiny of price bids of contractors and
suppliers’ quotations, verification of market studies,
inspection of the site, and seeking expert opinions
where required are all essential steps in this in-depth
analysis.

➢ Detailed evaluation of the technical, commercial,

financial, economic and management aspects are
taken up for ascertaining the project’s viability, and
its acceptability for project financing.
➢ The senior executives of the institution have a close
look at the proposal, with reference to available
reports and comments.
➢ Further discussions are held with the promoter and
necessary modifications are agreed upon.
➢ The final appraisal memorandum is prepared and
submitted to the managing director.
➢ The final appraisal memorandum goes to the board
of directors for approval.
➢ The promoter is informed of board’s approval.

Loan Syndication – The Process

Where the project, of a magnitude that calls for joint

financing by a group of institutions, is under
consideration, the evaluation proceeds on following lines:

➢ The project application is received by the financial institution.

➢ The institution’s project team carries out the

preliminary review of the technical, commercial,

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7
Notes
financial, economic and management aspects of the
proposal.
➢ The appraisal team holds further discussions with
the promoter and obtains required clarifications.

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8
 Notes
➢ The appraisal team prepares flash report on the
project and circulates it to the senior executives of
the participating institutions for their
consideration.

➢ The acceptability of the project is discussed at the

Senior Executive Meeting (SEM).

➢ At the SEM, the lead institution is identified from

among the participating institutions.

➢ The lead institution takes up a detailed evaluation

of the project appraisal. It has elaborate
discussions with the promoter, getting evidences
and clarifications to support the critical
assumptions in the proposal. This detailed
evaluation will involve an in depth examination of
the diverse aspects of the project proposal, by
comparison with similar projects, site inspection,
scrutiny of the collaboration agreements,
obtaining expert opinion as may be necessary and
such other procedures that can help in proper
assessment of the project’s viability and
desirability.

➢ The lead institution prepares the evaluation report

and circulates it to the participating institutions
for consideration.

➢ At the Inter-Institutional Meetings (IIM), the

project is jointly evaluated, and discussions are
held with the promoter, and site inspections are
carried out. Project up to ` 10 crores have their
evaluation reports considered by SEM, and those
that exceed ` 10 crores get considered at IIM.
➢ Changes or modifications that are found necessary
are effected with the consent of the promoter.
➢ Approvals for financing the project are obtained
from the respective sanctioning authorities of the
participating institutions.
➢ The lead institution takes over the administrative
responsibilities and informs the promoter of the
approval of the project.

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Notes

The SEM or IIM, as the case may be, decides on the

extent of participation by the member institutions of the
syndicate, as also the extent of assistance from the
concerned commercial banks and terms of assistance.
The commitment of assistance by each institution can be
formalized through the scheme of participation
certificates. Over the years, the institutions have been
able to evolve uniform approaches to

20
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 Notes
the methods of appraisal and approval, though there can be
variations in emphasis on specific aspects depending on the
nature of the project.

Project Control Process

Project Controls

It is a management action, either planned to

achieve the desired result or taken as a corrective
measure prompted by the monitoring process. Project
controls are mainly concerned with the metrics of the
project, such as quantities, time, cost and other
resources. Apart from these, project revenues and cash
flow can also be part of the project metrics under
control.

The successful performance of a project depends on

appropriate planning. The execution of a project is based
on a robust project plan and can only be achieved through
an effective schedule control methodology. The
development of a suitable Project Control system is an
important part of the project management effort.
Furthermore, it is widely recognized that planning and
monitoring plays a major role as the cause of project
failures. It has been proved time and again that Project
performance can be improved if dedicated Project
Controls systems are in place.

Project Control Process

Control is the process of comparing actual

performance against plan to identify deviations, evaluate
possible alternative courses of actions, and take
appropriate corrective action. The steps in the project
control process for measuring and evaluating project
performance are listed below:

➢ Setting a baseline plan.

➢ Measuring the actual performance
➢ Comparing actual with baseline plans.

20
1
Notes
➢ Taking corrective action.

Step 1: Setting a Baseline Plan

The baseline plan provides with the elements for

measuring performance. The baseline is derived from the
cost estimates; information

20
2
 Notes
relating to duration is derived from the work breakdown
structure (WBS) database; and time-sequence data are
derived from the network and resource scheduling
decisions. The WBS defines the work in discrete work
packages that are tied to deliverables and organization
units. In addition, each work package defines the work,
duration, and budget. From the WBS, the project network
schedule is used to phase all work, resources, and budgets
into a baseline plan.

Step 2: Measuring the Actual Performance

Time and budgets are quantitative measures of

performance that readily fit into the integrated
information system. Qualitative measures such as meeting
customer technical specifications and product function are
most frequently determined by on-site inspection or actual
use. Measurement of time performance is relatively easy
and obvious. Examples: the critical path, early on schedule
or late; is the slack of near critical-paths decreasing to
cause new critical activities, etc. For measuring
performance, earned value is necessary to provide a
realistic estimate of performance against a time-phased
budget. Earned value will be defined as the budgeted cost
of the work performed (EV).

Step 3: Comparing Actual with Baseline Plan

All the baseline plans seldom materialize as

expected and hence, it becomes imperative to measure
deviations from plan to determine if action is necessary.
Periodic monitoring and measuring the status of the
project allow for comparisons of actual versus expected
plans. It is crucial that the timing of status report be
frequent enough to allow for early detection of
variations from plan and early detection of causes.
Usually, status reports should take place every one to
four weeks to be useful and allow for proactive
correction.

Step 4: Taking Corrective Action

20
3
Notes

If deviations from plans are significant, corrective

actions will be needed to bring the project back in line with
original or revised plan. In some cases, conditions or scope
can change, which, in turn, will require a change in the
baseline plan to recognize new information.

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 Notes
Key Programme/Project Monitors, Controls and Reports

Following are the various types of project controls and reports:

a) Business Case: The Business Case effectively describes

what is the value of project outcome to the
sponsoring organization. Managing the Business
Case is about value management of benefits, costs,
timescales and risks.

b) Project Plan: A comprehensive plan which clearly

defines the products to be produced, resources and
time needed for all activities, any dependencies
between activities and points at which progress will
be monitored and controlled with any agreed
tolerances.

c) Project Initiation Document (PID): This document defines

all major aspects of the project and forms the basis
for its management and the assessment of overall
success. There are two primary uses of the
document:
➢ To ensure that the project has a complete and
sound basis before there is any major
commitment to the project
➢ To act as a base document against which the
project can assess progress, change management
issues, and ongoing viability questions.

For construction projects, the content of the

Project Initiation Document is set out in the Project
Execution Plan.

d) Stage Plan: Provides detail of how and when the

objectives for the stage are to be met by showing the
deliverables, activities and resources required. The
Stage Plan provides a baseline against which stage
progress will be measured and is used as the basis of
management control throughout the stage.

e) Work Package: Sets out all information needed to

deliver one or more specialist products. The
necessary information is collated by the Project
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5
Notes
Manager and used to formally pass responsibility for
work or delivery to a team leader or member.

f) Change Control Strategy: The Strategy documents the

procedure to ensure that the processing of all Project
Issues is controlled, including the submission,
analysis and decision making.

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6
 Notes
g) Highlight Reports: The highlight reports are used to provide
the Project Board (and possibly other stakeholders)
with a summary of the stage status at intervals
defined by them and to monitor stage and project
progress. The Project Manager also uses it to advise
the Project Board of any potential problems or areas
where the Project Board could help.

h) Checkpoint Report: From the Team Manager to the

Project Manager at a frequency defined in the stage
plan and/or work package detailing the status of
work for each member of a team.

i) Project Issue Log: A project issue is a generic term for

any mat- ter that has to be brought to the attention of
the Project Team and requires an answer. An issue
can have a negative or positive impact on the project
and includes items such as requests for change, off-
specifications (this is an item not included in the
original specifica- tion or errors or omissions found
in work already completed which would result in the
agreed specification or acceptance criteria not being
met), questions and statements of concern.

j) Risk Management Log: Risks can be threats to the

successful delivery of the Project. Usually they are
recorded in a risk register which is used to manage
the project’s exposure to risk that is the probability
of specific risks occurring and the potential impact if
they did.

k) End Stage Report: It Summarizes progress to date and

provides an overview of the project as a whole,
including impact of the stage on the project plan, the
business case and identified risks. The project board
uses the information to decide what action to take
with the project; approve the next stage; ask for
revised plans, amend the project scope or stop the
project.

l) End Project Report: A report sent from the Project

Manager to the Project Board, which confirms the
hand-over of all deliverables, provides an updated

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Notes
business case, and an assessment of how well the
project has done against its Project Initiation
Document.

m) Lessons Learned Report: A report which describes the

lessons learned in undertaking a project and which
includes statistics from the quality control of the
project’s management products. It is

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 Notes
approved by the Project Board then held centrally
for the benefit of future projects. If the project is
one of a number attached to a programme this
document will also be used as input to the
programme review.

n) Post Project Review: Documents whether business

benefits have been realized and recommendations
for future improvements have been recorded. This is
viewed as part of the project evaluation review which
includes the End Project Report and Lessons
Learned Report.

Project Control Issues

a) Monitoring Time Performance

A major goal of progress reporting is to catch any

negative variances from plan as early as possible to
determine if corrective action is necessary. Fortunately,
monitoring schedule performance is relatively easy. The
project network schedule, derived from the WBS/OBS,
serves as the baseline to compare against actual
performance. Gantt charts (bar charts) and control
charts are the typical tools used for communicating
project schedule status.

Gantt Charts

Gantt and control charts serve well as a means for

tracking and trending schedule performance. Their
easy-to-understand visual formats make them favorite
tools for communicating project schedule status-
especially to top management who do not usually have
time for details. Adding actual and revised time
estimates to the Gantt chart gives a quick overview of
project status on the report date. The following figure
shows the sample of multi-color Gantt chart.

Control Charts

Control chart is another tool used to monitor past

20
9
Notes
project schedule performance and current performance
and to estimate future schedule trends. Control charts are
also frequently used to monitor progress toward
milestones, which mark events and as such have zero
duration. The following figure shows the sample control
chart.

21
0
 Notes

b) Need for an Integrated Information System

There are many customized monitoring and control

systems used in practice. The disparity among monitoring
systems is usually found in the lack of connections with a
time-phased baseline plan. Such systems fail to compare
actual work completed for any time period against
budgeted scheduled costs for the same time period.
Without matching time-phased budgets to actual cost of
work completed, it is impossible to reliably measure cost
performance.

Development of an Integrated Cost/Schedule System

The earned value cost/schedule system uses several

acronyms and equations for analysis. Following five careful
steps ensures that the cost/ schedule system is integrated.

➢ Define the work using a WBS. This step involves

developing documents that include the following
21
1
Notes
information about Scope,

21
2
 Notes
Work packages, Deliverables, Organization units,
Resources and Budgets for each package.

➢ Develop work and resource schedules. This is done

by scheduling resources to activities and time-
phasing work packages into a network.

➢ Develop a time-phased budget using work packages

included in an activity. The cumulative values of
these budgets will become the baseline and will be
called the planned time-phased baseline of the value
of the work scheduled (PV).

➢ At the work package level, collect the actual costs for

the work performed. These costs will be called the
actual cost of the work completed (AC).

➢ Compute the schedule variance using the formula,

Schedule Variance = Earned Value – Planned time-
phased base line of the value of the work scheduled
(SV = EV – PV).

➢ Compute the cost variance using the formula, Cost

Variance = Earned Value – Actual cost of the work
completed (CV = EV – AC).

