lOMoARcPSD|2589649

Lecture notes - project management principles course notes

part 1

Project Management Principles (Griffith University)

Distributing prohibited | Downloaded by SOTIEKS CYBER (sotiekscyber@gmail.com)

 lOMoARcPSD|2589649

GRIFFITH SCHOOL OF ENGINEERING

GRIFFITH UNIVERSITY

3004ENG
P R O J E C T M A NAG E M E N T
PRINCIPLES

COURSE NOTES: PART 1

Prepared by

Kriengsak Panuwatwanich, PhD

Griffith School of Engineering

Griffith University, Queensland, Australia

2013

Distributing prohibited | Downloaded by SOTIEKS CYBER (sotiekscyber@gmail.com)

 lOMoARcPSD|2589649

COURSE OVERVIEW

Introduction
It is widely acknowledged that projects play an important role in many sectors of industry;
successful projects are considered a critical driving force for many organisations’ operations.
Because of the unique nature of a project, a particular set of managerial knowledge, skills and
abilities (KSAs) is required to successfully managing the project. Understanding and being able to
apply these KSAs is therefore important for graduates in their future careers to effectively perform
as a leader or member of a project team. As a result, 3004ENG Project Management Principles has
been developed as a core course to provide engineering and architecture students an overview of the
basic principles and techniques required for the evaluation, planning and management of projects
from inception through to completion. Although this course was developed within the engineering
context, its core element is largely concerned with generic project management framework.
Therefore students will be able to apply the KSAs developed in this course to the broader project
management context, such as architecture, business and technology.

Aims
This course deals with general principles of project management such as project definition, project
evaluation and selection, project planning and monitoring and project close out. The core elements
taught in the course complements the material taught in the program and therefore helps the student
to gain comprehensive knowledge about project management fundamentals. The primary aim of the
course is to provide engineering and architecture students with basic principles of project
management and their applications to real-life projects.

Learning Objectives
After successfully completing this course you should be able to:
1. Identify preferred meanings or definitions of a range of project management concepts,
techniques and terminologies
2. Apply numerical techniques to solve project management problems and make appropriate
recommendations
3. Describe key project management concepts/techniques and link them to real-world context
4. Effectively work in a team to analyse project management practices of real-world projects,
identify good and poor practices, and summarise key lessons learnt

Main References
Meredith, J. R. and Mantel, S. J. (2009), Project Management: A Managerial Approach, 7th edition,
John Wiley and Sons.
Nicholas, J.M. and Steyn, H. (2008), Project Management for Business, Engineering, and
Technology, 3rd edition, Elsevier.
Project Management Institute (2008), A Guide to the Project Management Body of Knowledge
(PMBOK), 4th edition
Smith, N. J. (2008), Engineering Project Management, 3rd edition, Blackwell Publishing.

ENG PMP Course Notes Part i

Distributing prohibited | Downloaded by SOTIEKS CYBER (sotiekscyber@gmail.com)

 lOMoARcPSD|2589649

LEARNING ACTIVITIES

Week Topic Module
1 Course Orientation: Introduction to the course, including the N/A
explanations of lecture contents to be covered, general rules,
requirements and assessment items
2 Introduction to Project Management: Introduction to project Module 1
management (basic definitions, the need for project managements,
types of organisational structure and their impacts on project
management, etc)
3 Project Lifecycle: Project lifecycles, Project scoping and integration Module 2
4 Project Stakeholder Management: Project stakeholder definitions, Module 3
Identifying project stakeholder and requirements, Project stakeholder
management framework.
5 Project Selection: Fundamental of engineering economics, economic Module 4
evaluation techniques/cash flow analysis
6 Project Selection (cont'd): decision analysis Module 4
7 Mid Semester Exam (No Class) Modules 1-4
8 Project Procurement Management: Project procurement and Module 5
project supply chain, types of contract, project procurement strategy
and process.
9 Project Planning: Fundamental of project planning, project Module 6
scheduling using deterministic approach
10 Project Planning (cont'd): Project resource planning and Module 6
management, Project risk management.
11 Project Monitoring and Control: Project Monitoring and Control Module 7
using Earned Value Analysis (EVA) technique
12 Project Audit and Termination: Project audit and termination Module 8
processes
13 Lecture Review Modules 5-8

ASSESSMENT ITEMS

Assessment Task Due Date Weighting

Mid Semester Exam Week 7 30%
(Contents covered in the first six weeks will
be assessed)
Assignment Week 12 30%
Group assignment (group of 4-5)
Exam during Exam Period (Central) November Examination Period 40%
(Only contents covered after mid-sem exam
will be assessed)

ENG PMP Course Notes Part ii

Distributing prohibited | Downloaded by SOTIEKS CYBER (sotiekscyber@gmail.com)

 lOMoARcPSD|2589649

TABLE OF CONTENTS

MODULE 1: INTRODUCTION TO PROJECT MANAGEMENT.............................................. 1 

1.1.  Learning Objectives .............................................................................................................. 1 
1.2.  Outline ................................................................................................................................... 1 
1.3.  Recommended Readings ....................................................................................................... 1 
1.4.  Key Concepts ........................................................................................................................ 2 
1.4.1.  What is a project? ........................................................................................................... 2 
1.4.2.  Nature of projects ........................................................................................................... 2 
1.4.3.  Typology of projects ....................................................................................................... 2 
1.4.4.  Three project objectives .................................................................................................. 3 
1.4.5.  Project, program, portfolio ............................................................................................. 3 
1.4.6.  What is management? ..................................................................................................... 4 
1.4.7.  What is project management? ......................................................................................... 4 
1.4.8.  Project, Program, Portfolio Management ....................................................................... 5 
1.4.9.  What is a project manager?............................................................................................. 5 
1.4.10.  Organisational structures and their influences on project management ......................... 6 
1.4.11.  When to use project management? ................................................................................. 9 
1.5.  Review questions................................................................................................................. 10 

MODULE 2: PROJECT LIFE CYCLE ......................................................................................... 11 

2.1.  Learning Objectives ............................................................................................................ 11 
2.2.  Outline ................................................................................................................................. 11 
2.3.  Recommended Readings ..................................................................................................... 11 
2.4.  Key Concepts ...................................................................................................................... 12 
2.4.1.  Project life cycle (PLC) ................................................................................................ 12 
2.4.2.  Conception phase .......................................................................................................... 14 
2.4.3.  Definition phase ............................................................................................................ 16 
2.4.4.  Execution phase ............................................................................................................ 19 
2.4.5.  Cost influence curve ..................................................................................................... 19 
2.4.6.  System thinking approach............................................................................................. 19 
2.5.  Review Questions ................................................................................................................ 20 

ENG PMP Course Notes Part iii

Distributing prohibited | Downloaded by SOTIEKS CYBER (sotiekscyber@gmail.com)

 lOMoARcPSD|2589649

MODULE 3: PROJECT STAKEHOLDER MANAGEMENT ................................................... 21 

3.1.  Learning Objectives ............................................................................................................ 21 
3.2.  Outline ................................................................................................................................. 21 
3.3.  Recommended Readings ..................................................................................................... 21 
3.4.  Key Concepts ...................................................................................................................... 22 
3.4.1.  Overview of project stakeholder management ............................................................. 22 
3.4.2.  Relevant concepts and techniques in managing project stakeholders .......................... 25 
3.5.  Review Questions ................................................................................................................ 35 

MODULE 4: PROJECT SELECTION ......................................................................................... 36 

4.1.  Learning Objectives ............................................................................................................ 36 
4.2.  Outline ................................................................................................................................. 36 
4.3.  Recommended Readings ..................................................................................................... 36 
4.4.  Key Concepts ...................................................................................................................... 37 
4.4.1.  Types of companies ...................................................................................................... 37 
4.4.2.  Project selection ............................................................................................................ 37 
4.4.3.  Project selection models ............................................................................................... 37 
4.4.4.  Economic evaluation of projects .................................................................................. 39 
4.4.5.  Decision analysis .......................................................................................................... 44 
4.4.6.  Project selection based on multiple criteria .................................................................. 49 
4.5.  Review Questions ................................................................................................................ 52 

ENG PMP Course Notes Part iv

Distributing prohibited | Downloaded by SOTIEKS CYBER (sotiekscyber@gmail.com)

 lOMoARcPSD|2589649

MODULE 1: INTRODUCTION TO PROJECT MANAGEMENT

1.1. Learning Objectives

When you have studied this module, you should be able to:
 Understand the nature of a project and its main objectives
 Define project management and the processes it involves
 Understand the roles of a project manager
 Discuss the way in which project management is affected by different types of
organisational structures and its implications on project managers’ roles and authorities

1.2. Outline
 Definitions of project
 Project objectives
 Project, program and portfolio
 The meanings of “project management” and “project manager”
 The roles of a project manager
 Influence of organisational structures on project management
 When to use project management

1.3. Recommended Readings

Texts Chapter/Section
Meredith, J. R. and Mantel, S. J. (2009), Project  Chapter 1: Project in Contemporary
Management: A Managerial Approach, 7th edition, Organisations
John Wiley and Sons.
Nicholas, J.M. and Steyn, H. (2008), Project  Introduction
Management for Business, Engineering, and  Chapter 1: What is Project
Technology, 3rd edition, Elsevier. Management?

