MM ZG 523 / QMJ ZG 523 Project Management

MM ZG 523 / QMJ ZG 523
PROJECT MANAGEMENT
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LECTURE 1 1
2
4 1
What is a Project?
• Project Defined
–A complex, nonroutine, one-time effort limited by time,
budget, resources, and performance specifications
designed to meet customer needs.
• Major Characteristics of a Project
–Has an established objective.
–Has a defined life span with a beginning and an end.
–Requires across-the-organizational participation.
–Involves doing something never been done before.
–Has specific time, cost, and performance
requirements.
Copyright © 2006 The McGraw-Hill Companies. All rights reserved. McGraw-Hill/Irwin 1–2
Programs versus Projects
• Program Defined
–A series of coordinated, related, multiple projects that
continue over an extended time and are intended to
achieve a goal.
–A higher level group of projects targeted at a common
goal.
–Example:
• Project: completion of a required course in project
management.
• Program: completion of all courses required for a business
major.
Comparison of Routine Work with Projects
Routine, Repetitive Work Projects
Taking class notes Writing a term paper
Daily entering sales receipts into Setting up a sales kiosk for a
the accounting ledger professional accounting meeting
Responding to a supply-chain Developing a supply-chain
request information system
Practicing scales on the piano Writing a new piano piece
Routine manufacture of an Apple Designing an iPod that is
iPod approximately 2 X 4 inches,
interfaces with PC, and stores
10,000 songs
Attaching tags on a manufactured Wire-tag projects for GE and
product Wal-Mart
TABLE 1.1
Project Life Cycle
FIGURE 1.1
The Challenge of Project Management
• The Project Manager
–Manages temporary, non-repetitive activities and
frequently acts independently of the formal
organization.
• Marshals resources for the project.
• Is linked directly to the customer interface.
• Provides direction, coordination, and integration to the project
team.
• Is responsible for performance and success of the project.
–Must induce the right people at the right time to
address the right issues and make the right decisions.
The Importance of Project Management
• Factors leading to the increased
use of project management:
–Compression of the product life cycle
–Global competition
–Knowledge explosion
–Corporate downsizing
–Increased customer focus
–Rapid development of Third World
and closed economies
–Small projects that represent big
problems
Integrated Project Management Systems
• Problems resulting from the use of piecemeal
project management systems:
–Do not tie together the overall strategies of the firm.
–Fail to prioritize selection of projects by their
importance of their contribution to the firm.
–Are not integrated throughout the project life cycle.
–Do not match project planning and controls with
organizational culture to make appropriate
adjustments in support of project endeavors.
Integrated
Management of
Projects
FIGURE 1.2
The Technical and
Sociocultural
Dimensions
of the Project
Management
Process
FIGURE 1.3
An Overview of Project Management.
PROJECT MANAGEMENT STRUCTURES
• ORGANISATIONS HAVE GENERALLY STRUGGLED

TO INTEGRATE MANAGEMENT OF PROJECTS
WHILE CONDUCTING ONGOING BUSINESS
• REASONS:
– ORGANISATIONS TYPICALLY SET UP TO DEAL WITH EVERY
DAY, REPETITIVE WORK
– PROJECTS ARE MULTIDISCIPLINARY WHEREAS MOST
ORGANISATIONS ARE FUNCTIONAL IN NATURE WITH
CLEARLY DELINEATED BOUNDARIES AND MANAGERIAL
ROLES
FUNCTIONAL ORGANISATIONS
• PROJECT IMPLEMENTED WITHIN EXISTING

ORGANISATIONAL HIERARCHY
• DIFFERENT PARTS OF THE PROJECT ARE GIVEN
TO THE RELEVANT DIVISIONS – MANAGEMENT
THROUGH NORMAL CHANNELS
• ADVANTAGES:
– NO CHANGE TO THE ORGANISATION
– EFFECTIVE USE OF QUALIFIED PERSONNEL
– CAN FOCUS MORE EFFECTIVELY THROUGH EXPERTISE
– MAINTAIN EXSTING CAREER PATHS
FUNCTIONAL ORGANISATIONS
• DISADVANTAGES:
– LACK OF FOCUS AND PRIORITISATION
– LACK OF INTEGRATION ACROSS FUNCTIONS
– LONGER TO COMPLETE PROJECTS - SLOWER
COMMUNICATION
– POOR MOTIVATION AMONGST STAFF – NO BUY IN
DEDICATED TEAMS
• INDEPENDENT TEAMS ACTING SEPARATE TO THE REST OF