Development of Project Baselines

The baseline (PV) serves as an anchor point for

measuring performance. The baseline is a concrete
document and commitment; it is the planned cost and
expected schedule performance against which actual cost
and schedule are measured. It can also serve as a basis for
developing cash flows and awarding progress payments.
Development of the project baseline is part of the planning
process. The baseline is the major input to the
cost/schedule system to be described.

Costs to be included in Baselines

The baseline PV is the sum of the cost accounts, and

each cost account is the sum of the work packages on the
cost account. Three costs are typically included in
baselines, viz., labour, equipment, and materials.
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Notes
Sometimes project direct overhead costs are also included.

21
4
 Notes
Rules for Placing Costs in Baselines

The major reasons for creating a baseline are to

monitor and report progress and to estimate cash flow.
Therefore, it is crucial to integrate the baseline with the
performance measurement system. Costs are placed in the
baseline exactly as managers expect them to be “earned”.

This approach facilitates tracking costs to their

point of origin. In practice, the integration is
accomplished by using the same rules in assigning costs to
the baseline as those used to measure progress using
earned value. Percent Complete Rule is the best method
for assigning costs to the baseline in order to establish
frequent check points over the duration of the work
package and assign completion percentages in monetary
terms.

Methods of Variance Analysis

Generally the method for measuring accomplishments

centers on two key computations:

➢ Comparing earned value with the expected schedule

value;
➢ Comparing earned value with actual costs.

c) Indices to Monitor Progress

In corporate world, project management

professionals prefer to use schedule and cost indices over
the absolute values of SV and CV, because indices can be
considered as efficiency ratios. Graphed indices over the
project life cycle can be very illuminating and useful. The
trends are easily identified for deliverables and the whole
project.

Performance Indexes

There are two indices of performance efficiency. The

first index measures cost efficiency of the work

21
5
Notes
accomplished to date:

Cost Performance Index (CPI) = EV/AC

Scheduling Performance Index (SPI) = EV/PV

21
6
 Notes
Project Percent Complete Index

There are two project percent complete indices,

which are used depending on the nature of project. The
first index assumes the origi- nal budget of work
complete, which is the more reliable information to
measure project percent complete. The second index
assumes the actual costs-to-date and expected cost at
completion, which is the most reliable measure for
measuring project percent complete. These indices
compare the up-to-date progress to the end of the project.
The implications un- derlying the use of these indices are
that conditions will not change, no improvement or action
will be taken, and the information in the database is
accurate.

Percent Complete Index for Budget = PCIB =

EV/BAC Percent Complete Index for Cost =
PCIC = AC/EAC

Technical Performance Measurement

Measuring technical performance is equally important

as measur- ing schedule and cost performance. The
consequences of poor technical performance will be very
adverse. Assessing technical performance of a system,
facility, or product is often accomplished by examining the
docu- ments found in the scope statement and/or work
package documentation.

Software for Project Cost/Schedule Systems

Software developers have created sophisticated

schedule/ cost systems for projects that track and report
budget, actual, earned, committed, and index values.
These values can be labour hours, materials, and/or
dollars. This information supports cost and schedule
progress, performance measurements, and cash flow
management.

Additional Earned-Values Rules

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7
Notes
Although the percent complete rule is the most-
used method of assigning budgets to baselines and for
cost control, there are two additional rules that are
very useful for reducing the overhead costs of
collecting detailed data on percent complete of
individual work packages. These rules are the 0/100
percent rule and the 50/50 rule. These two rules are
typically used for short-duration activities and/or small-
cost activities.

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 Notes
Forecasting Final Project Cost

There are basically two methods used to revise

estimates of future project costs. In many cases both
methods are used on specific segments of the project. The
result is confusion of terms in texts, in software, and
among practitioners in the field.

➢ The first method allows experts in the field to

change the original baseline durations and costs
because new information tells them the original
estimates are not accurate.

➢ The second method is used in large projects where

the original budget is less reliable. This method
uses the actual costs to-date plus an efficiency
index, (CPI = EV/AC) applied to the remaining
project work. When estimate for completion uses
the CPI as the basis for forecasting cost at
completion, acronym ‘(EAC)’ - Estimated total cost
At Completion’- is used.

d) Other Control issues

Baseline changes

Changes during the life cycle of projects are

inevitable and will occur. Some changes can be very
beneficial to project outcomes; changes having a negative
impact are the ones to be avoided. Careful project definition
can minimize the need for changes. The price for poor
project definition can be changes that result in cost
overruns, late schedules, low morale and loss of control.
Change comes from external sources or from within.
Externally, for example, the customer may request changes
that were not included in the original scope statement and
that will require significant changes to the project and thus,
to the baseline.

Contingency Reserve

In reality, plans seldom materialize as per estimates.

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Notes
Identified and unidentified risks occur, estimates go wrong,
customer wants changes, technology changes. Because,
perfect planning does not exist, some contingency funds
should be created before the project commences to cover
the unexpected. The size of the contingency reserve should
be related

22
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 Notes
to the uncertainties and risk of schedule and cost estimate
inaccuracies. Contingency reserve is not a free lunch for all
who come. Reserve funds should only be released by the
project manager on a very formal and documented basis.
Budget reserve contingency funds are not for scope
changes. Scope changes are covered by management
reserve fund.

The Costs and Problems of Data Acquisition

For large projects, there is no substitute for using a

percent complete system that depends on data collected
through observation at clearly defined monitoring points.

Scope Creep

Large changes in scope are easily identified. It is the

‘minor refine- ments’ that eventually build to be major
scope changes that can cause problems. These small
refinements are known in the field as scope creep.

Ways to Deal with Project Control Issues

Having understood the key control issues, setting

up appropriate controls will help assure the project is a
success. Following are some of the ways to deal with
project control issue:

a) Change management: Request that a member of senior

management announce the project to all
stakeholders, why the project has been launched and
the impact on those affected. By involving those
affected, there will be a less resistance to change.

b) Schedules: Make sure the project starts on time and

that tasks are completed on a timely basis. To help
assure project completes by the planned completion
date, employ the critical path method. This method
defines critical and non-critical tasks that impact
timely project completion.

c) Costs: Break down budgeted costs into easy-to-track

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Notes
categories. Make sure costs are recorded as soon as
they are incurred so that there is a clear
understanding of actual costs. Instruct project team
members who are responsible for approving bills;
otherwise costs can quickly escalate.

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 Notes
d) Requirements: Use a structured approach for defining
requirements so that the delivered project matches
the expectations of project stakeholders. Rather than
waiting until the end of a project to deliver what
stakeholders want, provide interim deliverables to
make sure the organization and the stakeholders are
in agreement with project progress. Waiting until the
end of the project to share information with users
could result in project cost overruns if changes must
be made in what was delivered.

e) Communications: Make sure communications to the

project team and stakeholders is clear and
understandable. Breakdowns in communications can
quickly derail a project and impact team members’
morale.

f) Staffing: Make sure the project is staffed with people

who have the required skills to achieve project
objectives. Have weekly meetings with project staff
so you can quickly address any project team or
stakeholder problems.

g) Checklist: Prepare a checklist of all areas you need

to monitor and control. Decide on what you will
monitor and how often. Do not delay acting on
issues that are not under control.

h) Monitoring, Reporting & Control: Monitoring is about

assessing what work has been completed for a
Project including costs, risks and issues. In
addition the Board will routinely monitor if the
business case continues to be viable in terms of
alignment with strategic objectives. This usually
takes the form of the production of documentation
and reports at key stages. Reporting provides the
Project Board with a summary of the status of the
project at intervals defined by them.

Conclusion

Controls usually relate to stages in projects and

are established to control the delivery of the project’s

22
3
Notes
products (outputs). In project management controls take
two forms - event driven and time driven. Event driven
means that the control occurs because of a specific event
has taken place. Examples of event driven controls include
End-Stage Reports, completion of a Project Initiation
Document (PID) and creation of an

22
4
 Notes
exception plan. Time driven controls are regular progress
feedbacks. Examples of time driven controls include
checkpoint and highlight reporting. This does not replace
the need for the Board to maintain an overall view of
progress. Monitoring is used to oversee progress of
products, outputs, and outcomes. Reporting advises the
correct people at the correct time of positive and negative
events, allowing for progression or remedial action as
appropriate. Controls then assist with both monitoring and
reporting by provision of required review points such as
End Stage Assessments.

****

22
5
Notes

Lesson 4.4 - Project Audit and Evaluation of Project Team

and its Manager

Learning Objectives

➢ To understand the meaning of project audits.

➢ To know the steps in project audit process.
➢ To understand the conditions of project closure.
➢ To know the steps in project closure process
➢ To appreciate the importance of evaluation of project
team, team member and manager.

Project Audits

Project audits are more than the status reports

which check on project performance. Project audits use
performance measures and forecast data. But project
audits are more inclusive. Project audits review why the
project was selected. It includes a reassessment of the
project’s role in the organization’s priorities. It includes
a check on the organizational culture to ensure that it
facilitates the type of project being implemented. It
assesses if the project team is functioning well and it is
appropriately staffed. Audits of projects in process
should include a check on external factors that might
change where the project is heading on the right path
– for example, technology, government regulations, and
competitive products. It includes a review of all factors
relevant to the project and to managing future projects. It
can be performed while a project is in process and after a
project is completed. There are only a few minor differences
between these audits.

In-Process Project Audits

In-process project audits allow for corrective changes,

if they are needed, on the audited projects or others in

22
6
 Notes
progress. It concentrates on project’s progress and
performance and checks if conditions have changed.

22
7
Notes
Post Project Audits

These audits tend to include more detailed and

depth than in- process project audits. Project audits of
completed projects emphasize improving the
management of future projects. These audits are more
long term oriented than in-process audits. Post project
audits check on the project performance, but the audit
represents a broader view of the project’s role in the
organization.

Factors Influencing Audit Depth and Detail

The depth and detail of the project audit depends on many factors:

➢ Organization size
➢ Project importance
➢ Project type
➢ Project risk
➢ Project size
➢ Project problems

Project Audit Guidelines

The Guidelines for conducting project audits include the following:

a) The philosophy must be that the project audit is

not a punishing exercise.
b) Comments about individuals or groups
participating in the project should not be revealed.
c) Audit activities should be intensely sensitive to
human emotions and reactions.
d) Accuracy of data should be verifiable or noted as
subjective or judgmental.
e) Senior management should announce support for the
project audit and see that the audit group has access
to all information, project participants and project
customers.
f) Objective of the project audit is to learn and
22
8
 Notes
conserve valuable organizational resources.

22
9
Notes
g) The audit should be completed quickly.
h) The audit leader should be given access to senior
management above the project managers.

Project Audit Process

Following the steps in the project audit process:

Step 1: Initiation and Staffing

Initiation of the audit process depends primarily

on organization size and project size along with the
other factors. However, every effort should be made to
make the project audit a normal process rather than a
surprise notice. In small organizations and project
where face to face contact at all levels is prevalent, an
audit may be informal and only represent another staff
meeting. But even in these environments, the content
of a formal project audit should be examined and
covered with notes made of the lessons learned.

In medium sized organizations that have several

projects occurring simultaneously, initiation can come
from a formal project review group, from the project
priority team or be automatic. A major tenet of the project
audit is that the outcome must represent an independent,
outside view of the project. Maintaining independence and
an objective view is difficult, given that audits are
frequently viewed as negative by project stakeholders.