Project Management Institute (2008), A Guide to the  Chapter 1: Introduction

Project Management Body of Knowledge (PMBOK),  Chapter 2 - Section 2.4.2:
4th edition. Organisational Structure

ENG PMP Course Notes Part

Distributing prohibited | Downloaded by SOTIEKS CYBER (sotiekscyber@gmail.com)

 lOMoARcPSD|2589649

1.4. Key Concepts

1.4.1. What is a project?

A project can be defined as a temporary endeavour undertaken to create a unique product, service,
or result. A project has a definite beginning and end, and can involve a single person, a single
organisational unit, or multiple organisational units. Typically, projects are multi-disciplinary,
complex, dynamic, and are delivered in a team environment. To senior management, a project must
be important enough to justify setting up a special organisational unit outside the routine
organisational structure. A project can create:
 A product that can be either a component of another item or an end item in itself
 A capability to perform a service (e.g. a business function that supports production)
 A result such as an outcome or document

1.4.2. Nature of projects

 Goal-oriented: aims at a specific end result or deliverables
 Somewhat unique: non-routine
 Time- and resource-constrained: temporary (has a target completion date and target cost)
 Cross-functional: cross-disciplinary and cross-organisational
 Somewhat unfamiliar and risky: involves something new or different
 Something is at stake
 Follows logical sequence or progression of phases or stages

1.4.3. Typology of projects

A project can be classified with respect to the levels of complexity and uncertainty involved.

Figure 1-1: Typology of projects (Nicholas & Steyn, 2008)

ENG PMP Course Notes Part

Distributing prohibited | Downloaded by SOTIEKS CYBER (sotiekscyber@gmail.com)

 lOMoARcPSD|2589649

1.4.4. Three project objectives

For every project, the common goal is to meet a three-dimensional target: complete the work for
customer/client or end-user in accordance with the budget, schedule and performance. These
common project objectives are interrelated. A trade-off is required if one of the objectives is
increased or decreased.

Figure 1-2: Three project objectives (Meredith & Mantel, 2009)

1.4.5. Project, program, portfolio

 A portfolio is a collection of projects or programs and other work to facilitate effective
management such that strategic business objectives can be met. 
 A program is a group of related projects managed in a coordinated way to obtain benefits
and control not available from managing them individually.

Figure 1-3: The difference between project, program and portfolio (Kloppenborg, 2009)

ENG PMP Course Notes Part

Distributing prohibited | Downloaded by SOTIEKS CYBER (sotiekscyber@gmail.com)

 lOMoARcPSD|2589649

1.4.6. What is management?

Management is the process of planning, organising, leading and controlling the work of
organisational members and of using all available organisational resources to reach specific
organisational goals.

1.4.6.1. Brief history of management theory

 Pre-industrial management (prior to 1890)
 Ruling of empires, kingdoms, tribes, clans, etc.
 Gurus : Niccolo Machiavelli, Confucius , Sun Tzu
 Scientific management (1890 – 1940)
 Industrial revolution era – management based on routinised, mechanistic processes.
Famous example: Ford’s Model T.
 Guru: Frederick Taylor
 Bureaucratic management (1930-1950)
 Hierarchical organisation management – line of work/authority/control
 Guru: Max Weber
 Human relations (1930-today)
 Focus on managing human resource (e.g. motivation, needs)
 Gurus : Frederick Herzberg, Abraham Maslow

1.4.6.2. The functions of management

Figure 1-4: The functions of management (Nicholas & Steyn, 2008)

1.4.7. What is project management?

Project management is “the application of management knowledge, skills, tools, and techniques to
project activities to meet the project requirements” (PMI, 2008). In short, it is management to
accomplish project goals/objectives. In long, it is management to (Nicholas & Steyn, 2008):
 Define and execute everything necessary to complete a complex system of tasks
 Achieve project end results that might be unique and unfamiliar
 And do it
 by target completion date

ENG PMP Course Notes Part

Distributing prohibited | Downloaded by SOTIEKS CYBER (sotiekscyber@gmail.com)

 lOMoARcPSD|2589649

 with constrained resources

 with an organisation that is cross-functional and newly-formed

1.4.8. Project, Program, Portfolio Management

Table 1-1: Differences between project, program, and portfolio management (PMI, 2008)

1.4.9. What is a project manager?

A manager directs process and gets work done through other people by initiating and directing
actions. A project manager is the person assigned by the performing organisation to initiate and
direct required actions to achieve the project objectives. According to Nicholas and Steyn (2008), a
project manager:
 Heads the project organisation and operates independent of the normal chain-of-command
 Is the focal point for bringing together all efforts toward a single project objective
 Is responsible for integrating people from different functional disciplines working on the
project
 Negotiates directly with functional managers for support
 Functional managers are responsible for individual work tasks and personnel within the
project; the project manager is responsible for integrating and overseeing the start and
completion of activities
 Project manager’s authorities and responsibilities can be affected by how the parent
organisation is structured
 A project manager requires both “soft skills” and “hard skills”

ENG PMP Course Notes Part

Distributing prohibited | Downloaded by SOTIEKS CYBER (sotiekscyber@gmail.com)

 lOMoARcPSD|2589649

1.4.10. Organisational structures and their influences on project management

Project manager’s authorities and responsibilities can be affected how the parent organisation is
structured. Typically, there are three main organisational structures: Functional, Projectised and
Matrix.

Figure 1-5: Three main organisational structures

Table 1-2: Organisational influence on projects (PMI, 2008)

ENG PMP Course Notes Part

Distributing prohibited | Downloaded by SOTIEKS CYBER (sotiekscyber@gmail.com)

 lOMoARcPSD|2589649

1.4.10.1. Functional organisation

Figure 1-6: Functional Organisation (PMI, 2008)

1.4.10.2. Weak matrix organisation

Figure 1-7: Weak Matrix Organisation (PMI, 2008)

ENG PMP Course Notes Part

Distributing prohibited | Downloaded by SOTIEKS CYBER (sotiekscyber@gmail.com)

 lOMoARcPSD|2589649

1.4.10.3. Balanced matrix organisation

Figure 1-8: Balanced Matrix Organisation (PMI, 2008)

1.4.10.4. Strong matrix organisation

Figure 1-9: Strong Matrix Organisation (PMI, 2008)

ENG PMP Course Notes Part

Distributing prohibited | Downloaded by SOTIEKS CYBER (sotiekscyber@gmail.com)

 lOMoARcPSD|2589649

1.4.10.5. Projectised organisation

Figure 1-10: Projectised Organisation (PMI, 2008)

1.4.10.6. Which structure is appropriate?

Selecting the appropriate structure depends on:
 The nature of the company/organisation
 Project
 Non-project
 The nature of business/industry
 The overall strategy of the company/organisation (this can change over time)

The projectised structure is ideal for effectively managing a project but it may not be applicable to
every organisation, particularly a non-project organisation.

1.4.11. When to use project management?

The five criteria for determining when to use project management techniques and organisation are:
 Unfamiliarity – The job is different from the ordinary and routine. Requires that different
things be done, the same things be done differently, or both.
 Magnitude of the effort – The job requires more resources (people, capital, equipment, etc.)
than are normally employed by the department or organisation.
 Changing environment – The industry or environment involves high innovation, high
competition, rapid product change or shifting markets.
 Interrelatedness – The job requires lateral relationships between the areas to coordinate and
expedite work and reconcile conflicts.
 Reputation of the organisation – Failure to satisfactorily complete the work could result in
financial ruin, loss of market share, damaged reputation, loss of future contracts, or other
problems for the stakeholders or larger environment.

ENG PMP Course Notes Part

Distributing prohibited | Downloaded by SOTIEKS CYBER (sotiekscyber@gmail.com)

 lOMoARcPSD|2589649

1.5. Review questions

1. What is a project?
2. What is project management?
3. What are the key differences between Project, Program and Portfolio management?
4. How is project management influenced by different types of organisational structures?
5. Explain how the role and authority of project managers vary between different types of
organisational structures?
6. If the projectised structure is suitable for effective project management, why aren’t all
organisations structured that way?