THE ORGANSIATION
• SEPARATE PROJECT MANAGER – INDEPENDENCE AND
FREEDOM VARIES (GIVEN RISE TO THE MAVERICK ‘SKUNK
WORK’ TEAMS)
• ADVANTAGES:
– MINIMUM DISRUPTION TO THE ORGANISATIONAL
STRUCTURE
– PROJECTS GET COMPLETED MORE QUICKLY
– HIGH LEVELS OF MOTIVATION
– POTENTIAL FOR CROSS-FUNCTIONAL INTEGRATION
DEDICATED TEAMS
• DISADVANTAGES:
–EXPENSIVE
–PROJECTITIS (TEAMS SEE THEMSELVES AS
DISTINCT FROM THE ORGANISATION)
–ONLY SELECTIVE EXPERTISE BROUGHT TO BEAR
ON PROBLEMS
–REINTEGRATION OF TEAMS MEMBERS INTO THE
ORGANISATION
MATRIX STRUCTURE
• HORIZONTAL STRUCTURE LAID ON TOP OF HIERARCHY

• PROJECT TEAM MEMBERS REPORT TO BOTH THE PROJECT
MANAGER AND FUNCTIONAL MANAGER
• TYPES OF MATRIX STRUCTURES
– WEAK MATRIX (PROJECT MANAGER ACTS AS PROJECT
ADMINISTRATOR – FUNCTIONAL MANAGERS CALL THE SHOTS)
– BALANCED MATRIX (PROJECT AND FUNCTIONAL MANAGERS
WORK CLOSELY TOGETHER – PROJ MANAGER ESTABLISHES
OVERALL PLAN, INTEGRATES CONTRIBUTIONS ETC)
– STRONG MATRIX (PROJECT MANAGER HAS MAJOR SAY)
MATRIX STRUCTURE
• ADVANTAGES:
– SHARING OF RESOURCES ON AN AS-NEEDED BASIS
– STONGER PROJECT FOCUS
– ACCESS TO FULL EXPERTISE OF THE ORGANISATION
– NO DIFFICULTY IN REINTEGRATION
• DISADVANTAGES:
– CONFLICT BETWEEN PROJECT AND FUNCTIONAL MANAGERS
– COMPETITION FOR SCARE RESOURCES
– LACK OF CLEAR AUTHORITY – EMPLOYEES REPORT TO
MULTIPLE BOSSES
– DIFFICULT TO REACH CONCENSUS ACROSS MULTIPLE DIVISIONS
CHOOSING THE APPROPRIATE STRUCTURE
• HOW IMPORTANT IS PROJECT MANAGEMENT TO THE

ORGANISATION?
• HOW MUCH WORK IS PROJECT BASED?
• WHAT IS THE RESOURCE AVAILIBILITY?
• SEVEN FACTORS HAVE BEEN ESTABLISHED TO DETERMINE
THE TYPE OF ORGANISATION (THE HIGHER THE LEVELS, THE
MORE THE NEED FOR AUTONOMOUS PROJ MANAGEMENT
– Project size; Strategic Importance; Novelty and Need for Innovation;
Need for Integration (number of departments involved); Environmental
Complexity (external interfaces); Budget and Time Constraints; Stability
of Resource Requirements.
ORGANISATIONAL CULTURE
• ORG CULTURE IS THE GLUE THAT BINDS THE ORGANISATION

• SHARED NORMS, BELIEFS, VALUES AND ASSUMPTIONS
• 10 DIMENSIONS:
– MEMBER (JOB VS ORGANISATION)
– TEAM EMPHASIS (INDIVIDUAL VS GROUP)
– MANAGEMENT FOCUS – (TASK VS PEOPLE)
– UNIT INTEGRATION (INDEPENDENT VS INTERDEPENDENT)
– CONTROL (LOOSE VS TIGHT)
– RISK TOLERANCE (LOW VS HIGH)
– REWARD CRITERIA (PERFORMANCE VS OTHER)

– CONFLICT TOLERANCE (LOW VS HIGH)
– MEANS VS ENDS (MEANS VS ENDS)
– OPEN-SYSTEMS FOCUS (INTERNAL VS EXTERNAL)
• FUNCTIONS OF CULTURE:
– PROVIDES SENSE OF IDENTITY
– LEGITIMISES MANAGEMENT SYSTEM
– HELPS CLARIFY AND REINFORCE STANDARDS OF BEHAVIOUR
– HELPS CREATE SOCIAL ORDER
• IMPLICATIONS FOR PROJECT MANAGEMENT:

– MEMBER ID – ORGANISATION
– TEAM EMPHASIS – GROUP
– MANAGEMENT FOCUS – MORE PEOPLE FOCUS
– UNIT INTEGRATION – HIGH INTERDEPENDANCE
– CONTROL – MORE LOOSE
– RISK TOLERANCE – HIGH
– REWARD CRITERIA – PERFORMANCE ORIENTED
– CONFLICT TOLERANCE – HIGH
– MEANS-ENDS – EVEN SPLIT
– OPEN-SYSTEM FOCUS – EXTERNAL ENVIRONMENT
Why Project Managers Need to Understand
the Strategic Management Process
• Changes in the organization’s mission and

strategy
–Project managers must respond to changes with
appropriate decisions about future projects and
adjustments to current projects.
–Project managers who understand their organization’s
strategy can become effective advocates of projects
aligned with the firm’s mission.
Applying a Selection Model
• Project Classification
–Deciding how well a strategic or operations project fits
the organization’s strategy.
• Selecting a Model
–Applying a weighted scoring model to bring projects to
closer with the organization’s strategic goals.
• Reduces the number of wasteful projects
• Helps identify proper goals for projects
• Helps everyone involved understand how and why a project is
selected
Benefits of Project Portfolio Management
• Builds discipline into project selection process.

• Links project selection to strategic metrics.
• Prioritizes project proposals across a common set of
criteria, rather than on politics or emotion.
• Allocates resources to projects that align with strategic
direction.
• Balances risk across all projects.
• Justifies killing projects that do not support organization
strategy.
• Improves communication and supports agreement on
project goals.
EXHIBIT 2.2
Portfolio of Projects by Type
FIGURE 2.2
PROJECT FEASIBILITY
“Can It Work?”
-Marketability ?
-Demand ?
-Technically ?
-Financially ?
-Economically ?
-Administratively ?
Copyright © 2006 The McGraw-Hill Companies. All rights reserved.

The Stages of the Development Process
• Creating the Concept • Construction Finance

• Testing the market • “Gap” Financing
• Evaluate Site Costs • Construction
• Pro Forma – Under Budget
– Income – Within schedule
– Expenses • Managing Property
• Finding Tenants • Selling the Asset
• Permanent Financing • Starting Over

PROJECT ANALYSIS
–Determining facts
–Making reasonable assumptions
–Analyzing risks
–Making recommendations to minimize risks

FINANCING & INVESTOR CONSIDERATIONS:
Public v. Conventional
Conv. Lenders consider: Public Lenders also
• market risk consider:
• borrower risk • public purpose
• project risk • regulatory compliance
• portfolio risk • affordability
• gap analysis

Borrower Risk
The Five C’s:
–Cash
–Capability
–Creditworthiness
–Character
–Collateral

Project Risk
• Completion risk
• Financial feasibility risk
• Collateral risk

Scope of Borrower Analysis
Assessing risks that the borrower will
complete the project, considering:
• Organizational structure
• Business experience & qualifications
• Financial condition & prospects
• General credit history

Collateral
• Completion guarantee
• Operating guarantee
• Portfolio:
–Overall stability, profitability, liquidity & vulnerability of
other assets in portfolio
–Diversification of portfolio
–Other direct & contingent liabilities
–Cross-collateralization

What to Look at: Collateral
• Net worth
• Schedule of real estate investments
• Notes on contingent liabilities
• Level of reserves/escrows
• Potential refinancings (e.g., balloons)
• Trends in property cash flows
• Market factors

Creditworthiness
• Loan payment history
• Current debt load
• Current performance
• Discrepancies

Capability
• Legal entity
• Experience: projects of similar scope
• Prior collaboration of team members
• Loan history (incl. defaults)
• Property management performance
• Not-for-profit issues

How to look at Capability
• Financial statements: debt load
• Credit report: payment history
• Lender contacts
• Property inspections

Character
• Subjective judgments:
–Likelihood to perform/stick with it
–Integrity/live up to commitments
• Look at:
–Past development performance
–Physical/management condition
–References on past debt performance & problem
resolution

Financial Statements
• Used to identify “current” problems
–losing $$ on operations
–not enough cash to meet obligations
• Used to identify “potential problems”
–look at trends
• Used to identify “source of problems”