It is imperative that the audit leader possesses the

following characteristics:

➢ No direct involvement or direct interest in the project

➢ Respect of senior management and other project
stakeholders
➢ Willingness to listen
➢ Independence and authority to report audit results
without fear of recrimination from special
interests.
➢ Perceived as having the best interest of the
23
0
 Notes
organization in making decision.
➢ Broad based experience in the organization or
industry.

23
1
Notes
Step 2: Data Collection and Analysis

The traditional content model for a project audit

represents two perspectives. One evaluates the project
from the view of the organization. The second
perspective represents the project team’s evaluative
view. The organization perspective is developed by a
small group primarily made up of persons not having a
direct interest in the project. The project team
perspective is developed by a group composed primarily
of team members along with persons independent of the
project to ensure the evaluation is objective. Each
organization and project is unique. Therefore, many fac-
tors need to be considered like the industry, project
size, newness of tech- nology and project experience
that can influence the nature of the audit.

Step 3: Reporting

The major goal of the audit report is to improve

the way future projects are managed. Concisely, the
report attempts to capture needed changes and lessons
learned from a current or finished project. The report
serves as a training instrument for project managers of
future projects. Audit reports needs to be customized
to the specific project and organizational environment.
Nevertheless, a generic format for all audit reports and
the managers who read and act on their content.
Usually, the following items are included in the reports:

➢ Classification of project based on nature, type, size,

number of staff and technology level.
➢ Analysis of information gathered such as project’s
mission, objectives, procedures, systems and
organizational resources used.
➢ Recommendation of positive successes that should be
continued and used in future projects.
➢ Lessons learned to avoid pitfalls in future.
➢ Appendix of data or details of analysis of the project.

Core Constituents to be analyzed during Project Audit

23
2
 Notes
a) Time Management

➢ Time schedule development and control measures

➢ Activity duration analysis in terms,
including inter-team dependency

23
3
Notes
b) Resource Management

➢ Resource planning and control in terms of

allocation of resources, criteria for distribution,
analysis of consumption patterns and
➢ Measures to control resource abuse

c) Personnel Management

➢ Allocation of staff and establishment of recruiting

policies
➢ Division of responsibilities regarding team
development and training needs

d) Information Management

➢ Policies regarding Preparing and Collecting

information
➢ Principles used for Classifying and Distributing
information
➢ Methods used for Filing, Updating and Retrieving
information

The purpose of the audit is not just analyzing various

project man- agement resources and functionalities but also
to help the organization understand the performance of
each of them. For this purpose, most audit processes use a
grading system to rank each audited project constituent:

➢ Critically Deficient — suggests a serious inability to

match project guidelines.

➢ Weak — unable to entirely comply with project

objectives.

➢ Satisfactory — basic project management principles

are followed but the overall performance has room
for improvement.

➢ Good — the compatibility with the project goals and

effectiveness of management tools, both are
appreciable and committed to project goal.

➢ Very Good — the process defines ideal project

23
4
 Notes
performance and adheres to planning/monitoring
expectations and performs as per project
expectations

23
5
Notes
Project Closure

Every project comes to an end eventually. On some

projects the end may not be as clear as would be hoped.
Although the scope statement defines a clear ending for a
project, the actual ending may or may not correspond.
Fortunately, a majority of projects are blessed with a well-
defined ending. Regular project audits and a priority team
will identify those projects that should have endings
different from those planned.

Thus, closure is the final stage in the project life

cycle and is triggered when the sponsor formally accepts
the project. The objectives of this stage are to: transition
the product, services and deliverables to operations and
support; logically complete administrative and logistical
close-out activities including contracts; release project
resources and capture performance information that will
help improve future projects.

Conditions for Project Closure

a) Normal

The most common condition for project closure is

simply a completed project. In the case of ‘turnkey’
projects, such as building a new production facility or
creating a customized information system, the finish is
marked by the transfer of ownership to the customer.
For many development projects, the end involves
handing over of the final design to production and the
creation of a new product or service line.

For other internal projects, such as system

upgrades or creation of new inventory control systems,
the end occurs when the output is incorporated into
ongoing operations. Some modifications in scope, cost,
and schedule probably occurred during implementation.

b) Premature

23
6
 Notes
For a few projects, the project may be completed
early with some parts of the project being eliminated. If
early project closure happens, it should have the support
of all project stakeholders. The decision should be left to
the audit group, project priority team or senior
management.

23
7
Notes
c) Perpetual

Some projects never seem to end. The project

appears to develop a life of its own. Although these
projects are plagued with delays, they are viewed as
desirable when they are finally completed. The major
characteristic of this kind of project is constant ‘add-
ons’. The owner or others continuously require more
small changes that will improve the project outcome-
product or service. These changes typically represent
‘extras’ perceived as being part of the original project
intent.

d) Failed Project

In rare circumstances, projects simply fail, for a variety of

reasons.

e) Changed Priority

The priority team continuously revises project

selection priorities to reflect changes in organizational
direction. Normally these changes are small over a
period of time, but periodically major shifts in
organization require dramatic shifts in priorities. In this
transition period, projects in process may need to be
altered or cancelled. Thus, a project may start with a
high priority but see its rank erode or crash during its
project life cycle as conditions change.

Closure Process

As the project nears the end of its life cycle, people

and equipment are directed to other activities or projects.
Carefully managing the closure phase is as important as
any other phase of the project. Getting the project manager
and team members to wrap up the odds and ends of closing
down the project is sometimes difficult. The typical close-
out plan includes answers to questions like:

➢ What tasks are required to close the project?

23
8
 Notes
➢ Who will be responsible for these tasks?
➢ When will closure begin and end?
➢ How will the project be delivered?

23
9
Notes
Implementing the closedown plan includes several
wrap-up activities. Many organizations develop lengthy
lists for closing projects as they gain experience. These
are very helpful and ensure everything is taken care of.
Implementing closedown includes the following five major
activities:

➢ Getting delivery acceptance from the customer.

➢ Shutting down resources and releasing to new ones.
➢ Reassigning project team members.
➢ Closing accounts and seeing all bills are paid.
➢ Evaluating the project team, project team members,
and the project manager.

Team, Team Member and Project Manager Evaluation

Auditing includes performance evaluations of the

project team, individual team members, and the project
manager.

Team Evaluation

Some conditions should be established or agreed

upon before auditing the project team. Some conditions
include the following:

➢ Whether standards for measuring performance exist?

Are the goals clear for the team and individuals?
Challenging? Attainable? Lead to positive
consequences?
➢ Whether individual and team responsibilities and
performance standards are known to all team
members?
➢ Whether team rewards are adequate? Do they
send a clear signal that senior management
believes in synergy of teams?
➢ Whether a clear career path for successful project
managers is in place?
➢ Whether the team has discretionary authority to
manage short- term difficulties?
24
0
 Notes
➢ Whether there is a relatively high level of trust
emanating from the organization culture?

24
1
Notes
Team evaluation should be beyond time, cost, and
specifications. Whether there are any other conditions
beyond these three criteria? The “characteristics of
highly effective teams” can easily be adapted as
measurements of team effectiveness.These “in-place
conditions” will support any evaluation approach for
teams and their members.

Team’s project performance should be evaluated in one of two

ways:

➢ Team members should evaluate themselves and each

other.
➢ Team members should evaluate each other and
team leaders should evaluate individual team
members.

Do’s of Team Evaluation

Each team member should also be allowed to evaluate

him or her- self.To begin with, team members and leaders
use the Project Team Evalu- ation Templates. Following are
the guidelines for evaluating project teams:

a) Analyze Evaluations - Analyze how individual team

members evaluated themselves and each other to get
a better feel for how the team feels as a whole.

b) Analyze the Difficulties - How difficult have team

projects been? Were tasks new or known? In either
case did the team rise to the degree of difficulty? If
not, why? If you feel the team lacked on certain
tasks, instead of berating the team in your
evaluations, discuss a past project where they
performed well, point out what was different this
time around.

c) Analyze Performance - How well did the team perform?

Don’t confuse performance with potential. Stick to
the actual results of the team.

d) Analyze Achievement - Did the team achieve the

project goal? If so, point out contributions and
24
2
 Notes
results.

e) Life Cycle - How well did the team perform within the
life cycle of the project? Were deadlines met? If not,
identify overruns. Try to analyze what happened if
the life cycle of the project was longer than
anticipated. What could have been done differently?

24
3
Notes
f) Judge Individuality - By looking at individual
evaluations, analyze what each individual
contributed to the project. How well did each team
member do? Keep in mind that some team members
succeed in some areas while others succeed in
different areas. Did the individuals perform at a level
that was helpful to the team as a whole?

g) Be honest - You probably are pleased with your team

most of the time. Don’t use this as your guide in
evaluating your team. All employees have room
for improvement including teams. Not every
project is a job well done. This is by far the hardest
part of evaluating your team. If negatives are
identified and must be discussed, start by talking
about a past project that flowed well. Next, discuss
past success and compare it to the current project.
How could things have been improved upon?

Do not’s of Team Evaluation

Following are the not to be followed while evaluating project teams:

➢ Don’t be too lenient. Don’t be the project manager

who says everything is fine when it’s not.
➢ Everyone has room to improve. If you don’t identify
these areas, your team will never improve.
➢ Don’t judge everything on an “average” basis. Some
things worked and some things didn’t. If a team
feels they are average in performance, what are you
really telling them?
➢ Do not judge individuals’ performance based on their personality
➢ If a team member or the team as a whole did one
wrong thing, don’t make this the focus of your
evaluation. Evaluate performance for the entire
project.

Evaluations are not the most popular thing for

project managers. Evaluating team project performance
is a key if team has to succeed or improve on future
projects. Keep in mind that if weak areas are not
24
4
 Notes
identified, your team may just think everything is fine. If
you feel you need help on evaluating your team, talk with
mentors, other project managers and human resources
department.

24
5
Notes
Individual Team Member and Project Manager Evaluation

Team evaluation is crucial, but at some point a

project manager is likely to be asked to evaluate the
performance of individual members. Such an evaluation
will typically be required as part of the closure process
and will then be incorporated in the annual
performance appraisal system of the organization.
These evaluations constitute a major element of an
individual’s personnel file and often form the basis for
making the decisions about promotions, future job
assignments, merit pay increases, and other rewards.

Peer Evaluation

Peer evaluations offer an opportunity for team to

comment on the performance of their peers. For
example, the team may ask its members at a midpoint in
the project to self-evaluate their improving team
effectiveness. The goal is to provide information during
the project that will allow the participants to modify
their behaviour for the success of the project. In the
recent times, 360 degree feedback is gaining
momentum in the organizations. 360 degree feedback is
a multi-rater approach and involves soliciting feedback
relating to the performance of team members from all
the stakeholders of the project. This includes not only
the project and area managers but also peers,
subordinates and customers.

Self Assessment Questions

1) What are the objectives of project network?

2) What are the rules for developing a project network?
3) What are the approaches used to develop project
networks?
4) Explain the fundamentals of AON.
5) What are network analysis techniques?
6) Explain Critical Path Method with an example.
7) Explain PERT with an example.
24
6
 Notes
8) What are the three time estimates used in PERT?
9) What is crashing of project network?
10) Explain the relationship between activity time and cost.

24
7
Notes
11) Explain the relationship between project time and cost.
12) Explain the crashing of project network with an example.
13) What is resource leveling?
14) What is resource allocation?
15) How to avoid cost and time overruns?
16) What is project appraisal?
17) Explain the steps in project appraisal process by
banks and financial institutions.
18) What is loan syndication?
19) What are project controls? Explain the steps in
Project Control Process.
20) What are the key project monitors, controls and reports used?
21) Explain the various project control issues.
22) What are the tools used for communicating project
schedule status?
23) Explain the need for an integrated information
system for project monitoring and control.
24) What are the steps in developing an integrated
cost/schedule system?
25) What are project baselines? What are the costs
included in baselines?
26) Explain the indices used to monitor progress.