ENG PMP Course Notes Part

Distributing prohibited | Downloaded by SOTIEKS CYBER (sotiekscyber@gmail.com)

 lOMoARcPSD|2589649

MODULE 2: PROJECT LIFE CYCLE

2.1. Learning Objectives

When you have studied this module, you should be able to:
 Understand and define project life cycle
 Explain each of the main project life cycle phases
 Discuss the theoretical characteristics of cost, risk and level of effort associated with a
project life cycles
 Discuss the concept of system thinking approach to project management

2.2. Outline
 Definitions and characteristics of project life cycle
 Project life cycle phases
 Conception
 Definition
 Execution
 Cost influence curve
 System thinking approach

2.3. Recommended Readings

Texts Chapter/Section
Meredith, J. R. and Mantel, S. J. (2009), Project  Chapter 1: Project in Contemporary
Management: A Managerial Approach, 7th edition, Organisations
John Wiley and Sons.
Nicholas, J.M. and Steyn, H. (2008), Project  Chapter 3: System Development Cycle
Management for Business, Engineering, and and Project Conception
Technology, 3rd edition, Elsevier.
Project Management Institute (2008), A Guide to the  Chapter 1: Introduction
Project Management Body of Knowledge (PMBOK),  Chapter 2: Project Lifecycle and
4th edition. Organization

ENG PMP Course Notes Part

Distributing prohibited | Downloaded by SOTIEKS CYBER (sotiekscyber@gmail.com)

 lOMoARcPSD|2589649

2.4. Key Concepts

2.4.1. Project life cycle (PLC)

Project life cycle (PLC) is a collection of generally sequential and sometimes overlapping project
phases. These phases include: Conception, Definition and Execution (Nicholas & Steyn, 2008):

 The “Conception” phase involves project initiation, feasibility study and proposal
preparation
 The “Definition” phase involves clarification of user requirements, preparation of detailed
system requirement and a project master plan, and reviewing requirements and plan with the
clients
 The “Execution” phase involves the detailed design, production/build, implementation and
termination

PLC provides the basic framework for managing the project, regardless of the specific work
involved (Meredith & Mantel, 2009; PMI, 2008)

Phase A: Conception phase Phase B: Definition phase

Initiation stage Project definition
Feasibility stage System definition
Proposal preparation User and system requirements

Phase D: Operation phase Phase C: Execution phase

System maintenance and Design stage
evaluation Production/build stage
Fabrication
Testing
Implementation stage
System System Training
Acceptance tests
improvement termination
Installation
Termination

(To Phase A: Project Life Cycle

repeat cycle)
 
Figure 2-1: Systems development cycle (Nicholas & Steyn, 2008) 

ENG PMP Course Notes Part

Distributing prohibited | Downloaded by SOTIEKS CYBER (sotiekscyber@gmail.com)

 lOMoARcPSD|2589649

Figure 2-2: Pattern of cumulative project progress over PLC (Meredith & Mantel, 2009)

Figure 2-3: Pattern of level of effort required over PLC (Meredith & Mantel, 2009)

ENG PMP Course Notes Part

Distributing prohibited | Downloaded by SOTIEKS CYBER (sotiekscyber@gmail.com)

 lOMoARcPSD|2589649

Figure 2-4: Project life cycle and organisation (PMI, 2008)

2.4.2. Conception phase

The project conception phase consists of three main stages:
 Project initiation
 Feasibility study
 Proposal preparation

2.4.2.1. Project initiation

 The development of a project begins with the customer or user perceiving a problem, need,
or opportunity
 Initial investigation is usually undertaken to clarify the problem and evaluate the merit of
solutions; this includes:
 Fact finding
 Gathering data
 Reviewing existing documentation
 If customer decides to proceed with the idea, next step is to contact a developer or contractor
to:
 investigate idea further, or
 do the work and deliver the solution/end-item
 Contact between customer and contractor initiated with the Request For Proposal (RFP).
Also called RFB, RFQ, or RFT (bid, quote, or tender).
 Request For Proposal (RFP) has the following:
 Purposes
– Describe customer’s needs, problems, or idea
– Solicit suggestions/solutions from contractors
– Inform contractors how to respond to RFP (where to send proposal, to whom,
and what to include in proposal)

ENG PMP Course Notes Part

Distributing prohibited | Downloaded by SOTIEKS CYBER (sotiekscyber@gmail.com)

 lOMoARcPSD|2589649

 Contents
– Statement of Work (SOW)
– Proposal requirements
– Contractual provisions
– Additional information or data

Figure 2-5: Request for Proposal

2.4.2.2. Feasibility study and proposal preparation

 Prepare conceptual designs for each practical alternate scheme
 Determine the best method to adopt
 Ascertain the terms and programming of capital expenditure
 Present to the owner a full report on the various alternatives and a recommendation
 Owner/client can then decide whether to proceed, postpone or abandon the proposal
 The standard contents of a project proposal include:
 Executive Summary
 Technical Section (Statement of Work)
 Cost and Payment Section
 Legal Section
 Management/Qualifications Section
 Avoid “giveaways” when developing the project proposal (i.e., too detailed proposal that
tells everything)

2.4.2.3. Conception phase considerations

 Project conception is a very important phase where the project team should spend all the
needed time to ensure that the project concept is carefully examined and well developed.
 However, this should not be so much so that it becomes overly time consuming and
expensive.
 E.g. the Thai Canal Project, which was initiated in 1677 and is still under the “pre-
feasibility” study stage (Detailed story at: http://asiancorrespondent.com/30158/thai-canal-
project-over-300-years-of-conceptualising-and-still-counting/)

ENG PMP Course Notes Part

Distributing prohibited | Downloaded by SOTIEKS CYBER (sotiekscyber@gmail.com)

 lOMoARcPSD|2589649

(Source: http://www.island.lk/userfiles/image/2010/09/28/p3.jpg)

Figure 2-6: Proposed Thai canal

2.4.3. Definition phase

What must the project do to deliver the system concept and satisfy the user requirements?
 The main tasks include:
 Project team holds “kickoff” meeting
 Clarify in detail user requirements
 Prepare detailed system requirements
 Prepare project master plan
 Review requirements and plan with customer
 This phase mainly involves Project Scoping and Integration

2.4.3.1. Project scoping

 Project scoping is defining, determining and planning of the project’s objectives in order to
ensure that the client’s requirements/needs are met
 Project scoping phases include:
 Concepts/ideas/needs for the project
 Scope planning – development of the project brief or scope statement, including
justification, objectives and deliverables
 Scope definition – refinement of the major project deliverables determined under
scope planning; needs Work Breakdown Structure (WBS) and Responsibility Matrix
(see details below)
 Scope verification – formal sign off by the stakeholders of the scope definition
 Scope change control – management of changes to the scope of the project after sign
off

ENG PMP Course Notes Part

Distributing prohibited | Downloaded by SOTIEKS CYBER (sotiekscyber@gmail.com)

 lOMoARcPSD|2589649

Work Breakdown Structure (WBS)

 WBS is a product-oriented family tree subdivision of hardware, services, and data required
to produce the end product.
 It breaks tasks down into successively finer levels of detail and continues until all
meaningful tasks or work packages have been identified.
 These smaller elements make tracking the work easier.

Figure 2-7: Elements of WBS (Nicholas & Steyn, 2008)

Figure 2-8: Example of WBS for building a house (Nicholas & Steyn, 2008)

ENG PMP Course Notes Part

Distributing prohibited | Downloaded by SOTIEKS CYBER (sotiekscyber@gmail.com)

 lOMoARcPSD|2589649

Responsibility Matrix
A responsibility matrix is used to show the connections between work that needs to be done and
project team members.

Figure 2-9: Responsibility Matrix (Nicholas & Steyn, 2008)

2.4.3.2. Project master plan

The project master plan includes:
 What? – Scope Statement and detailed requirements
 How? – Detailed work definition (WBS and work package/work task details)
 Who? – Responsibility for work tasks
 What? – Detailed schedules with milestones
 How much? – Project budget and cost accounts
 What if? – Risk plan
 How well, what, how? – Performance tracking and control
 Other elements of the plan, as needed for, e.g.
 Work review and testing
 Quality control
 Documentation Implementation
 Communication/meetings
 Procurement
 Contracting and contract administration

ENG PMP Course Notes Part

Distributing prohibited | Downloaded by SOTIEKS CYBER (sotiekscyber@gmail.com)

 lOMoARcPSD|2589649

2.4.4. Execution phase

 Detailed Design – Design alternatives will be evaluated and final acceptable design chosen.
The final design will then be developed so it can be used to produce the final project
outcome.
 Production/build – This stage involves the actual production of a finished, physical end-
item. Throughout this phase, project management oversees and controls resources, motivates
the workers and keeps the customer/client updated on the project progress.
 Implementation – The acceptance test will be carried out to ensure that the final project
outcome meets the customer/client requirements.
 Termination/handover – The completed project outcome will be handed over to the
customer/client.

2.4.5. Cost influence curve

A cost influence curve illustrates the nature of influence that different project phases can have on
the project cost throughout a project life cycle. At the beginning of a project, the ability to influence
the ultimate project cost is greatest (e.g. different construction materials will result in different
costs). Any change made to the project will also incur low cost of change the cumulative project
cost spent is low. As the project progresses, the ability to influence the project cost is low (e.g.
decision has been made to the construction materials to be used). As a result, any change to the
project will likely to incur higher cost of change as the project has already progressed.

Figure 2-10: Cost Influence Curve

2.4.6. System thinking approach

 Traditional view – linear, static and closed. We assume that project progresses in well
defined, predictable stages from conception to completion.
 In reality, management needs to be dynamic, responding to new information and adapting
the plan rather than keeping rigidly to the original. Project management requires “system
thinking”.
 According to Nicholas & Steyn (2008), the system thinking approach acknowledges that the
behaviour of any one element affects the behaviour of others and that no single element can
perform effectively without help from the others. It recognises “interdependencies” and
“cause-effect relationships” among elements, i.e. “feedback loops” exist (see figure below).