Analyzing Project INVESTMENT Risk
Development Budget

Budgets are...
• Estimates
• Iterative
• Dynamic
• Linked

The Budgets
Development Budget Operating Budget
• Sources • Revenue
• Uses • Expenses
• NOI
• Cash Flow

Development Cost Analysis
• Investors make their own estimates & analyze
variance from developer’s budgets
• All development costs analyzed:
• Acquisition cost
• Construction cost
• Soft costs, esp. developer fees
• Development Sources: gap analysis

Operating Analysis
Key Operating Measures:
• Net Operating Income (NOI)
• Cash flow (ROI/ROE)
• Debt coverage ratio
• Break-even ratio

INVESTMENT ANALYSIS Models
• The Payback Model
–Measures the time it will take to recover the project
investment.
–Shorter paybacks are more desirable.
–Emphasizes cash flows, a key factor in business.
–Limitations of payback:
• Ignores the time value of money.
• Assumes cash inflows for the investment period (and not
beyond).
• Does not consider profitability.
INVESTMENT ANALYSIS Models (cont’d)
• The Net Present Value (NPV) model
–Uses management’s minimum desired rate-of-return
(discount rate) to compute the present value of all net
cash inflows.
• Positive NPV: the project meets the minimum desired rate of
return and is eligible for further consideration.
• Negative NPV: project is rejected.
Net Present Value (NPV) and Internal Rate of Return (IRR):
Example Comparing Two Projects
EXHIBIT 2.3
General Financing Issues
• Equity required
• Firmness of other commitments
• Inter-creditor issues
• Rate/order of disbursements
• Overruns
• Balloons & other long-term issues
• Financing Methods & Cost- Selection

Project Screening Matrix
FIGURE 2.3
A Portfolio Management System
• Selection Criteria
–Financial: payback, net present value (NPV), internal
rate of return (IRR)
–Non-financial: projects of strategic importance to the
firm.
• Multi-Weighted Scoring Models
–Use several weighted selection criteria to evaluate
project proposals.
Wrap-up
0011 0010 1010 1101 0001 0100 1011
• Questions ???
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MM ZG 523 / QMJ ZG 523

• ORGANISATIONS HAVE GENERALLY STRUGGLED

• PROJECT IMPLEMENTED WITHIN EXISTING

• INDEPENDENT TEAMS ACTING SEPARATE TO THE REST OF

• HORIZONTAL STRUCTURE LAID ON TOP OF HIERARCHY

• HOW IMPORTANT IS PROJECT MANAGEMENT TO THE

• ORG CULTURE IS THE GLUE THAT BINDS THE ORGANISATION

– REWARD CRITERIA (PERFORMANCE VS OTHER)

• IMPLICATIONS FOR PROJECT MANAGEMENT:

• Changes in the organization’s mission and

• Builds discipline into project selection process.

Copyright © 2006 The McGraw-Hill Companies. All rights reserved.

• Creating the Concept • Construction Finance

Copyright © 2006 The McGraw-Hill Companies. All rights reserved.

Copyright © 2006 The McGraw-Hill Companies. All rights reserved.

Copyright © 2006 The McGraw-Hill Companies. All rights reserved.

Copyright © 2006 The McGraw-Hill Companies. All rights reserved.

• Financial feasibility risk

Copyright © 2006 The McGraw-Hill Companies. All rights reserved.

Copyright © 2006 The McGraw-Hill Companies. All rights reserved.

Copyright © 2006 The McGraw-Hill Companies. All rights reserved.

Copyright © 2006 The McGraw-Hill Companies. All rights reserved.

Copyright © 2006 The McGraw-Hill Companies. All rights reserved.

Copyright © 2006 The McGraw-Hill Companies. All rights reserved.

Copyright © 2006 The McGraw-Hill Companies. All rights reserved.

Copyright © 2006 The McGraw-Hill Companies. All rights reserved.

Copyright © 2006 The McGraw-Hill Companies. All rights reserved.

Copyright © 2006 The McGraw-Hill Companies. All rights reserved.

Copyright © 2006 The McGraw-Hill Companies. All rights reserved.

Copyright © 2006 The McGraw-Hill Companies. All rights reserved.

Copyright © 2006 The McGraw-Hill Companies. All rights reserved.

Copyright © 2006 The McGraw-Hill Companies. All rights reserved.

Copyright © 2006 The McGraw-Hill Companies. All rights reserved.

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