CASE STUDY
Refurbishing Heathrow Airport Terminal 1, On Time, Within
Budget, With No Disruptions to Travelling Public

Terminal 1 had been out of date and badly in need of

refurbishment, with the 40-yearold building not seeing
any significant updates since it was built in the 60s.
With serious refurbishment going elsewhere at Heathrow
Airport, as well as the upcoming opening of Terminal 5
and the introduction of international passengers to
Terminal 1, it was in need of a major overhaul. “There
were a number of factors associated

24
8
 Notes
with this project that made success a big challenge.
Managing multiple stakeholders, suppliers, and
contractors within a strict deadline and budget would
ordinarily be difficult, but doing this alongside keeping the
terminal continuously open for passengers was a huge
issue that required strict planning and coordination. “Risk
had to be tightly managed and identified early on to ensure
that a solution could be found before it turned into a major
issue that would take the project off-time and off-budget.
David Buisson, PMP, Project Manager ensured that
communications management was strictly adhered to and
regular meetings are conducted. This large-scale project
had to be delivered whilst remaining completely
operational for customers—challenging enough in any
circumstances, but this was particularly the case for
Terminal 1 at Heathrow Airport given the fact that some
20 million people a year travel through the airport.
£6.3million worth of additional work was added without an
increase to the original project budget.

The use of PMI software played a vital role in

communications management for the project, allowing
the entire project team to have visibility of all activity
on the project almost in real time, minimising time
wasting or duplication of work. This was a part of the
commitment to good communications between the team
and allowed for easier access to the project plans.
Weekly coordination meetings were held to ensure that
any problems or issues were picked up immediately and
dealt with. Each meeting would examine a five week
look ahead at the work schedule anticipating any future
issues before they might happen. Project manager
David Buisson would examine the top five risks every
week with various contractors, visiting them onsite to
determine a solution to the problem. “This project was a
huge success despite considerable odds against it. It
was completed on-time, within budget with no major
problems and whilst remaining open to the public. The
success of this project is due to excellent management.
Analyse how the project was completed without time
and cost overruns.

24
9
Notes

****

25
0
 Notes

UNIT – 5

Project Management

One of the prerequisite to become an effective

project manager is building cooperative relationship
among different groups of people to successfully complete
the project. The success of any project depends not only
on the performance of project teams but also on the
contributions on top management, functional managers,
customers, suppliers, contractors and others. In this
chapter, let us understand the difference between man-
aging and leading a project, how to manage the various
project stakehold- ers, the importance of social network
building, qualities of an effective project manager, stages
in team development model, situational factors affecting
team development and project team pitfalls.

Unit Structure

Lesson 5.1 - Project Managing Versus Leading of Project

Lesson 5.2 - Qualities of Project Manager and
Managing Project Teams
Lesson 5.3 - Team Building Models and Performance
Teams and Team Pitfalls

25
1
Notes

Lesson 5.1 - Project Managing Versus Leading of Projects

Learning Objectives

➢ To appreciate the difference between managing and

leading a project.
➢ To understand the various stakeholders to project,
both internal and external,
➢ To learn how to manage the project stakeholders.
➢ To learn the ways to build social network to succeed in
projects.

Managing Vs. Leading of a Project

In a perfect world, the project manager would simply

implement the project plan and the project would be
completed. The project manager would work with others
to formulate a schedule, organize a project team, keep
track of progress and announce what needs to be done
next week and then everyone would follow. But in reality,
no one lives in a perfect world and not all things are going
as per the plans. The following may likely to happen in
reality:

a) Project Participants Get Impatient

b) Project Team Members Fail To Complement Each Other
c) Service Departments Are Unable To Fulfill Their
Commitments
d) Technical Problems Arise
e) Work Completion Take Longer Time Than
Expected f) Cost May Overrun.

21
6
Differences between a Leader and Manager

Let us now take a look at the difference between a

manager and leader which is presented in the following
table.

Differences between a manager and leader

Differences in ➢ Managers ➢ Leaders

➢ Emphasize rationality ➢ Are perceived as

and control; brilliant, but sometimes
➢ Problem-solvers lonely;
(focusing on goals, ➢ Achieve control of
Personality resources, organization themselves before they
style structures, or people); try to control others;
➢ Persistent, tough- ➢ Can visualize a purpose
minded, hard working, and generate value in
intelligent, analytical, work;
tolerant and ➢ Imaginative, passionate,
➢ Have goodwill toward non- conforming risk-
others takers.

➢ Adopt impersonal, ➢ Tend to be active since

almost passive, attitudes they envision and
towards goals; promote their ideas
➢ Decide upon goals instead of reacting to
based on necessity current situations;
Attitude
instead of desire and ➢ Shape ideas instead of
towards
are therefore deeply responding to them
goals
tied to their ➢ Have a personal
organization’s culture; orientation towards
➢ Tend to be reactive goals;
since they focus on ➢ Provide a vision that
current information alters the way people
think about what is
desirable, possible and
necessary

21
7
 ➢ View work as an ➢ Develop new
enabling process; approaches to long-
➢ Establish strategies and standing problems and
makes decisions by open issues to new
combining people and options;
ideas; ➢ First, use their vision to
➢ Continually coordinate excite people and only
and balance opposing then develop choices
Conception
views; which give those im-
of work
ages substance;
➢ Are good at reaching
compro- mises and ➢ Focus people on shared
mediating conflicts ideals and raise their
between opposing expectations;
values and perspectives; ➢ Work from high-risk
➢ Act to limit choice; positions because of
strong dislike of
➢ Tolerate practical, mundane work.
mundane work because
of strong surviv- al
instinct which makes
them risk-averse.
➢ Prefer working with ➢ Maintain inner
others; perceptiveness that
➢ Report that solitary they can use in their
activity makes them rela- tionships with
anxious; are col- others;
laborative; ➢ Relate to people in
➢ Maintain a low level of intuitive, empathetic
emo- tional involvement way;
in relation- ships; ➢ Focus on what events
Relations ➢ Attempt to reconcile and deci- sions mean to
with others differ- ences, seek participants;
compromises, and ➢ Attract strong feelings of
establish a balance of iden- tity and difference
power; or of love and hate;
➢ Relate to people ➢ Create systems where
according to the role human relations may be
they play in a sequence turbulent, in- tense,
of events or in a and at times even disor-

21
8
 decision- making ganized.
process;
➢ Focus on how things
get done; maintain
controlled, rational,
and equitable
structures;
➢ May be viewed by others
as in- scrutable,
detached, and ma-
nipulative.

21
9
 ➢ Report that their ➢ Reportedly have not had
adjustments to life have an easy time of it;
been straightfor- ward ➢ Lives are marked by a
and that their lives have continual struggle to
been more or less find some sense of
peaceful since birth; order;
➢ Have a sense of self as ➢ Do not take things for
a guide to conduct and granted and are not
attitude which is satisfied with the
derived from a feeling status quo;
of being at home and in
➢ Report that their “sense
harmony with their
Influence of self ” is derived from
environment;
of past a feeling of profound
➢ See themselves as separateness;
experience
conservators and
on self ➢ May work in
regulators of an existing
identify organizations, but they
order of affairs with
never belong to them;
which they personally
identify and from which ➢ Report that their sense
they gain rewards; of self is independent of
work roles,
➢ Report that their role
memberships, or other
harmo- nizes with their
social indicators of
ideals of re- sponsibility
social identity;
and duty;
➢ Seek opportunities for
➢ Perpetuate and
change (i.e.
strengthen ex- isting
technological, political,
institutions; display a
or ideological);
life development process
which fo- cuses on ➢ Support change; find
socialization. their purpose is to
profoundly alter human,
economic, and political
relationships;
➢ Display a life
development process
which focuses on
personal mastery.
Source: http://www.au.af.mil/au/awc/awcgate/sba/leadvmanage.htm

Role of Project Manager

22
0
 Thus, the project manager’s job is to set the project
back on the right track. A manager accelerates certain
activities, finds out ways to solve technical problems, acts
as peacemaker when pressures arise and makes
appropriate trade-offs among time, cost and scope of the
project. However, in reality, project managers do a lot of
things to keep the proj-

22
1
Notes
ect on track. They also innovate and adapt to ever
changing situations. They often come across deviations
from plans and introduce considerable changes in the
scope of the project and counter the unexpected threats
or opportunities.

For example, the scope of the project may have to

be modified dur- ing the course of implementation,
taking into consideration the change in the customer’s
needs. Competitors may release new products that dic-
tate switching the time, cost, and scope priorities of the
project. Work- ing relationships among project
participants may break down, requiring rejuvenating
the project tem. Ultimately, there may be a wide
difference between what was planned in the beginning
and what was achieved at the end of the project.

The project managers are responsible for the following:

a) Integrating the resources assigned for the project.

b) Initiate changes in plans and schedules in tune
with internal con- straints and external
unexpected problems.
c) Keeps the project going while making necessary
adjustments along the way. According to Kotter,
these two different activities repre- sent the
distinction between management and leadership.

Managing Vs. Leading a Project

Thus, management is about coping with complexity,

while leader- ship is about coping with change. Good
management brings about order and stability by
formulating plans and objectives, designing structures
and procedures, monitoring result against plans and
taking corrective at- tention when necessary. Leadership
involves recognizing and articulating the need to
significantly alter the directions and operations of the
proj- ect, aligning the people to new directions and
motivating them to work together to overcome hurdles
produced by the change and realize new objectives.
22
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Strong leadership is only desirable and is not always
necessary to successfully complete a project.

Well-defined projects that encounter no significant

surprises re- quire little leadership,. Example:
Constructing a conventional apartments building in
which the project manager simply administrates the
project

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1
Notes
plan. In contract, more leadership is required when the
degree of uncer- tainty encountered on projects is higher
in terms of changes in project scope, technological
problems, breakdown of relationship and coordina- tion
between people, etc. For example, strong leadership is
required for a software development project where the
parameters are always changing to meet the
developments in the industry.

It is a rare mix to see a person who can perform both

the role of leader and manager well. Some people may be
great visionaries and inspire others but fail in the day to
day management. On the other side, there are some other
people, who may not inspire others but are well-organized
and methodical and very successful in execution. Thus,
people with good leadership qualities need the help of
good managers who can oversee and manage the projects
successfully. Otherwise, people with poor leadership
qualities have to count the help of managers who are good
in leading and help the leader in understanding the need
to change and coordinating the project stakeholders.
Still, one of the things that make good project managers
so valuable to an organization is that they have the ability
to both manage and lead a project. In this process, they
recognize the need to manage project interfaces and build
a social network that allows them to complete the project
successful by ensure cooperation.

Managing Project Stakeholders

Project stakeholders are those entities within or

outside an organization which:

1. Sponsor a project, or
2. Have an interest or a gain upon a successful completion of a project;
3. May have a positive or negative influence in the project completion.

Normally, project managers are eager to implement

their own ideas and manage their people successfully to
complete their project. By experience, they understand
that project success depends on cooperation of a wide

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 Notes
range of individuals, many of whom do not report to
them. For example, during the course of a system
integration project, a project manager was surprised by
how much time she was spending negotiating and working
with vendors, consultants, technical specialists and other
functional managers.