ENG PMP Course Notes Part

Distributing prohibited | Downloaded by SOTIEKS CYBER (sotiekscyber@gmail.com)

 lOMoARcPSD|2589649

Figure 2-11: An example of a project management feedback loop (Toole, 2005)

2.5. Review Questions

1. What does an S-curve of the project life cycle represent?
2. What does the theoretical pattern of the “level of effort” of a project over its life cycle look like?
3. Why is Work Breakdown Structure (WBS) needed for project management?
4. “Project life cycle phases include the stages from the conception of a particular system to the
routine operation/use of such system”. Is this statement correct? Provide your reason(s).
5. What would be the consequences if the project conception phase is not carried out properly?
6. System thinking approach emphasises the use of feedback loop. Why is this so important in
project management?

ENG PMP Course Notes Part

Distributing prohibited | Downloaded by SOTIEKS CYBER (sotiekscyber@gmail.com)

 lOMoARcPSD|2589649

MODULE 3: PROJECT STAKEHOLDER MANAGEMENT

3.1. Learning Objectives

When you have studied this module, you should be able to:
 Understand the definition of project stakeholders
 Describe project stakeholder management process
 Understand and discuss the following techniques/concepts used in project stakeholder
management:
 Stakeholder Matrix
 Requirement Analysis
 Quality Function Deployment (QFD) and Kansei Engineering
 Value Management
 Concurrent Engineering

3.2. Outline
 Overview of project stakeholder management
 Definitions and types of project stakeholders
 Project stakeholder management process
 Relevant concepts and techniques in managing project stakeholders
 Stakeholder Matrix
 Requirement Analysis
 Quality Function Deployment (QFD) and Kansei Engineering
 Value Management
 Concurrent Engineering

3.3. Recommended Readings

Texts Chapter/Section
Nicholas, J.M. and Steyn, H. (2008), Project  Chapter 3: System Development Cycle
Management for Business, Engineering, and and Project Conception
Technology, 3rd edition, Elsevier.  Chapter 4: Project and System
Definition

Project Management Institute (2008), A Guide to the  Chapter 10: Project Communications
Project Management Body of Knowledge (PMBOK), Management
4th edition.
Smith, N. J. (2008), Engineering Project Management,  Chapter 2: Value Management
3rd edition, Blackwell Publishing.
Standards Australia (2007), Australian Standard: Value All
Management (AS4183: 2007).

ENG PMP Course Notes Part

Distributing prohibited | Downloaded by SOTIEKS CYBER (sotiekscyber@gmail.com)

 lOMoARcPSD|2589649

3.4. Key Concepts

3.4.1. Overview of project stakeholder management

3.4.1.1. Project stakeholders

Project stakeholders are those groups or individuals who can affect, or are affected by, the process
and result of the project. They can be classified as:
 Primary stakeholders – directly related to the project. They have immediate influence on the
project, or may be directly affected by it.
 Example: Project core team, project champions and sponsors, equity and debt
holders, etc.
 Secondary stakeholders – not directly related to the core of the project.
 Example: Local authorities, unions, local communities, political parties, consumer
groups, etc.

Figure 3-1: Project stakeholders

3.4.1.2. Project stakeholder management processes

Managing stakeholders is one of the critical tasks that determine the success or failure of a project.
A study by Kappleman, McKeenan & Zhang (2006) identified 53 early warning signs of project
failure. Among the top ten early warning signs, three are directly related to poor stakeholder
management.

Managing project stakeholders mainly involve the understanding of each stakeholder group and
then to develop and implement necessary strategies to manage them. Building rapport and good
relationships with the stakeholders is an ideal strategy to successful stakeholder management.

ENG PMP Course Notes Part

Distributing prohibited | Downloaded by SOTIEKS CYBER (sotiekscyber@gmail.com)

 lOMoARcPSD|2589649

Table 3-1: Top 10 early warning signs of project failure (out of 53) (Kappleman, McKeenan &
Zhang, 2006)

Figure 3-2: Project stakeholder management processes

ENG PMP Course Notes Part

Distributing prohibited | Downloaded by SOTIEKS CYBER (sotiekscyber@gmail.com)

 lOMoARcPSD|2589649

3.4.1.3. Understand stakeholders

To understand stakeholders, it is essential to consider this: Who will use or be affected by the
project?

Figure 3-3: Project stakeholder map

Understanding stakeholders mainly involves the following:

 Determine stakeholders’ missions
 Examine their motivations, and the aspect of the project that is likely to attract their
attention
 Determine strengths and weaknesses
 Assess their power and capabilities to influence the project
 Predict behaviour
 Anticipate behaviours of stakeholders so we can estimate the impact from such
behaviours and develop coping strategy

Table 3-2: Classification of stakeholders

ENG PMP Course Notes Part

Distributing prohibited | Downloaded by SOTIEKS CYBER (sotiekscyber@gmail.com)

 lOMoARcPSD|2589649

Stakeholders generally fall into the following categories:

 The good stakeholders
 Sponsor/Project Champion
 Someone who can be trusted
 Supporter of the project
 The bad stakeholders
 Misinformed stakeholder
 Unengaged stakeholder
 A stakeholder who is too busy
 The ugly stakeholders
 Whiners
 Complainers
 Naysayers

3.4.1.4. Build relationships

 Building relationships is a recommended stakeholder management strategy.
 Good relationship building activities lead to respect and trust, which are important
determinants of project success:
 Share individual motives
 Encourage open communication
 Jointly establish agenda/Project Charter
 Shared learning
 Education, Engagement, Involvement
 Relationships should be established at the levels of both core project team and all other
stakeholders.

3.4.1.5. Example of stakeholder management

An example of stakeholder management is the Stakeholder Advisory Group at the Gold Coast
University Hospital Project in Australia (Gold Coast University Hospital Newsletter, Sept. 2008).
 The GCUH Stakeholder Advisory Group was established in November 2007 with broad
representation from key groups within the Gold Coast community.
 By forming this group, it allowed effective representation of the interests of the wider
community ensuring the development of the Hospital was something which the community
wanted and needed.
 The role of this 29-member group is to facilitate wide stakeholder engagement in the
development of the new hospital.
 With representatives from the community, education sector, special interest groups, private
health providers, Gold Coast City Council and non-government organisations, the group
provides invaluable feedback and advice to the project team at bi-monthly meetings.

3.4.2. Relevant concepts and techniques in managing project stakeholders

Relevant concepts and techniques of project stakeholder management include:
 Stakeholder Matrix
 Requirement Analysis
 Quality Function Deployment (QFD) and Kansei engineering

ENG PMP Course Notes Part

Distributing prohibited | Downloaded by SOTIEKS CYBER (sotiekscyber@gmail.com)

 lOMoARcPSD|2589649

 Value Management
 Concurrent Engineering

3.4.2.1. Stakeholder Matrix

 Stakeholder matrix can be used to help analyse the stakeholders based on the levels of
influence and importance they have on the project:
 Influence – refers to how powerful the stakeholder is
 Importance/Interest – refers to how much the stakeholder is affected by the project
 The position of each stakeholder can be Supportive, Neutral, or Resistant

Figure 3-4: Stakeholder Matrix

3.4.2.2. Requirement Analysis

Systems are defined by requirements. Thus, they are the starting point for all systems development
projects. The requirements must be carefully analysed and agreed upon so they can be translated to
system requirements. Simple steps to identify user requirements include:
1. Ask the user to state the needs as clearly as possible
2. Ask the user a complete set of questions to further elicit the needs
3. Conduct research to better understand the needs
4. Based on information from Steps 2 and 3, restate and document the needs
5. Give the restated needs to the user

However, it should be noted that the requirements stated by the customers/clients may not
completely reflect their actual needs. Therefore, more effort is required to fully satisfying certain
customers/clients, as they can fall into one or more of the following categories:

 Expecters – Base level of service and value that must be provided in order to be in business.

 Spoken – It represents the spoken or verbalised wants of the customer, and is typical of most
market research activities. For example, when questioned, a customer may want a hot pie,
but not too hot, or fast service at a takeaway shop. To the degree to which an organisation
delivers these attributes, the customer will be very satisfied and even “delighted”.

ENG PMP Course Notes Part

Distributing prohibited | Downloaded by SOTIEKS CYBER (sotiekscyber@gmail.com)

 lOMoARcPSD|2589649

 Unspoken – Represents the requirements that a customer will not talk about or request. This
is because they assume these requirements will be there. They are expected, and therefore
not expressed. If unspoken requirements are present the customer will be indifferent. For
example, a customer will not be “delighted” with a non-poisonous pie. However, if
unspoken requirements are missing the customer will be extremely dissatisfied.

 Exciters – This type of requirement is unspoken and unexpected. If it is absent the customer
will not be dissatisfied. If present and well implemented incredible levels of customer
satisfaction can be delivered. Exciters can also be described as customer delights or as
pleasant surprises. For example, a base model car that provides radio control on the steering
wheel may be described as an exciter.

Figure 3-5: Different levels of customer requirements and satisfaction

3.4.2.3. Quality Function Deployment (QFD)

Quality Function Deployment (QFD) is a methodology for translating customer needs into specific
system or product characteristics, and then for specifying the processes and tasks needed to produce
that system or product.

Figure 3-6: QFD Concept (Cristiano et al., 2001)

ENG PMP Course Notes Part

Distributing prohibited | Downloaded by SOTIEKS CYBER (sotiekscyber@gmail.com)

 lOMoARcPSD|2589649

The benefits of QFD are:

 Obtaining a more detailed statement of customer needs
 Customer needs can be met much better
 More complete up-front planning
 Redesign time due to design changes is substantially reduced
 Better cross-functional communication within the organisation
The limitations of QFD are:
 Quality-based, i.e. it does not consider company specific constraints (budget, technology,
schedule)
 Does not consider strategic objectives of the organisation (more appropriate for quality-
oriented organisations)
 Subjective judgements
 More suitable for design-build procurement system
 Need to have clear definition of customers
 Time consuming, manpower intensive

Example of QFD Concept: The Ideal Lunch

The ideal lunch example attempts to identify what a customer may require and how that will
be achieved in terms of developing the ideal lunch. Issues that may have to addressed
include:

What is required? How will it be achieved?

Fills me up. Weight of portion.

Tastes good. Percent of nutrition requirements.
Easy to make. Time to prepare.
Easy to clean up. Number of dishes used.
Does not cost much. Cost of ingredients.

Once the “whats” have been identified they are weighted for customer importance. The
“hows” are in turn rated for their effectiveness in satisfying each “what”. A simple table can
be developed to assign the relationships between the “hows” and the “whats” (see Figure
3.8). A calculation can then be performed and each “how” can be ranked in order of
importance (see Figure 3.9).

ENG PMP Course Notes Part

Distributing prohibited | Downloaded by SOTIEKS CYBER (sotiekscyber@gmail.com)

 lOMoARcPSD|2589649

Figure 3-7: Relationships between the customer requirements (whats) and services (hows)

Figure 3-8: Absolute scores calculated from the relationship strength and weighting

Formal QFD tool: the House of Quality (HoQ)

The House of Quality involves building a relationship matrix that matches customer
requirements (Whats) to design requirements or operation parameters (Hows). The QFD
process requires input from many disciplines including engineering, manufacturing, design,
marketing and sales. Therefore QFD is a powerful integrative device and works best if there
is an ongoing history of cross-functional co-operation.

Customer requirements are usually not directly actionable and must be translated into the
internal technical language of the organisation before building the House of Quality.

ENG PMP Course Notes Part

Distributing prohibited | Downloaded by SOTIEKS CYBER (sotiekscyber@gmail.com)

 lOMoARcPSD|2589649

Figure 3-9: House of Quality (Nicholas & Steyn, 2008)

HoQ example 1: TV remote control switch

Figure 3-10: TV remote control switch (Nicholas & Steyn, 2008)

ENG PMP Course Notes Part

Distributing prohibited | Downloaded by SOTIEKS CYBER (sotiekscyber@gmail.com)

 lOMoARcPSD|2589649

HoQ example 2: Housing project

Figure 3-11: Housing project (Dikmen et al., 2005)

ENG PMP Course Notes Part

Distributing prohibited | Downloaded by SOTIEKS CYBER (sotiekscyber@gmail.com)

 lOMoARcPSD|2589649

QFD related technique: Kansei Engineering (Mitsuo, 2002)

 Kansei Engineering (a.k.a. Image QFD)

 The implementation of the customer’s feeling and demands into product function and
design (e.g., in the GTR rebirth documentary – the car was required to look
“macho”, “masculine”, “sophisticated”, “elegant”)
 The aim is to translate the customer’s kansei into the product design domain
 Employ computer assisted design system, expert system and database

 Some examples of organisations introducing Kansei Engineering

 Automotive: Mitsubishi, Mazda, Toyota, Honda, Ford, Hyundai
 Construction machinery: Komatsu
 Consumer electric: Sharp, Sanyo, Matsushita, LG, Samsung, Fuji Xerox, Cannon
 Undergarment: Wacoal
 Cosmetic: Shiseido

3.4.2.4. Value Management

 Definitions of “Value” (Oxford Advanced Learner’s Dictionary):
 “how much something is worth in money or other goods for which it can be
exchanged”
 “how much something is worth compared with its price”
 “the quality of being useful or important”

 In economics, there are various valuation techniques. For example, options pricing, hedonic
method, travel cost method, contingent valuation, etc.
 The notion of value can be divided into two ways of thinking:
 Hard System Thinking: Its common characteristic is a high level of performance and
capability relative to its cost. This can also be expressed as maximising the function
of a product relative to its cost.

Value = (Performance + Capability)/Cost = Function/Cost

 Soft System Thinking: Value is an “attribute of entity determined by the entity’s

perceived usefulness, benefits, and importance” (Standards Australia, 2007).

Figure 3-12: Soft system thinking (Standards Australia, 2007)

ENG PMP Course Notes Part

Distributing prohibited | Downloaded by SOTIEKS CYBER (sotiekscyber@gmail.com)

 lOMoARcPSD|2589649

 Value for Money (VFM) is a measure used for comparing alternatives based on the
relationship between value and total cost. VFM may be improved in a number of ways, as
shown in the figure below.

Figure 3-13: Ways of improving value (Standards Australia, 2007)

What is Value Management?

“VM is a structured and analytical process which follows a prescribed work plan to achieve best
value, or where appropriate, best value for money” (Standards Australia, 2007).

 VM is a structured analytical process

 A structured way of thinking with relevant stakeholders to achieve best value for
money in the development of a project
 VM is a powerful process enabling stakeholders to define and achieve their needs through:
 Facilitated workshops encouraging participation
 Teamwork
 End-user buy in
 Three main components of VM are:
 Value Planning (VP): the title given to value techniques applied during the concept or
“planning” phases of a project. VP is used during the development of the brief to
ensure that value is planned into the whole project from its inception. This can be
achieved by addressing and ranking stakeholders’ requirements in order of
importance.
 Value Engineering (VE): the title given to value techniques applied during the design
or “engineering” phases of a project. VE investigates, analyses, compares and selects
among the various available options that will meet the value requirements of the
stakeholders. Techniques used in VE include Functional Analysis and Life Cycle
Costing.
 Value Analysis (VA) or Value Reviewing (VR): the title given to value techniques
applied respectively to completed projects to analyse/audit the project’s performance
and compare a completed (or nearly completed) design or project against
predetermined expectations. VA studies are those conducted during the post-
production stage and may be part of a system evaluation exercise.

ENG PMP Course Notes Part

Distributing prohibited | Downloaded by SOTIEKS CYBER (sotiekscyber@gmail.com)

 lOMoARcPSD|2589649

 VM benefits include:
 Improved communication and teamworking
 A shared understanding among key participants
 Better quality project definition
 Increased innovation
 The elimination of unnecessary cost

 VM Framework: Job Plan (Standards Australia, 2007)

Figure 3-14: Job Plan

ENG PMP Course Notes Part

Distributing prohibited | Downloaded by SOTIEKS CYBER (sotiekscyber@gmail.com)

 lOMoARcPSD|2589649

3.4.2.5. Concurrent Engineering

 Concurrent Engineering (a.k.a. simultaneous engineering):
 The combined early efforts of designers, developers, and producers to ensure that
those questions get asked and answered to the satisfaction of everyone
 Requires cross-functional team

Figure 3-15: Concurrent Engineering (Nicholas & Steyn, 2008)

 How to implement Concurrent Engineering?

 by looking into overall requirements and integrating them in the context of the
project/product/system life cycle
 by establishing an interdisciplinary team; and by making a team to work
 by transferring a serial project management process into a parallel one

3.5. Review Questions

1. How would you identify project stakeholders?
2. Why is it important to determine strengths and weaknesses of the stakeholders as well as to
anticipate their behaviours?
3. Determining customer requirements simply involves asking what the customer wants. But why
is satisfying customer requirements considered difficult to achieve in many projects?
4. In the House of Quality, what is the benefit of the matrix showing relationships between
Technical Requirements and Customer Requirements?
5. How does Concurrent Engineering help to ensure that a project satisfies all its requirements?
6. In determining value, what is the main difference between hard system and soft system thinking?
7. How would you determine if the project is value for money?
8. How would you improve value for money of a project?

ENG PMP Course Notes Part

Distributing prohibited | Downloaded by SOTIEKS CYBER (sotiekscyber@gmail.com)

 lOMoARcPSD|2589649

MODULE 4: PROJECT SELECTION

4.1. Learning Objectives

When you have studied this module, you should be able to:
 Understand the role of project selection in a company
 Understand the nature and types of project selection models
 Understand and apply key project evaluation techniques
 Understand and apply decision making techniques
 Explain the selection of project using multiple criteria approach

4.2. Outline
 Overview of project selection
 Economic evaluation of projects
 Decision analysis
 Project selection based on multiple criteria

4.3. Recommended Readings

Texts Chapter/Section
Meredith, J. R. and Mantel, S. J. (2009), Project  Chapter 2: Strategic Management and
Management: A Managerial Approach, 7th edition, Project Selection
John Wiley and Sons.
Nicholas, J.M. and Steyn, H. (2008), Project  Chapter 10: Managing Risks in
Management for Business, Engineering, and Projects – Decision Trees
Technology, 3rd edition, Elsevier.