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3
Notes
When new project managers do find time to work
directly on the project, they adopt a hands-on approach to
managing the project. They choose this style not because
they are power hungry people but eager to achieve the
results. They quickly become frustrated by the slow
process and non-cooperation of various groups.
Unfortunately, as this frustration builds, the natural
temptation is to exert more pressure and get more heavily
involved in the project. These project managers quickly
earn the reputation of ‘micro managing’ and begin to lose
sight of the real goal they play in guiding a project.

Working with a number of different groups of

stakeholders is a prerequisite for any significant project.
First, there is a core group of specialists assign to
complete the project. This group is likely to be
supplemented at different times by professionals who work
on specific segments of the project. Second, there are the
groups of the people within the performing organizations
who are either directly or indirectly involved with the
project. The most notable is top management, to whom the
project manager is accountable. There are also other
project managers, functional managers who provide
resource and or may be responsible for specific segments
of the project and administrative support service success
human resources, finance etc.

Project Stakeholders

Depending on the nature of the project, there are a

number of different groups outside the organization that
influence the success of the project. Examples of project
stakeholders include the customer, the user group, the
project manager, the development team, the testers,
etc. Stakeholder is anyone who has an interest in the
project. Project stakeholders are individuals and
organizations that are actively involved in the project, or
whose interests may be affected as a result of project
execution or project completion.

They may also exert influence over the project’s

objectives and outcomes. The project management team
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4
 Notes
must identify the stakeholders, determine their
requirements and expectations, and, to the extent
possible, manage their influence in relation to the
requirements to ensure a successful project. Each of the
group of stakeholders brings different expertise,
standards, priorities, and agendas to the project. The
sheer

22
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Notes
breadth and complexity of the relationships that need to be
managed distinguishes project management from regular
management. The project stakeholders include the
following:

a) Project Managers: They compete with each other for

the available scarce resources and the support of top
management. They also have to share resources and
exchange information.

b) Project Team: The project team manages and

completes project work. Most participants want to
do a good job, but they are also concerned with
their other obligations and how their involvement
on the project will contribute to their personal
goals and aspirations.

c) Administrative Support Group: Administrative support

groups, such as human resources, information
systems, purchasing agents, and maintenance,
provide valuable support services. At the same time
they impose constrains and requirements on the
project such as the documentation of expenditures
and the timely and accurate delivery of information.

d) Functional Managers: Functional managers,

depending on how the project is organized, can
play a minor or major role toward project success.
In matrix arrangement, they may be responsible
for assigning project personnel, resolving
technical dilemmas, and overseeing the
completion of significant segments of project
work. Even in dedicated project teams, the
technical input from function- al managers may be
useful, and acceptance and completed project
work may be critical to in-house project.
Functional managers want to co-operate up to a
point, but only up to a certain point. They are also
concerned with preserving their status within the
organization and minimizing the disruptions the
project may have on their own operations.

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 Notes
e) Top Management: Top management approves funding
of the proj- ect and establishes priorities within the
organization. They define success and adjudicate
rewards for accomplishments. Significant
adjustments in budget, scope, and schedule typically
need their ap- proval. They have a natural vested
interest in the success of the project, but at the same
time want to be responsive to what is best to the
entire organism.

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7
Notes
f) Project sponsors: Project sponsors champion the project
and use their influence to get approval of the project.
Their reputation is tied to the success of the project,
and they need to be kept informed of any major
developments. They defend the project when it
comes under attack and are a key project partner.

g) Sub-contractors: Subcontractors may do all the actual

work, in some cases, the project team merely
coordinating their contribu- tions. In other cases,
they are responsible for ancillary segments of the
project scope. Poor work and schedule slips can
affect work of the core project team. While
contractors’ reputations rest with doing good work,
they must balance their contributions with their own
profit margins and their commitments to other
clients.

h) Government Agencies: Government agencies place

constraints on project work. Permits need to be
secured. Construction work has to be built to code.
Products have to meet safety standards, for ex-
ample, Occupational Safety and Health
Administration standards.

i) Other Organizations: Other organizations, depending on

the na- ture of the project may directly or indirectly
affect the project. For example, suppliers provide
necessary resources for completion of the project
work. Delays, shortages, and poor quality can bring a
project to a standstill. Public interest groups may
apply pressure on government agencies. Customers
often hire consultants and audi- tors to protect their
interests on the project.

j) Customers: Customers define the scope of the project,

and ulti- mate project success rests in their
satisfaction. Project managers need to be responsive
to changing customer need and requirements and to
meeting their expectations. Customers are primarily
con- cerned with getting good deal and this naturally
breed tension with the project team.

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 Notes

Managing Project Stakeholders: 6 Steps to Success

To successfully manage project shareholders,

following 6 steps (called as INFORM model – source:
http://pmtips.net/managing- stakeholders-6-steps-success)
are followed:

22
9
Notes
a) Identify: Who are the stakeholders on your project? A
stakeholder is anyone who has a vested interest in
the project – someone who wants it to succeed but
equally someone who doesn’t. You cannot start
managing stakeholders until you know who they are.
Who are the main groups or departments affected by
your project? Stakeholders can also be external to
your organization like the government and third
party providers as well. The identification exercise
should not be done in a vacuum: you will not be able
to complete the list yourself, so get your project team
involved too.

b) Nominate: In each groups you have identified, pick

someone to be the key individual. Choose carefully!
You may find that key people nominate themselves,
which makes your role easier: it is better to work
with people who want to be involved than those who
you have to be dragged into the project compulsorily.
Your key, nominated stakeholders should ideally be
people who are directly affected, with enough
authority to make decisions about things that touch
their departments. They are the person who you will
use to channel communication back to their group.

c) Feel: Begin to analyze the attitudes of the people who

have been identified as your key stakeholders: those
named individuals who represent each stakeholder
group. Contact them and explain about the project.
Get them onboard and coming to project meetings if
necessary. All this will help you understand how they
feel about the work you are doing. Do they support
the project? Or would they rather it was stopped
now? Are they ambivalent? This group can often be
the hardest to manage effectively. Your initial
stakeholder analysis is now complete.

d) Observe: Having established where your key

stakeholders sit in relation to the project you can
start to influence their attitudes. The aim is to
watch people over time, and help them move towards
a positive way of thinking: a way that will help you

23
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 Notes
achieve your aims. Keep a close eye on people as
their opinions will swing between positive and
negative over the life of a project. A one-off analysis
exercise is never enough: you have to continually
monitor how people are reacting and manage
accordingly.

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Notes
e) Review: People and job roles change. So do projects.
The person who put themselves forward to represent
the marketing team six months ago may not be the
right person today. If you notice that their influence
is slipping away, or they are less inclined to come to
meetings or respond to emails, then ask them if
they still want to be involved. If they say no, they
could suggest someone else who would be a relevant
addition to the team. Make sure you brief any new
stakeholder representative on their roles and
responsibili- ties, decisions in the pipeline and what
decisions you will expect of them in future.

f) Manage: The last step is to monitor and manage your

stakeholders and their expectations as the project
progresses – not just at the outset and when you
need something from them. Put a note in your diary
to give your key stakeholder representatives a quick
call every now and then just to keep them up to date.
This will help promote the project and also ensure
the stakeholder concerned is mindful of the work
being done. It can also help build your reputation as
an excellent project manager! At the end of the
project, thank them and manage them out of the
team. You want a good relationship with them that
could last over many projects but you don’t want to
be their personal helpline six months after the
project has finished, so make sure they know who
now has operational responsibility now the project
has closed.

Social Network Building

In building the social network, there are four steps,

viz., mapping dependencies, managing by wandering
around, managing upward rela- tions and leading by
example.

a) Mapping Dependencies

First step to building a social network is to identify

those on whom the project depends on success. The project

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2
 Notes
manager and his or her key assistants need to ask the
following questions,

➢ Whose cooperation is needed?

➢ Whose agreement or approval is needed?
➢ Whose opposition would keep us from accomplishing the
project?

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3
Notes
It is always better to overestimate rather than under
estimate de- pendencies on too often, otherwise talented
and successful project man- agers have been de-railed
because they were blindsided by some who’s position or
power that they had not anticipated. After identifying who
you are dependent on, you are ready to “step into their
shoes”, and see their project from their perspectives. To
help you do that asks yourself the fol- lowing questions:

➢ What differences exist between me and the people on

whom I depend? (Goals, Values, Pressures, Risks)
➢ How these different people do knew the project?
(supporters in different antagonists)
➢ What is the current status of the people I depend on?
➢ What sources of influence do I have relative to whose
on whom I depend?

Once, you begin this analysis, you can begin to

appreciate what others value and what currencies you
are able to offer on the basis on which to build a
mutually satisfying relationship. Likewise, you begin to
realize where potential problems lie, relationships in
which you have a current debit or n 0 convertible
currency, furthermore, diagnosing others point of view
as well as the basis for their positions will help you
anticipate the reactions and feelings about your
decisions and actions. This informa- tion is vital for
selecting the appropriate influence strategy and tactics
and conducting win-win negotiations.

b) Management by Wandering Around

Once you have established who the keep players are

that will deter- mine success. Then you initiate contact and
begin to build a relationship with those players. Building
this relationship requires a management style referred as
management by wandering around (MBWA) to reflect that
managers spend the majority of the time outside their
offices. MBWA is somewhat of a misnomer in that there is a
purpose or pattern behind the wandering. Through face to
face interactions, project managers are able to stay in touch
23
4
 Notes
with what is really going on in the project and build
coopera- tive relationship essential to project success.

23
5
Notes
Effective project managers initiate contact with key
payers to keep abreast of developments, anticipate
potential problems, provide encour- agement and re-enforce
the objectives and vision of the project. They are able to
intervene to resolve conflicts and prevent stalemates from
occur- ring. In essence, they “manage” the project. By
staying in touch with the various aspects of the project,
they become the focal point for information on the project.
Participants turn to them, to obtain the most current and
comprehensive information about the project, which re-
enforces as cen- tral role as project manager.

While a significant amount of their time is devoted to

the project team, effective project managers find the time
to regularly interact with more important stakeholders.
They keep in touch with suppliers, ven- dors, top
management and other functional managers. In doing so,
they maintain familiarity with different parties, sustain
friendship, discover opportunities to do favours and
understand the motives and needs of oth- ers. They remind
people of commitment and champion the cause of their
project. They also shape people’s expectations. Through
frequent com- munication, they reduce people’s concern
about project dispel romours, warn people of potential
problems and lay the ground work for dealing with
setbacks in more effective manner.