ENG PMP Course Notes Part

Distributing prohibited | Downloaded by SOTIEKS CYBER (sotiekscyber@gmail.com)

 lOMoARcPSD|2589649

4.4. Key Concepts

4.4.1. Types of companies

Companies considering projects fall into two broad categories:
 Project companies – companies whose core business is completing projects
 Must select which projects they will bid on
 Generally based on:
– Their expertise
– Resource they have available
– Their chance of winning bid
 Preparing a bid is expensive
 They do not want to waste that effort on bids where they are unlikely to be successful
 Non-project companies – companies whose core business is something else
 Must decide which potential projects they will pursue
 Available capital is the major constraint
 Profitability is often the major criteria
 Must evaluate approaches when there is more than one project that can accomplish a
goal

4.4.2. Project selection

 Project selection is the process of evaluating individual projects or groups of projects, and
then choosing to implement some set of them so that the objectives of the parent
organisation will be achieved.
 This process can be applied to any area of the organisation's business in which choices must
be made between competing alternatives.
 Challenge of project selection - each project will have different costs, benefits, and risks.
Rarely are these known with certainty. In the face of such differences, the selection of one
project out of a set is a difficult task. Choosing a number of different projects, a portfolio, is
even more complex (Meredith & Mantel, 2009). It is important to ensure that projects are
closely aligned with the organisation’s strategy.

4.4.3. Project selection models

 Models are used to select projects
 All models simplify reality
 That is, they only look at the key variables involved in a decision
 The more variables included in a model, the more complex it becomes
 Simpler models usually work better

4.4.3.1. Nature of project selection models

 Models turn inputs into outputs
 Managers decide on the values for the inputs and evaluate the outputs
 The inputs never fully describe the situation

ENG PMP Course Notes Part

Distributing prohibited | Downloaded by SOTIEKS CYBER (sotiekscyber@gmail.com)

 lOMoARcPSD|2589649

 The outputs never fully describe the expected results

 Models are tools
 Managers are the decision makers

4.4.3.2. Model criteria

 Realism – reality of manager’s decision
 Capability – able to simulate different scenarios and optimize the decision
 Flexibility – provide valid results within the range of conditions
 Easy to use – reasonably convenient, easy execution, and easily understood
 Inexpensive – data gathering and modelling costs should be low relative to the cost of the
project
 Easy to implement – must be easy and convenient to gather, store and manipulate data in the
model

4.4.3.3. Types of Project Selection Models

 Nonnumeric Models
Nonnumeric models do not return a numeric value for a project that can be used for
comparison with other projects. These are really not “models” but rather justifications for
projects. However, just because they are not true models do not make them all bad. The
types of nonnumeric models include:
 Sacred Cow – A project, often suggested by top management, that has taken on a life of
its own. It continues, not due to any justification, but “just because”
 Operating Necessity – A project that is required in order to protect lives or property or to
keep the company in operation
 Competitive Necessity – A project that is required in order to maintain the company’s
position in the marketplace
 Product Line Extension – Projects to expand a product line are evaluated on how well
the new product meshes with the existing product line rather than on overall benefits
 Comparative Benefit – Projects are subjectively ranked based on their perceived benefit
to the company
 Numeric Models
Numeric models return a numeric value for a project that can be easily compared with other
projects.
 Is project worth it or not?
– requires consideration of the comparative economics
– requires consideration of all the various alternative methods
 Comparison
– not only with the initial capital cost
– continuing operation and maintenance
 Deal with measurable economic factors
 No project can be economically justified if its costs exceed its benefits
 The benefits are defined as the total gain to the owner arising from the project, and the

ENG PMP Course Notes Part

Distributing prohibited | Downloaded by SOTIEKS CYBER (sotiekscyber@gmail.com)

 lOMoARcPSD|2589649

costs are the amounts to be spent to create and sustain the project
 The benefits must include all the tangible and intangible effects
 The costs should include interest, depreciation, operation, maintenance and any other
charges attributable to the project
 Numerical Modelling
 Fundamental approaches, (the focus of this course), include:
– Economic evaluation/Financial modelling
– Decision analysis – under certainty, uncertainty, risk
– Multi-criteria project selection
 Advanced techniques include:
– Analytical Hierarchy Process (AHP)
– Artificial Neural Network (ANN)
– Goal programming

4.4.4. Economic evaluation of projects

4.4.4.1. Time value of money

The time-dependent value of money stemming both from changes in the purchasing power of
money (inflation or deflation) and from the real earning potential of alternative investments over
time.

4.4.4.2. Cash flow diagram

Cash flow is the stream of monetary (dollar) values (costs and benefits) resulting from a project
investment.

Considerations for drawing a cash flow diagram:

 In a cash flow diagram the end of period t is the same as the beginning of period (t + 1)
 Beginning-of-period cash flows are: rent, lease, and insurance payments
 End-of-period cash flows are: O&M, salvages, revenues, overhauls
 The choice of time 0 is arbitrary - it can be when a project is analysed, when funding is
approved, or when construction begins
 It is better to show two or more cash flows occurring in the same year individually so that
there is a clear connection from the problem statement to each cash flow in the diagram

4.4.4.3. Interest Factors

Interest factors are multiplicative numbers calculated from interest formulae for given interest rates
and periods. They are used to convert cash flows occurring at different times to a common time.

ENG PMP Course Notes Part

Distributing prohibited | Downloaded by SOTIEKS CYBER (sotiekscyber@gmail.com)

 lOMoARcPSD|2589649

There are 3 types of interest factors:

 Single Payment Factors
 Uniform Series Present-Worth Factor and Capital-Recovery Factors
 Sinking-Fund Factor and Uniform-Series Compound-Amount Factors

a) Single Payment Factors

 Single Payment Compound Amount: F = P(F/P, i, n)

F(n) = P(1 + i)n

 Single Payment Present Worth: P = F(P/F, i, n)

F
P  F(1  i ) n
(1  i ) n

Example: What present sum will yield $1000 in 5 years at 10 percent?

P = 1,000(1.1)-5
= 1,000(0.62092)
= $620.92

This result means that $620.92 “deposited” today at 10 percent compounded annually will
yield $1,000 in 5 years.

b) Uniform Series Present-Worth Factor and Capital-Recovery Factors

 Uniform series capital recovery: A = P(A/P, i, n)

Pi 1  i 
n
A

1  i n  1 
 Uniform series present worth: P = A(P/A, i, n)

P

A (1  i) n  1 
i(1  i ) n

Example: How much would be needed today to provide an annual amount of $50,000 each
year for 20 years, at 9% interest each year?
P = $50,000 (P/A, 9%, 20)
= $50,000 (9.1285) = $456,427

c) Sinking-Fund Factor and Uniform-Series Compound-Amount Factor

 Uniform series compound amount: F = A(F/A, i, n)

A(1  i )n  1
F
i

ENG PMP Course Notes Part

Distributing prohibited | Downloaded by SOTIEKS CYBER (sotiekscyber@gmail.com)

 lOMoARcPSD|2589649

 Uniform series sinking fund: A = F(A/F, i, n)

Fi
A
(1  i ) n  1 
Example: How much will you have in 40 years if you save $3,000 each year and your
account earns 8% interest each year?
F = $3,000 (F/A, 8%, 40)
= $3,000 (259.0565)
= $777,170

Table 4-1: Summary of interest factors

4.4.4.4. Economic Evaluation Techniques

a) Payback Period
 The length of time until the original investment has been recouped by the project.
 A shorter payback period is better.

Example:

Project Cost
Payback Period 
Annual Cash Flow

$100,000
Payback Period  4
$25,000

ENG PMP Course Notes Part

Distributing prohibited | Downloaded by SOTIEKS CYBER (sotiekscyber@gmail.com)

 lOMoARcPSD|2589649

b) Present Worth
 In a Present Worth (PW) comparison of alternatives, the cash flows associated with each
alternative investment are all converted to a present sum of money.
 Converting all cash flows to present worth is often referred to as discounting; (hence PW is
also referred to as Discounted Cash Flow (DCF) technique). In this case, interest rate in the
formula is referred to as discount rate.
 The Net Present Value (NPV) of an investment is simply the difference between cash
outflows and cash inflows on a present value basis.
NPV = ∑ Present Worth (Benefits) - ∑ Present Worth (Costs)

Example:
What is the net present value of this project? Is the project an acceptable investment?

Initial Investment: $100,000

Project Life: 10 years
Salvage Value: $ 20,000
Annual Cash Inflows: $ 40,000
Annual Cash outflows: $ 22,000
Annual Discount Rate: 12%

 Annual Cash Inflows

$40,000(P/A, 12%, 10) $226,000

 Salvage Value
$20,000(P/F, 12%, 10) $6,440

 Annual Cash Outflows

$22,000(P/A, 12%, 10) -$124,000

 Initial Investment (t=0) -$100,000

 Net Present Value $8,440 (Greater than zero, therefore acceptable project)

Alternatively, the Single Payment Present Worth formula can be used to calculate present worth:
 Annual Cash Inflows = $40,000(P/F, 12%, 10) + $40,000(P/F, 12%, 9) + $40,000(P/F,
12%, 8) + $40,000(P/F, 12%, 7) + $40,000(P/F, 12%, 6) + $40,000(P/F, 12%, 5) +
$40,000(P/F, 12%, 4) + $40,000(P/F, 12%, 3) + $40,000(P/F, 12%, 2) + $40,000(P/F,
12%, 1) = $226,000

 Salvage Value = $6,440 (Same as previous)

 Annual Cash Outflows: $22,000(P/F, 12%, 10) + $22,000(P/F, 12%, 9) + $22,000(P/F,

12%, 8) + $22,000(P/F, 12%, 7) + $22,000(P/F, 12%, 6) + $22,000(P/F, 12%, 5) +
$22,000(P/F, 12%, 4) + $22,000(P/F, 12%, 3) + $22,000(P/F, 12%, 2) + $22,000(P/F,
12%, 1) = $226,000 (negative)
ENG PMP Course Notes Part

Distributing prohibited | Downloaded by SOTIEKS CYBER (sotiekscyber@gmail.com)

 lOMoARcPSD|2589649

 Initial Investment = -$100,000 (Same as previous)

 Net Present Value = $8,440

c) Benefit-Cost (BC) Ratio

 The ratio of the sum of the present value of future benefits to the sum of the present value of
the future capital expenditures and costs.
 Also called the profitability index.
 Ratios greater than 1.0 are good.

BC ratio = ∑ Present Worth (Benefits) / ∑ Present Worth (Costs)

Example:
Project A Project B
 Present value cash inflows $500,000 $100,000
 Present value cash outflows $300,000 $ 50,000
 Net Present Value $200,000 $ 50,000
 Benefit/Cost Ratio 1.67 ($500,000/$300,000) 2.00 ($100,000/$50,000)

d) Rate of Return
 The discount rate (r) that causes the NPV to be zero (that is, ∑PW cash inflows = ∑PW cash
outflows)
 In general, the calculation procedure involves a trial-and-error solution
 Often referred to as Internal Rate of Return (IRR)
 The higher the IRR, the better

Example:
Given an investment project having the following annual cash flows; find the IRR.

Step 1: Pick an interest rate and solve for the NPV. Try r =15%
NPV = -30 -1(P/F,1,15%) + 5(P/F,2,15) + 5.5(P/F,3,15) + 4(P/F,4,15) + 17(P/F,5,15) +
20(P/F,6,15) + 20(P/F,7,15) - 2(P/F,8,15) + 10(P/F,9,15)
= + $5.62
Since the NPV>0, 15% is not the IRR. It now becomes necessary to select a higher interest
rate in order to reduce the NPV value.

Step 2: If r =20% is used, the NPV = - $ 1.66 and therefore this rate is too high.

Step 3: By interpolation, the correct value for the IRR is determined to be r =18.7%

ENG PMP Course Notes Part

Distributing prohibited | Downloaded by SOTIEKS CYBER (sotiekscyber@gmail.com)

 lOMoARcPSD|2589649

4.4.5. Decision analysis

4.4.5.1. Decision making process

The decision making process comprises the following steps:
1. Clearly define the problems and the factors that influence it
2. Develop specific and measurable objectives
3. Develop a model
4. Evaluate each alternative solution
5. Select the best alternative
6. Implement the decision and set a timetable for completion

4.4.5.2. Decision making environments

There are three types of decision-making environments as follows:
 Decision making under certainty
 State of nature is known (State of nature is an occurrence or a situation over which
the decision maker has little or no control)
 Decision making under uncertainty
 Complete uncertainty as to which state of nature may occur
 Decision making under risk
 Several states of nature may occur
 Each has a probability of occurring

a) Decision Making Under Certainty

 The consequence of every alternative is known
 Usually there is only one outcome for each alternative
 This seldom occurs in reality

b) Decision Making Under Uncertainty

 Probabilities of the possible outcomes are NOT known
 This focuses on three methods for decision making under uncertainty:
1. Maximax Criterion
2. Maximin Criterion
3. Equally likely Criterion

Example: Fair & Square Shed Ltd.

 Decision: Whether or not to make and sell storage sheds

 Alternatives:
 Build a large plant
 Build a small plant
 Do nothing
 Outcomes: Demand for sheds will be high, moderate, or low
 Pay-off Table:

ENG PMP Course Notes Part

Distributing prohibited | Downloaded by SOTIEKS CYBER (sotiekscyber@gmail.com)

 lOMoARcPSD|2589649

1. Maximax Criterion
• The optimistic approach
• Assume the best payoff will occur for each alternative

2. Maximin Criterion
• The pessimistic approach
• Assume the worst payoff will occur for each alternative

3. Equally Likely Criterion

• Assumes all outcomes equally likely and uses the average payoff

c) Decision Making Under Risk

 Each possible state of nature (i.e. outcome) has an assumed probability.
 States of nature are mutually exclusive

ENG PMP Course Notes Part

Distributing prohibited | Downloaded by SOTIEKS CYBER (sotiekscyber@gmail.com)

 lOMoARcPSD|2589649

 Probabilities must sum to 1 (100%)

 Determine the Expected Monetary Value (EMV)

EMV = ∑(probability of outcome  payoff of outcome)

Example: Fair & Square Shed Ltd.

Assume that the probabilities of the outcomes are known. EMV can be calculated for each
alternative.

Another example: Combining decision making under risk with present worth technique
A company is considering an investment based on an estimated cash flow for each possible
business scenario below. Determine whether the company should make an investment.
Assume i=15%.

 PWpoor = -5000 + 2500(P/F,15%,1) + 2000(P/F, 15%,2) + 1000(P/F,15%,3)

= -5000 + 4344 = -656

 PWmoderate = -5000 + 4566 = -434

 PWgood = -5000 + 6309 = +1309

 EMV (PWtotal) =  PWi [P(i)]

= -656(0.2) – 434(0.6) + 1309(0.2)
= -$130 (Negative EMV, therefore should not invest)

ENG PMP Course Notes Part

Distributing prohibited | Downloaded by SOTIEKS CYBER (sotiekscyber@gmail.com)

 lOMoARcPSD|2589649

4.4.5.3. Decision trees

 Information in decision tables can be displayed as decision trees
 A decision tree is a graphical display of the decision process that indicates decision
alternatives, states of nature and their respective probabilities, and payoffs for each
combination of decision alternative and state of nature
 Appropriate for showing sequential decisions
 Symbols used in a decision tree:
  – decision node from which one of several alternatives may be selected
  – a state-of-nature node out of which one state of nature will occur
 Arcs connecting between nodes and outcomes

Decision Outcome 0.5
Alternatives
Node Node
0.2 Probabilities
0.3

Final 
Outcomes

Figure 4-1: Decision Trees

Example: Refer to Fair & Square Shed Ltd from Decision Making Under Risk section

4.4.5.4. Multistage decision trees

 Multistage problems involve a sequence of several decisions and outcomes
 It is possible for a decision to be immediately followed by another decision
 Decision trees are best for showing the sequential arrangement

ENG PMP Course Notes Part

Distributing prohibited | Downloaded by SOTIEKS CYBER (sotiekscyber@gmail.com)

 lOMoARcPSD|2589649

Example:

A company is deciding whether to bid for a certain project or not. They estimate that merely
preparing the bid will cost $10,000. If their company bid then they estimate that there is a
50% chance that their bid will be put on the "short-list", otherwise their bid will be rejected.

Once "short-listed" the company will have to supply further detailed information (entailing
costs estimated at $5,000). After this stage their bid will either be accepted or rejected.

They are considering three possible bid prices, namely $155,000, $170,000 and $190,000,
including the decision to abandon the bid. They estimate that the probability of these bids
being accepted (once they have been short-listed) is 0.90, 0.75 and 0.35 respectively. The
company estimate that the labour and material costs associated with the contract are
$127,000.

What should the company do and what is the expected monetary value of your suggested
course of action?

ENG PMP Course Notes Part

Distributing prohibited | Downloaded by SOTIEKS CYBER (sotiekscyber@gmail.com)

 lOMoARcPSD|2589649

 It is recommended that the company should prepare a bid, and, if get short listed, should bid
for $170,000.

4.4.6. Project selection based on multiple criteria

Comparing projects based on multiple criteria:
 Project valued high in one way might be considered very poor in another
 Require scoring method that uses several criteria

This is different from comparing projects based on a single criterion in which the best value project
is selected based on a single criterion, such as highest B/C ratio, NPV, or EMV (as in the previous
sections).

ENG PMP Course Notes Part

Distributing prohibited | Downloaded by SOTIEKS CYBER (sotiekscyber@gmail.com)

 lOMoARcPSD|2589649

Figure 4-2: Example of multi-criteria project selection – Simplified Checklist Model

Multi-Criteria Scoring Models

Each project receives a score that is the weighted sum of its grade on a list of criteria. Scoring
models require:
 agreement on criteria
 agreement on weights for criteria
 a score assigned for each criteria

Total score = ∑ (weight x score)

Figure 4-3: Example of simple scoring model

ENG PMP Course Notes Part

Distributing prohibited | Downloaded by SOTIEKS CYBER (sotiekscyber@gmail.com)

 lOMoARcPSD|2589649

Case Study: Hinze Dam Stage 3 Project

Background
Stage 1 of the Hinze Dam, completed in 1976, provided storage capacity of 42,400 million litres,
which was increased to 161,070 million liters with the completion of Stage 2 in 1989.

The Stage 3 upgrade will raise the Hinze Dam embankment from 93.5 meters to 106 meters,
providing a total capacity of 286,500 million litres.