Experienced project managers build relationships

before they need them. They initiate contact with the
key stakeholders at times when there are no
outstanding issues or problems and therefore no
anxieties and sus- picions. On the social occasions they
engage in small talk and responsive chitchat. Smart
project managers also seek to make deposit in their
rela- tionships with potentially important stake holders.
They are responsive to others request for aid provide
supportive counsel and exchange informa- tion. In doing
so they are establishing credit in those relationships
which will allow them to deal with more serious
problems down the road. When one person views
another as pleasant, credible and helpful based on past
contact, he or she is more likely to be responsive to
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 Notes
request for help and less confrontational when problem
arise.

c) Managing Upward Relations

Project success is strongly affected by the degree to

which a proj- ect has the support of the top management.
Such support is reflected in

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7
Notes
an appropriate budget, responsiveness to unexpected
needs, and a clear signal to others in the organization
about the importance of cooperation. Visible top
management support is not only critical for securing the
sup- port of other managers within an organization, but it
also is a key factor in the project manager’s ability to
motivate the project team. Nothing es- tablishes a
manager’s right to lead more tan his/her ability to defend.
To win the loyalty of team members, project managers
have to be effective advocates for their projects. They
have to be able to get top management to withdraw
unreasonable demand, provide additional resources and
recognize the accomplishment of team members. Working
relationship with top management is a common source of
concern. While it may seem difficult for a subordinate to
manage a superior, smart project managers devote
considerable time and attention to influencing and
garnering the support of top management. Project
managers have to accept profound differences in
perspective and become skilled at the art of persuading
su- periors.

d) Leading by Example

A highly visible, interactive management style is not

only essential to building and sustaining cooperative
relationships, it also allows proj- ect managers to utilize
their most powerful leadership tool – their own behaviour.
Often, when faced with uncertainty, people look to others
for clues as to how to respond and demonstrate a
propensity to imitate the behaviour of superiors. A project
manager’s behaviour symbolizes how other people should
work on the project. Through her behaviour a project
manager can influence how other \s act and respond to a
variety of issues related to the project. To be effective,
project managers must “walk the talk”. Six aspects of
leading by example include setting the priorities, com-
municating the urgency, help in problem solving, ensuring
cooperation, ensuring standards of performance and
responding to ethical dilemmas properly.

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 Notes

****

23
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Notes

Lesson 5.2 - Qualities of Project Manager and Managing Projects

Learning Objectives

➢ To know the qualities of an effective project manager.

➢ To learn the ground rules of project team.
➢ To understand the steps in managing project teams.

Qualities of Project Manager

The above diagram shows the qualities of a

successful project manager. What qualities are most
important for a project leader to be effective? With the
unique opportunity to ask some of the most talented
project leaders in the world on their Project Leadership
courses, the top 10 qualities of project managers are
arrived based on their rank order according to frequency
listed.

a) Inspires a Shared Vision: An effective project leader is

often described as having a vision of where to go and
the ability to articulate it. Visionaries thrive on
change and being able to draw new boundaries. It
was once said that a leader is someone who “lifts us
up, gives us a reason for being and gives the vision
24
0
 Notes
and spirit to change.” Visionary leaders enable
people to feel they have a real

24
1
Notes
stake in the project. They empower people to
experience the vision on their own. According to
Bennis “They offer people opportunities to create
their own vision, to explore what the vision will
mean to their jobs and lives, and to envision their
future as part of the vision for the organization.”
(Bennis, 1997).

b) Good Communicator: The ability to communicate with

people at all levels is almost always named as the
second most important skill by project managers and
team members. Project leadership calls for clear
communication about goals, responsibility,
performance, expectations and feedback. There is a
great deal of value placed on openness and
directness. The project leader is also the team’s link
to the larger organization. The leader must have
the ability to effectively negotiate and use
persuasion when necessary to ensure the success of
the team and project. Through effective
communication, project leaders support individual
and team achievements by creating explicit
guidelines for accomplishing results and for the
career advancement of team members.

c) Integrity: One of the most important things a project

leader must remember is that his or her actions, and
not words, set the modus operandi for the team.
Good leadership demands commitment to, and
demonstration of, ethical practices. Creating
standards for ethical behaviour for oneself and living
by these standards, as well as rewarding those who
exemplify these practices, are responsibilities of
project leaders. Leadership motivated by self-interest
does not serve the well being of the team. Leadership
based on integrity represents nothing less than a set
of values others share, behaviour consistent with
values and dedication to honesty with self and team
members. In other words the leader “walks the talk”
and in the process earns trust.

d) Enthusiasm: Plain and simple, we don’t like leaders

24
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 Notes
who are negative - they bring us down. We want
leaders with enthusiasm, with a bounce in their step,
with a can-do attitude. We want to believe that we
are part of an invigorating journey - we want to feel
alive. We tend to follow people with a can-do
attitude, not those who give us 200 reasons why
something can’t be done. Enthusiastic leaders are
committed to their goals and express this
commitment through optimism. Leadership emerges
as someone expresses such

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Notes
confident commitment to a project that others want to
share his or her optimistic expectations. Enthusiasm is
contagious and effective leaders know it.

e) Empathy: They are, in fact, mutually exclusive.

According to Norman Paul, in sympathy the subject
is principally absorbed in his or her own feelings as
they are projected into the object and has little
concern for the reality and validity of the object’s
special experience. Empathy, on the other hand,
presupposes the existence of the object as a separate
individual, entitled to his or her own feelings, ideas
and emotional history (Paul, 1970). As one student so
eloquently put it, “It’s nice when a project leader
acknowledges that we all have a life outside of
work.”

f) Competence: Simply put, to enlist in another’s

cause, we must believe that that person knows
what he or she is doing. Leadership competence
does not however necessarily refer to the project
leader’s technical abilities in the core technology
of the business. As project management continues
to be recognized as a field in and of itself, project
leaders will be chosen based on their ability to
successfully lead others rather than on technical
expertise, as in the past. Having a winning track
record is the surest way to be considered
competent. Expertise in leadership skills is
another dimension in competence. The ability to
challenge, inspire, enable, model and encourage
must be demonstrated if leaders are to be seen as
capable and competent.

g) Ability to delegate task: Trust is an essential element in

the relationship of a project leader and his or her
team. You demonstrate your trust in others through
your actions - how much you check and control
their work, how much you delegate and how much
you allow people to participate. Individuals who are
unable to trust other people often fail as leaders and
forever remain little more that micro-managers, or

24
4
 Notes
end up doing all of the work themselves. As one
project management student put it, “A good leader is
a little lazy.” An interesting perspective!

h) Cool Under Pressure: In a perfect world, projects would

be delivered on time, under budget and with no
major problems or obstacles to overcome. But we
don’t live in a perfect world - projects have

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5
Notes
problems. A leader with a hardy attitude will take
these problems in stride. When leaders encounter a
stressful event, they consider it interesting, they feel
they can influence the outcome and they see it as an
opportunity. “Out of the uncertainty and chaos of
change, leaders rise up and articulate a new image of
the future that pulls the project together.” (Bennis
1997) And remember - never let them see you sweat.

i) Team Building Skills: A team builder can best be

defined as a strong person who provides the
substance that holds the team together in common
purpose toward the right objective. In order for a
team to progress from a group of strangers to a
single cohesive unit, the leader must understand
the process and dynamics required for this
transformation. He or she must also know the
appropriate leadership style to use during each
stage of team development. The leader must also
have an understanding of the different team
players styles and how to capitalize on each at the
proper time, for the problem at hand.

j) Problem Solving Skills: Although an effective leader is

said to share problem-solving responsibilities with
the team, we expect our project leaders to have
excellent problem-solving skills them- selves. They
have a “fresh, creative response to solve problems
and not much concern with how others have
performed them. (Kouzes 1987).

The other qualities include the following: a)

effective time management; b) optimist; c) systems
thinker; and d) proactive.

Managing a Project Team

Managing project teams is the art and science of

managing relatively short-term efforts having finite
beginning and ending points. The concept of project
management involves two equally important
components of hardware and software. The hardware

24
6
 Notes
of tools and systems make it a science. However, there
are other things in managing projects than just
applying analytical tools to help monitor, track and
control. In managing a project team, a Project Manager
needs to possess excellent analytical and organizational
skills. A technical proficiency in the specialist area of
their project is also a distinct advantage. Remember,
though, that projects

24
7
Notes
achieve their outcomes through people – a variety of
people working together in a coordinated way to
produce the desired results. How are you encouraging
peak performance from your project team? As with any
manager getting the best out of their people, you will need
to pay attention to your general leadership and
management skills. Some of these skill areas that you will
need to pay attention to are:

➢ Clarifying project team member roles

➢ Setting team and individual goals
➢ Monitoring and measuring team and individual
performance
➢ Feeding back team and individual performance
➢ Resolving conflicts between team members
constructively
➢ Delegating responsibilities and tasks
➢ Motivating using a combination of intrinsic and
extrinsic rewards
➢ Developing the skills of team members
➢ Coaching team members

Effective teams are so much more productive than

groups working on the same task because they are able to
leverage off each others’ strengths and compensate for
each others’ weaknesses. Making sure that you have the
right mix of team members in your project team is
therefore an important consideration. Conducting a team
profiling exercise is also an effective method for getting
each project team member to appreciate their respective
strengths and weaknesses.

Team Ground Rules

If your project team gets stuck in a problem with

lots of unproductive conflict, there are a number of
things you can try. If you haven’t already done so, get
your team together to clarify and agree the “ground
rules” that govern the team’s behavior. Your “ground
rules” should cover these five key areas of team
operation:
24
8
 Notes
➢ Team meetings
➢ Team working
➢ Team communication
➢ Team member relationships
➢ Team decision-making

24
9
Notes
Discussing the ground rules will uncover hitherto
unspoken assumptions. Each team member will come to
see more clearly where other team members are
coming from and what they need from the team to get
their job done. Be sure to post the agreed ground rules
in a visible place where the teams meet regularly. The
bigger problems for project managers are those
associated with the human element: conflict resolution,
team building, coaching, mentoring and negotiation.
This workshop is intended to provide team leaders with
fundamental skills necessary to copy with this element
of the art of managing project teams.

Blended Learning – Maximum Benefits with Minimum Time

The goal of blended learning is to provide the most

efficient and effective instruction experience by combining
delivery modalities. Blended learning offers a range of
learning tools and experiences, which in total focuses on
the best learning style for all learners. With a
combination of online e-learning and classroom training,
learners will enjoy an all rounded learning experience.

Learning Outcomes

➢ Communicate information to team members in

accordance with organizational and project
requirements.
➢ Implement training and development for project
team to meet project specifications.
➢ Monitor and evaluate team performance in
accordance with performance measures.
➢ Monitor and manage team dynamic to ensure smooth
executing of project.

Steps in Managing the Team

a) Define the Scope: The first, and most important, step in

any project is defining the scope of the project. What
is it you are supposed to accomplish by managing
this project? What is the project objective? Equally
25
0
 Notes
important is defining what is not included in the
scope of your project. If you don’t get enough
definition from your boss, clarify the scope yourself
and send it back upstairs for confirmation.

25
1
Notes
b) Determine Available Resources: What people,
equipment, and money will you have available to
you to achieve the project objectives? As a project
manager, you usually will not have direct control
of these resources, but will have to manage them
through matrix management. Find out how easy or
difficult that will be to do.

c) Check the Timeline: When does the project have to be

completed? As you develop your project plan you
may have some flexibility in how you use time
during the project, but deadlines usually are fixed. If
you decide to use overtime hours to meet the
schedule, you must weigh that against the limitations
of your budget.

d) Assemble Your Project Team: Get the people on your

team together and start a dialogue. They are the
technical experts. That’s why their functional
supervisor assigned them to the project. Your job is
to manage the team.

e) List the Big Steps: What are the major pieces of the
project? If you don’t know, start by asking your team.
It is a good idea to list the steps in chronological
order but don’t obsess about it; you can always
change the order later.

f) List the Smaller Steps: List the smaller steps in each of

the larger steps. Again, it usually helps you
remember all the steps if you list them in
chronological order. How many levels deep you go of
more and more detailed steps depends on the size
and complexity of your project.

g) Develop a Preliminary Plan: Assemble all your steps into

a plan. What happens first? What is the next step?
Which steps can go on at the same time with
different resources? Who is going to do each step?
How long will it take? There are many excellent
software packages available that can automate a lot
of this detail for you. Ask others in similar positions
what they use.

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h) Create Your Baseline Plan: Get feedback on your
preliminary plan from your team and from any other
stakeholders. Adjust your timelines and work
schedules to fit the project into the available time.
Make any necessary adjustments to the preliminary
plan to produce a baseline plan.

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i) Request Project Adjustment: There is almost never
enough time, money or talent assigned to a project.
Your job is to do more with the limited resources
than people expect. However, there are often limits
placed on a project that are simply unrealistic. You
need to make your case and present it to your boss
and request these unrealistic limits be changed. Ask
for the changes at the beginning of the project. Don’t
wait until it’s in trouble to ask for the changes you
need.

j) Work Your Plan, But Don’t Die For It: Making the plan
is important, but the plan can be changed. You
have a plan for driving to work every morning. If
one intersection is blocked by an accident, you
change your plan and go a different way. Do the
same with your project plans. Change them as
needed, but always keep the scope and resources
in mind.

k) Monitor Your Team’s Progress: You will make little

progress at the beginning of the project, but start
then to monitor what everyone is doing anyway. That
will make it easier to catch issues before they
become problems.

l) Document Everything: Keep records. Every time you

change from your baseline plan, write down what the
change was and why it was necessary. Every time a
new requirement is added to the project write down
where the requirement came from and how the
timeline or budget was adjusted because of it. You
can’t remember everything, so write them down so
you’ll be able to look them up at the end-of-project
review and learn from them.

m) Keep Everyone Informed: Keep all the project

stakeholders informed of progress all along. Let
them know of your success as you complete each
milestone, but also inform them of problems as soon
as they come up. Also keep you team informed. If
changes are being considered, tell the team about
them as far ahead as you can. Make sure everyone on

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the team is aware of what everyone else is doing.

****

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Notes

Lesson 5.3 - Team Building Models, Performance

Teams and Team Pitfalls

Learning Objectives

➢ To understand the stages in Team Development

model.
➢ To understand the situational factors affecting team
development.
➢ To learn how to develop high performance teams.
➢ To identify area of team pitfalls

Five Stages of Group Development

The following figure shows the five stages team development

model.

Stage 1: Forming

In the Forming stage, personal relations are

characterized by dependence. Group members rely on
safe, patterned behavior and look to the group leader for
guidance and direction. Group members have a desire for
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6
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acceptance by the group and a need to be known that the
group is

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Notes
safe. They set about gathering impressions and data
about the similarities and differences among them and
forming preferences for future sub grouping. Rules of
behavior seem to be to keep things simple and to avoid
controversy. Serious topics and feelings are avoided.
The major task functions also concern orientation.
Members attempt to become oriented to the tasks as
well as to one another. Discussion centers around
defining the scope of the task, how to approach it, and
similar concerns. To grow from this stage to the next,
each member must relinquish the comfort of non-
threatening topics and risk the possibility of conflict.

Stage 2: Storming

The next stage, called Storming, is characterized by

competition and conflict in the personal relations
dimension an organization in the task-functions dimension.
As the group members attempt to organize for the task,
conflict inevitably results in their personal relations.
Individuals have to bend and mold their feelings, ideas,
attitudes, and beliefs to suit the group organization.
Because of “fear of exposure” or “fear of failure,” there
will be an increased desire for structural clarification and
commitment. Although conflicts may or may not surface as
group issues, they do exist. Questions will arise about who
is going to be responsible for what, what the rules are,
what the reward system is, and what criteria for
evaluation are. These reflect conflicts over leadership,
structure, power, and authority. There may be wide
swings in members’ behavior based on emerging issues of
competition and hostilities. Because of the discomfort
generated during this stage, some members may remain
completely silent while others attempt to dominate. In
order to progress to the next stage, group members must
move from a “testing and proving” mentality to a problem-
solving mentality. The most important trait in helping
groups to move on to the next stage seems to be the ability
to listen.

Stage 3: Norming

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In the Norming stage, interpersonal relations are

characterized by cohesion. Group members are engaged in
active acknowledgment of all members’ contributions,
community building and maintenance, and solving of
group issues. Members are willing to change their
preconceived ideas or opinions on the basis of facts
presented by other members, and they actively ask
questions of one another. Leadership is shared, and

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Notes
cliques dissolve. When members begin to know-and
identify with-one another, the level of trust in their
personal relations contributes to the development of group
cohesion. It is during this stage of development (assuming
the group gets this far) that people begin to experience
a sense of group belonging and a feeling of relief as a
result of resolving interpersonal conflicts. The major task
function of stage three is the data flow between group
members: They share feelings and ideas, solicit and give
feedback to one another, and explore actions related to
the task. Creativity is high. If this stage of data flow and
cohesion is attained by the group members, their
interactions are characterized by openness and sharing of
information on both a personal and task level. They feel
good about being part of an effective group. The major
drawback of the norming stage is that members may begin
to fear the inevitable future breakup of the group; they
may resist change of any sort.
Stage 4: Performing

The Performing stage is not reached by all groups. If

group members are able to evolve to stage four, their
capacity, range, and depth of personal relations expand to
true interdependence. In this stage, people can work
independently, in subgroups, or as a total unit with equal
facility. Their roles and authorities dynamically adjust to
the changing needs of the group and individuals. Stage
four is marked by interdependence in personal relations
and problem solving in the realm of task functions. By
now, the group should be most productive. Individual
members have become self-assuring, and the need for
group approval is past. Members are both highly task
oriented and highly people oriented. There is unity: group
identity is complete, group morale is high, and group
loyalty is intense. The task function becomes genuine
problem solving, leading toward optimal solutions and
optimum group development. There is support for
experimentation in solving problems and an emphasis on
achievement. The overall goal is productivity through
problem solving and work.

Stage 5: Adjourning
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The final stage, adjourning involves the

termination of task behaviors and disengagement from
relationships. A planned conclusion usually includes
recognition for participation and achievement and an
opportunity for members to say personal goodbyes.
Concluding a group

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can create some apprehension - in effect, a minor crisis.
The termination of the group is a regressive movement
from giving up control to giving up inclusion in the group.
The most effective interventions in this stage are those
that facilitate task termination and the disengagement
process.

Situational Factor Affecting Team Development

Experience and research indicate that high-

performing project teams are much more likely to develop
under the following conditions:

➢ There are 10 or fewer members per team

➢ Members volunteer to serve on the project team
➢ Members serve on the project from beginning to end.
➢ Members are assigned to the project full-time.
➢ Members are part of an organizational culture that
fosters cooperation and trust all relevant
functional areas are represented on the team
➢ The project involves a compelling objective
➢ Members are located within conversational distance of each other

In reality, is rare that a project manager is assigned

a project that meets all of these conditions. It is important
for project managers and team members to recognize the
situational constraints; they are operat- ing under and do
the best they can. It would be naive to believe that every
project theme has the same potential to evolve into a high
performing team. Under less than ideal conditions it may
be a struggle just to meet project objectives. Ingenuity,
discipline and sensitivity to team dynamics are essential to
maximize the performance of the project team.

Team Focus

All the team members need to understand the

direction you’re headed and work toward that end. It is
paramount that the team members know and
understand the objectives of the project. After all, that
is the reason they have been brought together in the
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first place. Keep in mind that people see and hear
things from their own perspective. It is the job of
project manager to make certain the team members
understand the objec- tives and their assignments
correctly.

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Notes
Effective Team Characteristics

Effective teams are typically very energetic teams.

Their enthusi- asm is contagious, and it feeds on itself. They
generate a lot of creativity and become good problem
solvers. Teams like this are every project man- ager’s
dream. Investing yourself in team building as well as
relationship building, especially when you don’t think you
have the time to do so, will bring many benefits.

Factors in Leadership

One of the markers of an effective leader is the

ability to size up a situation and make decisions based on
what is the best thing to do. A leader who is able to adjust
his response to fit the situation is ahead of one who cannot
shift between leadership styles. Factors in situational deci-
sions include the motivation and level of competency of
the followers. There are four developmental levels of
followers who have significant im- pact on the final
outcomes of the situation. The four levels are: the enthu-
siastic beginner, the disillusioned learner, the reluctant
contributor and the peak performer.

a) Enthusiastic Beginner

An enthusiastic beginner has a high level of

enthusiasm and commitment and a low level of experience
and competence. Leaders who are faced with followers such
as this need to be direct and autocratic in their leadership
style as the followers are eager and want to please, but
often do not know how. The autocratic leadership style
provides goals, strategies and deadlines for followers to
meet.

b) Disillusioned Learner

Someone who is a disillusioned learner exhibits both

low competence and enthusiasm or commitment.
Individual or groups of disillusioned followers are difficult
to motivate as they believe there is no way to change

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the situation; that it is hopeless. A leader who has
disillusioned followers may be most successful adopting an
autocratic leadership style that provides leadership
expectations that could override low motivation and
competence.

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Notes
c) Reluctant Contributor

A reluctant contributor is someone who has a high

level of com- petency with low commitment. In this
situation, utilizing a participative style of leadership may
provide the motivation to participate. The partici- pative
leadership style brings everyone’s opinion and ideas into
the deci- sion-making process. Many competent individuals
have low motivation because they feel under-utilized and
under-appreciated. The participative style of leadership
often makes them feel valued and ready to contribute.

d) Peak Performer

Someone functioning at the peak performance level

has high motivation and high competence. Using an
autocratic leadership style with this individual is ill-
advised and generally only causes resentment and low
morale. A laissez faire leadership style is sometimes
successful, as this individual has the capability to take the
lead and manage the situation herself. The participative
leadership style works quite effectively with the peak
performer and actually results in a situation being
resolved quickly and effectively.

Building High-Performance Project Teams

The project managers play a key role in developing

high-perfor- mance project teams. They recruit members,
conduct meetings, estab- lish team identity, create a
common sense of purpose or a shared vision, manage a
reward system that encourage teamwork, orchestrate
decision making, resolve conflicts that emerge within the
team, and rejuvenate the tem when energy diminishes.
The project managers take advantage of situational
factors that naturally contribute to team development
while improvising around those factors that inhibit team
development. By this process, they exhibit a highly
interactive management style that exempli- fies teamwork
and manage the interface between the team and the rest
of the organization.

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 Notes

a) Recruiting Project Members

The process of selecting and recruiting project

members vary across organizations. Two important
factors which affect recruitment are

26
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Notes
the importance of the project and the management
structure being used to complete the project. For high
priority projects which are critical to the future of the
organizations, the project manager will be given complete
freedom to choose whomever he or she deems necessary.
For less significant projects, the project manager will have
to persuade personnel from other areas within the
organization to join the team. When selecting team
members, project managers look for individuals with the
necessary experience and knowledge/technical skills
critical for project completion. At the same time they are
less obvious considerations that need to be factored into
the recruitment process such as a) problem solving ability,
availability, technological expertise, credibility, political
connections, ambition, initiative and energy.

b) Conducting Project Meetings

The first project kick-off meeting is critical to the

early functioning of the project team. The first team
meeting sets the tone for how the team will work together.
If it is crisply run, focusing on real issues and concerns in
an honest and straightforward manner, members become
excited about being part of the project team. There are
three objectives project managers try to achieve during the
first meeting of the project team:

a) Providing an overview of the project, including the

scope and objectives, the general schedule, method,
and procedures;

b) Address some of the interpersonal concerns

captured in the team development model; and

c) Model how the team is going to work together to

complete the project. The project manager must
recognize that first impressions are most important
and his/her behavior will be carefully monitored and
interpreted by team members. This meeting should
serve as an exemplary role model for subsequent
meetings and reflect the leader’s style.

c) Establishing Ground Rules

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The establishment of operational ground rules for

how the tea will work together is the important duty of
project manager and this can be done as part of an
elaborate first meeting or during follow-up meetings.