Among many project alternatives, HSD3 was selected mainly based on:
 Sound economic justification
 It simultaneously satisfies two major criteria:
1. To achieve flood mitigation objectives that are in line with Gold Coast City
Council’s commitment. Currently over 4,000 existing properties downstream of
Hinze Dam could potentially be affected in a 1:100 year flood event and result in
$147 M in damages.
2. To augment the capacity and reliability of water supply in line with the Gold
ENG PMP Course Notes Part

Distributing prohibited | Downloaded by SOTIEKS CYBER (sotiekscyber@gmail.com)

 lOMoARcPSD|2589649

Coast Water Futures & the Queensland Government’s South East Queensland
Regional Water Supply Strategy (SEQRWSS) findings.

Project alternatives: Flood mitigation options

1. Raising of Hinze Dam
2. Dredging of the Lower Nerang River - Dredging to improve water flow through the mid and
the lower sections of the Nerang River, by accelerating flows of floodwaters and allowing
greater discharge through the system
3. Bridges improvements – Increasing cross sectional area of the waterway at bridges could
potentially reduce peak flood levels
4. Benowa Flood Channel modifications – Bypass the current Benowa Flood Channel
configuration to reduce congestion of floodwaters
When evaluating the flood mitigation options - Cost benefit analysis of each of these options
was undertaken to identify the BC ratios. The option with the highest BC ration was the Benowa
channel modification option. However this option was not able to provide a sufficient scale of
flood mitigation benefits. Raising the Hinze Dam is the preferred option as it had the highest
benefit cost ratio and resulted in the most significant flood mitigation benefits of all of the
options.

4.5. Review Questions

1. What is the difference between project and non-project companies? And how does this affect
project selection?
2. Why is project selection considered a challenging task for organisations?
3. “Numeric project selection models should be complicated and include as many parameters as
possible in order to give precise solutions.” Is this statement valid? Why?
4. Describe the economic evaluation techniques that can be used to evaluate projects.
5. What is the main difference between decision under uncertain and decision under risk?
6. What is the difference between single-criterion and multi-criteria project selection techniques?

7. A local city council will build an aqueduct to bring water in from the upper part of the state. It can be
built at a reduced size now for $300 million and be enlarged 25 years hence for an additional $350
million (incur at the end of year 25). An alternative is to conduct a full-size aqueduct now for $400
million. Both alternatives would provide the needed capacity for the 50-year analysis period.
Maintenance costs are small and may be ignored. At 6% interest, which alternative should be selected?

8. A company is planning to buy a machine to improve its current operating capacity. There is a choice
between purchasing a brand new machine or a used one. Based on the information provided in the
following table, determine which machine the company should invest in, given i = 12% per year.

New Machine Used Machine

Capital cost $44,000 $23,000
Annual operating cost $6,000 $9,000
Annual repair cost $200 $350
Overhaul every 3 years - $1,900
Overhaul every 5 years $2,100 -
Salvage value $6,000 $3,500
Expected operating life 14 years 14 years

ENG PMP Course Notes Part

Distributing prohibited | Downloaded by SOTIEKS CYBER (sotiekscyber@gmail.com)

 lOMoARcPSD|2589649

9. Three alternative designs are being considered for a potential improvement project related to the
operation of your department. The prospective cash flows for these alternatives are shown in the
following table, and the discount rate is 15% per year.

End of Year Alternative Net Cash Flows

A B C
0 -$200,000 -$230,000 -$212,500
1 90,000 108,000 -15,000
2 122,500
3 a a
4 a
5
6 90,000 108,000 122,500
a
Continuing uniform cash flow

Determine the most economical alternative using NPV method.

10. The Miramar Company is going to introduce one of three new products: a widget, a hummer, or a
nimnot. The market conditions (favorable, stable, or unfavorable) will determine the profit or loss the
company realizes, as shown in the following payoff table.

Market Conditions
Product Favorable Stable Unfavorable
(prob = 0.2) (prob = 0.7) (prob = 0.1)
Widget $120,000 $70,000 –$30,000
Hummer $60,000 $40,000 $20,000
Nimnot $35,000 $30,000 $30,000

a. Compute the expected value for each decision and select the best one
b. Assume that probabilities cannot be assigned to future market conditions, and determine the best
decision using the maximax, maximin, and equal likelihood criteria.

11. Andy Hamish has come into an inheritance from his grandparents. He is attempting to decide among
several investment alternatives. The return after one year is primarily dependent on the interest rate
during the next year. The rate is currently 7%, and he anticipates it will stay the same or go up or down
by at most 2 points. The various investment alternatives plus their returns ($10,000) given the interest
rate changes are shown in the following table.

Interest Rates
Investments
5% 6% 7% 8% 9%

Money market fund 2 3.1 4 4.3 5

Stock growth fund -3 -2 2.5 4 6
Bond fund 6 5 3 3 2
Government fund 4 3.6 3.2 3 2.8
Risk fund -9 -4.5 1.2 8.3 14.7
Savings bond 3 3 3.2 3.4 3.5

a. Determine the best investment using the following decision criteria.

1. Maximax
2. Maximin
3. Equally likely

ENG PMP Course Notes Part

Distributing prohibited | Downloaded by SOTIEKS CYBER (sotiekscyber@gmail.com)

 lOMoARcPSD|2589649

b. Assume that Andy, with the help of a financial newsletter and some library research, has been able to
assign probabilities to each of the possible interest rates during the year as follows:

Interest Rate 5% 6% 7% 8% 9%
Probability 0.2 0.3 0.3 0.1 0.1

Based on expected monetary value, determine the best investment decision.

12. Kookaburra Electric Service is an electrical utility company providing services in the South East
Queensland region. It is considering replacing some of its equipment at a generating substation and is
attempting to decide whether it should replace an older, existing PCB transformer. (PCB is a toxic
chemical known formally as polychlorinated biphenyl.) Even though the PCB generator meets all current
regulations, if an incident occurred, such as a fire, and PCB contamination caused harm either to
neighboring businesses or farms or to the environment, the company would be liable for damages.
Recent court cases have shown that simply meeting utility regulations does not relieve a utility of
liability if an incident causes harm to others. Also, courts have been awarding large damages to
individuals and businesses harmed by hazardous incidents.

If the utility replaces the PCB transformer, no PCB incidents will occur, and the only cost will be that of
the transformer, $85,000. Alternatively, if the company decides to keep the existing PCB transformer,
then management estimates there is a 50-50 chance of there being a high likelihood of an incident or a
low likelihood of an incident. For the case in which there is a high likelihood that an incident will occur,
there is a .004 probability that a fire will occur sometime during the remaining life of the transformer and
a .996 probability that no fire will occur. If a fire occurs, there is a .20 probability that it will be bad and
the utility will incur a very high cost of approximately $90 million for the cleanup, whereas there is a .80
probability that the fire will be minor and a cleanup can be accomplished at a low cost of approximately
$8 million. If no fire occurs, then no cleanup costs will occur. For the case in which there is a low
likelihood of an incident occurring, there is a .001 probability that a fire will occur during the life of the
existing transformer and a .999 probability that a fire will not occur. If a fire does occur, then the same
probabilities exist for the incidence of high and low cleanup costs, as well as the same cleanup costs, as
indicated for the previous case. Similarly, if no fire occurs, there is no cleanup cost.

Perform a decision tree analysis of this problem for Kookaburra Electric Service and indicate the
recommended solution.

13. The Metal Exploration Group (MEG) is a company set up to conduct geological explorations of parcels
of land in order to ascertain whether significant metal deposits (worthy of further commercial
exploitation) are present or not. Currently, MEG has an option to purchase outright a parcel of land for
$3m.

If MEG purchases this parcel of land then it will conduct a geological exploration of the land. Past
experience indicates that for the type of parcel of land under consideration geological explorations cost
approximately $1m and yield significant metal deposits as follows:

• manganese 1% chance
• gold 0.05% chance
• silver 0.2% chance

Only one of these three metals is ever found (if at all), i.e. there is no chance of finding two or more of
these metals and no chance of finding any other metal.

If manganese is found then the parcel of land can be sold for $30m, if gold is found then the parcel of
land can be sold for $250m and if silver is found the parcel of land can be sold for $150m.

ENG PMP Course Notes Part

Distributing prohibited | Downloaded by SOTIEKS CYBER (sotiekscyber@gmail.com)

 lOMoARcPSD|2589649

MEG can, if they wish, pay $750,000 for the right to conduct a three-day test exploration before
deciding whether to purchase the parcel of land or not. Such three-day test explorations can only give a
preliminary indication of whether significant metal deposits are present or not and past experience
indicates that three-day test explorations cost $250,000 and indicate that significant metal deposits are
present 50% of the time.

If the three-day test exploration indicates significant metal deposits then the chances of finding
manganese, gold and silver increase to 3%, 2% and 1% respectively. If the three-day test exploration
fails to indicate significant metal deposits then the chances of finding manganese, gold and silver
decrease to 0.75%, 0.04% and 0.175% respectively.

By using decision analysis under risk technique, what would you recommend MEG to do? Show all
your working and comment on the findings.

ENG PMP Course Notes Part

Distributing prohibited | Downloaded by SOTIEKS CYBER (sotiekscyber@gmail.com)