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Notes
These ground rules involve not only organizational and
procedural issues but also normative issues on how the
team will interact with each other. Though specific
procedures will vary across organizations and projects,
some of the major issues that need to be addressed
include:

a) Planning decisions
b) Tracking decisions
c) Managing change decisions; and
d) Relationship decisions

During the course of establishing these operational

procedures, the project manager, through word and deed,
should begin working with members to establish the
norms for team interaction. One of the ways making the
norms more tangible is by creating a project team charter
that goes beyond the scope statement of the project and
states in explicit teams the norms and values of the team.
This charter should be a collaborative effort on the part of
the team. Project managers can lead by proposing certain
tenets, but they need to be open to suggestions from the
team. Once there is general agreement to the rules of
conduct, each member signs the final document to
symbolize commitment to the principles it contains. Very
important thing is that this should not become ritual and
the charter has to be a legitimate part of the project
monitoring system. Just as the team reviews the progress
toward project objectives, the team assesses the extent to
which members are adhering to the principles in the
charter.

d) Managing Subsequent Project Meetings

The project kick-off meeting is one of the several

kinds of meetings required to complete a project. Other
meetings include status report meetings, problem-solving
meetings, audit meetings. Meetings are often considered a
disturbance to productivity, but this does not have to be
the case. The most common complaint is that meetings
last too long. By establishing proper guidelines to
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 Notes
conduct various projects related meetings and careful and
consistent application of these guidelines can make the
meetings a vital part of projects. This will also help in real
time communication process.

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Notes
e) Establishing a Team Identity

One of the challenges project managers often face in

building a team is the lack of full-time involvement of team
members. Specialists work on different phases of the
project and spend the majority of their time and energy
elsewhere. They are often members of multiple teams,
each competing for their time and commitment. Project
managers need to try to make the project team as
tangible as possible to the participants by developing a
unique team identity to which participants can become
emotionally attached. Team identity can be established by

a) Effective use of meeting;

b) Co-location of team members
c) Creation of project team name; and
d) Having team rituals.

f) Creating a Shared Vision

Once the project manager accepts the importance

of building a shared vision, the next question is how to
get a vision for a particular project. First, project
managers do not get visions. They act as catalysts and
midwives for the formation of a shared vision of a
project team. In many cases, visions are inherent in the
scope and objectives of the project. People get naturally
excited about being the first ones to bring a new
technology to the market or solving a problem that is
threatening their organization.

g) Managing Project Reward System

Project managers are responsible for managing the

reward system that encourages team performance and
extra effort. One advantage they have is that often
project work is inherently satisfying, whether it is
manifested in an inspiring vision or simple sense of
accomplishment. Projects provide participants with a
change in scenery, a chance to learn new skills, and an
opportunity to break out of their departmental cocoon.
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While project managers tend to focus on group

rewards, there are times when they need to reward
individual performance. Rewards used

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Notes
to motivate and recognize individual contributions
include letters of commendation, public recognition for
outstanding work, job assignments and flexibility.

h) Orchestrating the Decision-Making Process

Most decisions on a project do not require a formal

meeting to discuss alternatives and determine solutions.
Instead decisions are made in real time as part of the
daily interaction patterns between project managers,
stakeholders, and team members. Group decision making
should be used when it will improve the quality of
important decisions. This is often the case with complex
problems that require the input of a variety of different
specialists. Group decision making should also be used
when strong commitment to the decision is needed and
there is low probability of acceptance if only one person
makes the decision. Participation is used to reduce
resistance and secure support for the decision.

i) Managing conflict within the Project

Disagreements and conflicts naturally emerge within

a project team during the life of the project. Participants
will disagree over priorities, allocation of resources, the
quality of specific work, solutions to discovered problems,
and so forth. Some conflicts support the goals of the group
and improve project performance. For example, two
members may be locked in a debate over a design trade-
off decision involving different features of a product. They
argue that their preferred feature is what the primary
customer truly wants.

This disagreement may force them to talk to or get

more information from the customer, with the result that
they realize neither feature is highly valued, but instead
the customer wants something else. On the other hand,
conflicts can also hinder group performance. Functional
conflicts can be encouraged and there should be a clear
demarcation between functional and dysfunctional
conflict. Members may be upset and dissatisfied with the

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interchange, but as long as the disagreement furthers the
objectives of the project, then the conflict is function.
Managing dysfunctional conflict is a much more
challenging task than encouraging functional conflict
because dysfunction conflict is hard to identify.

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Notes
j) Rejuvenating the Project Team

Over the course of a long project, a team

sometimes drifts off course and loses momentum. The
project manager needs to swing into ac- tion to realign
the team with the project objectives and step on the
pedal. There are both formal and informal ways of
doing this. Informally, the project manager can institute
new rituals to reenergize a team. Another option is to
have the project sponsor give a pep talk to the team
members. Sometimes, more formal actions need to be
taken. The project manager may recognize the need for
a teambuilding session devoted to improving the work
processes of the team.

Project Team Pitfalls

High performance project teams can produce

dramatic results however like any other good thing there
is a dark side to project teams that managers need to be
aware of. In this section we examine more detail some of
the pathologies that the high performing project teams
can suc- cumb to and high light what project managers
can do to reduce the likeli- hood of these problems
occurring.

a) Groupthink

Janis first identified groupthink as a factor that

influenced the mis- guided 1961 Bay of Pigs invasion of
Cuba, his term refers to the tendency of members in highly
cohesive groups to lose their critical evaluative capa-
bilities. This malady appears when pressures for conformity
are combined with an illusion of invincibility to suspend
critical discussion of decisions. As a result decisions are
made quickly with little consideration of alterna- tives; often
the practice leads to fiascos that, after the fact, appeared
totally improbable. Some of the symptoms of group think
include the following:

➢ Illusion of Invulnerability: The team feels invincible. It is

marked by a high degree of esprit de corps, and
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 Notes
implicit faith in its own wisdom and an inordinate
optimism that allows group members to feel-
complacent about the quality of the decisions.

➢ Whitewash of Critical Thinking: The group members

discuss only a few solutions, ignoring alternatives;
they fail to examine the

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Notes
adverse consequences that could follow their
preferred course of action; and they too quickly
dismiss any alternatives that on the surface appear to
be unsatisfactory.

➢ Negative Stereotypes of Outsiders: Good guy, bad guy

stereotypes emerge in which the group considers any
outsiders who oppose their decisions as the bad
guys, who are perceived as incompetent and
malicious and whose points are unworthy of serious
consideration.

➢ Direct Pressure: When a team member does speak out

or question the direction in which the team is
headed, direct pressure is applied to the dissenter.
He or she is reminded that speed is important and
that the aim is agreement not argument.

b) Bureaucratic Bypass Syndrome

Project teams are often licensed to get things done

without having to go through normal protocols of the
parent organization. Bypassing bureaucratic channels
is appealing and invigorating. However, if bypassing
becomes a way of life, it results in the rejection of
bureaucratic policies and procedures, which provide
the glue for the overall organization. A team that
operates outside the organization may alienate other
workers who are constrained by the norms and
procedures of the organization; eventually, these
outside bureaucrats will find ways to put up road blocks
and thwart the project team.

c) Entrepreneurs Disease

Project teams can be intoxicating in the same way

that start up ventures are. Such intoxication is exciting
and contributes greatly to the success of the team. But
abuse can occur as the team makes decision based on
what is best for the project instead of on what’s best for
parent organization. The team becomes myopic in its
focus and often views the constraints imposed by the

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parent organization or something to overcome. When this
attitude occurs on developmental project the team
members, enthralled with their accomplishments
sometimes quit the parent organization and start their
own business. While starting a new venture may be good
for the project team, it does little for the parent
organization that sponsored and financed the development
work.

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Notes
d) Team Spirit Becomes Team Infatuation

High-performing project teams can be tremendous

source of personal satisfaction. The excitement, chaos,
and joy generated by working on a challenging project can
be an invigorating experience. Leavitt and Lipman-Blumen
even go so far as to say that the team members behave
like people in love. They become infatuated with the
challenge of the project and the talent around them. This
total preoccupation with the project and the project team,
while contributing greatly to the remarkable success of
the project, can leave in its wake a string of broken
professional and personal relationships that contribute to
burnout and disorientation upon completion of the project.

e) Going Native

Going native is a phrase first used by the British

Foreign Service during colonial times to describe
agents who assumed the customs, values and
prerogatives of their foreign country assignment, they
did so to the point that they were no longing
representing the best interest of the British empire but
rather those of the natives. This same phenomenon can
occur within the project teams working abroad or in
those who become closely identified with their
customers. In essence, the customer’s interest takes
precedent organizations interests. This change in view
point can lead to excessive scope creep and open
defiance of corporate policy and interests.

Conclusion

Dealing with these maladies is problematic because,

in most cases, they are a distortion of a good thing, rather
than a simple evil. Awareness is the first step for
prevention. The next step is to take pre-emptive action to
reduce the likelihood of these pitfalls occurring. For
example, managers can reduce the isolation of the project
team by creating work-related connections outside the
project team. These include interactions naturally occur in

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a matrix environment where members work on multiple
projects and maintain ties to their home department.
Likewise, the isolation of dedicated project teams can be
reduced by the timely involvement of external specialists.
In either case, the active involvement of relevant members
of the parent organization at project status meetings can
help maintain the link between the project and the rest of
the organization.

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If the team appears to be suffering from group think, then
the project manager can encourage functional conflict by
playing the devil’s advocate to encourage dissent. Finally,
formal team-building sessions may reveal dysfunctional
norms and refocus the attention of the team on project
objectives.

Self Assessment Questions

1) Differentiate between managing versus leading a project.

2) Who are the various project stakeholders? How to manage them?
3) Explain the steps in successfully managing the stakeholders?
4) What is social network building?
5) What is management by wandering around?
6) Discuss the ways to build social network to succeed in projects.
7) Discuss the qualities of an effective project manager.
8) What are the ground rules for project teams?
9) What is blended learning?
10) Explain the steps in managing project teams.
11) Explain the steps in Five Stage Team Development Model.
12) Discuss the factors in leadership in relation to four
development levels of followers.
13) Discuss the situational factors affecting team development.
14) How to build high performance project teams? Explain.
15) Discuss the areas of project team pitfalls.

CASE STUDY

The role of the finance team in climate change projects

Asda is Britain’s second largest supermarket with

368 stores. It has successfully embedded sustainability in
its strategy and has implemented many initiatives to save
energy, reduce packaging and remove unnecessary waste
from its stores. Asda’s finance team plays an intrinsic role
in the decision making process including planning, testing
and roll out of all of their sustainability programmes.
These include: zero waste to landfill; reducing harmful

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emissions from stores; depots and transport; responsible

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Notes
store development (e.g. Asda’s low carbon flagship store
in Bootle, Liverpool); minimising packaging on own-
label products; continually improving waste
management practices at store level; encouraging
customer and associate recycling through ‘bring back’
facilities and ‘green’ transport. Below are examples of
the finance team’s specific contribution to some recent
projects at ASDA.

Projects Finance team’s contribution

Bio/bakery recycling projects Cost benefit analysis

ASDA project management Stewardship, progress,

process responsibility and
performance
Reporting

Evaluation of the potential Financial evaluation,

impact of carbon reduction interpretation and
commitment regulations presentation to
on Asda
senior executive team

New initiative store testing Investment appraisal

Analyse the role of finance team in managing climate

change projects.

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 Notes

****

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