Project Management

MBA - FINANCE
III Semester
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MBA (Finance) – III Semester Paper code: MBFM 3004

PAPER – XIV

Project Management

Objectives

➢ To understand the concept of project and steps in project

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

Unit - I

Project – Classification – Importance of Project Management – An

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

Unit-II

Project feasibility studies - Opportunity studies, General opportunity

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

Unit - III

Project Evaluation under certainty - Net Present Value (Problems -

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

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

Unit - IV

Developing a Project Plan - Developing the Project Network –

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

Unit - V

Managing versus leading a project - managing project stakeholders

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

[Note: Distribution of Questions between Problems and Theory of this

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

References

Arun Kanda, PROJECT MANAGEMENT, PHI, Delhi, 2011

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

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UNIT - I

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

Unit Structure

Lesson 1.1 - Project Management – An Overview

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

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Lesson 1.1 - Project Management – An Overview

Learning Objectives

➢ To understand the concept, characteristics and elements of projects.

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

Concept of Project

Project is defined as temporary but interrelated tasks undertaken to

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

A project is a temporary endeavor, having a defined beginning and

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

A project is an investment made on a package of interrelated time-

bound activities; consequently, a project becomes a time-bound task. Every
project has two phases basically; the first is preparation and construction, and
the second, its operation. Project planning deals with specified tasks,
operations or activities which must be performed to achieved the project

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

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

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

Typical examples of projects include: construction of a house,

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

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

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Characteristics of a Project

1. Temporary: Projects are temporary in nature. Every project has a

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

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

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

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

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

4. Defined Time and Resources: As the projects have definite

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

5. Multiple Talents: As projects involve many interrelated tasks done

by many specialists, the involvement of people from several

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

Basic Elements of Project

There are three basic elements which must be considered in a project

cycle. These are discussed below:

Operations

Operations are the activities or jobs which must be performed to

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

Resources

The second of the project elements, resource can be classified under

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

Conditions or Restraints

The third project element refers to externally imposed conditions

or restraints, like supply of materials, machines, and designs by outside
agencies. The delivery system should be planned carefully in co-
ordination with the activities to be undertaken.

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

White Elephants

In India, almost every project in infrastructural sectors has been

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

Stages in Project Life Cycle:

The project life cycle typically passes through four stages, viz.,
Initiating, planning, executing and closing. The following figure shows the
Project Life Cycle.

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

a) Project Initiation Stage: In this stage, the specifications of the

project are defined along with the clear cut project objectives. Project
teams are formed and their major responsibilities are assigned. More
specifically, this stage defines the goals, specifications, tasks and
responsibilities.

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

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

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

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

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Classification of Projects

The projects can be classified into various types:

1) Based on Ownership

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

2) Based on Investment

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

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

3) Based on Research in Academia

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

which involve more than one year to 3 or 5 years and minimum
funding of ` 3 lakhs in case of social sciences and ` 5 lakh in case of
sciences.
b) Minor Projects: The minor projects in academia are those projects
which will be completed within a year and have a maximum funding
of ` 1 lakh in social science and ` 3 lakh in case of sciences.

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4) Based on Sector

a) Agricultural Projects: These are the projects which are related to

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

5) Based on Objective

a) Commercial Projects: These projects are undertaken for commercial

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

b) Social Projects: These projects are undertaken for social purposes

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

6) Based on Nature

a) Conventional Projects: These projects are traditional projects which

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

b) Innovative Projects: These projects involve the use of technology,

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

i) Technology: Depending on the level of technological

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

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

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

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

iii) New product development: These projects are undertaken in the

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

7) Based on Time

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

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

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

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

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

d) Very short term projects: By very name you can understand that
these projects are completed within a very short period, say, within
a day. For example, product launch project.

8) Based on Functions

Based on the functional area of management, the projects can be

classified into:

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

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

b) Financial Projects are undertaken to raise finance or restructure

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

c) Human Resources Projects are undertaken in the area of human

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

d) IT and Technology Projects which are undertaken in the area of IT

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

e) Production Projects are undertaken in the area of production or

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

f) Strategic Projects are taken by the organizations to executive a

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

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9) Based on Risk

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

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

b) Low Risk Projects: These projects do not involve risk and they are
carried out in the normal course of action. For example, road and
bridge construction, house construction.

10) Based on Investment Decisions

On the basis how the projects influence the investment decision

products, project can be classified into

a) Independent Projects: An independent project is one, where the

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

b) Mutually exclusive Projects: The mutually exclusive projects are

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

c) Contingent Projects: A contingent project is one where the ac-

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

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

11) Based on Output

Based on output, projects are classified into quantifiable and non-

quantifiable ones.

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

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

b) Non-quantifiable projects: In these projects quantification of the

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

12) Based on Techno-Economic Characteristics

Based on the technology intensity, size of the investment, and scope

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

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

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

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

b) Causation-Oriented Projects: The availability of a particular raw

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

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

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

13) Based on Financial Institutions’ Classification

Financial institutions – both central and state level have classified

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

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

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

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

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

Project Management

Project management is the discipline of planning, organizing,

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

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

Project management knowledge draws on nine areas, viz.,

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

Project management deals with planning, scheduling, controlling

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

Importance of Project Management

Project management is the art of managing the project and its

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

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

a) Reduction in the Product Life Cycle

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

b) Global Competition

In the globally competitive today’s market, customers want

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

c) Knowledge Explosion

The knowledge explosion world over has increased the complexity of

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

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d) Corporate Downsizing

Restructuring of organizations in the recent years has resulted

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

e) Increased Customer Focus

Increased competition has increased the expectation of customers.

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

f) Managing Small Projects

In today’s competitive world, a situation has emerged in the

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

g) Upsurge of Third World and Closed Economies

The gradual opening of emerging economies has created an

explosion of demand for goods and services within these economies for
their development. Thus, new markets emerge in the scenario. The
developed markets have started introducing their products and services into
these markets. Many firms are using project management techniques to
establish distribution channels and foreign bases of operations.

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Notes
An Integrated Approach to Project Management

Many project managers have tried many tools, techniques and

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

a) Integration of Projects with Strategic Plan

Strategic plans are written by one group of managers, projects are

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

b) Integration within the Process of Managing Actual Projects

The integration within the process of managing projects has two

dimensions. The first dimension is the technical side of the management
process which consists of the formal, disciplined, pure logic part of the
process. It relies on the formal information system and it includes
planning, scheduling and controlling of projects. The second dimension
is the socio-cultural side and this centers on creating a temporary social
system within a larger organizational environment that combines the
talents of a divergent set of professionals working to complete the project.

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Conclusion

Without a scientific approach to the task of managing the projects

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

****

21
Notes

Lesson 1.2 - Project Portfolio Management System and Structure

Learning Objectives

➢ To understand the concept of Project Portfolio Management

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

Project Portfolio Management System

Project Portfolio Management System (PPM) is a term used by

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

Thus, Project Portfolio Management is about more than running

multiple projects. Each portfolio of projects needs to be assessed by its
business value and adherence to strategy. The portfolio should be designed

22
 Notes
to achieve a defined business objective or benefit. Project management guru
Bob Buttrick summarized it when he said; “Directing the individual project
correctly will ensure it is done right. Directing ‘all the projects’ successfully
will ensure we are doing the right projects.” Project portfolio management
organizes a series of projects into a single portfolio of reports that capture
project objectives and other critical factors. While at individual project
level it is important to know how each project is performing, the impact of
each project on the portfolio is also important. The following questions
should be asked:

➢ Does each project contribute to the overall achievement of the

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

Working at portfolio level is about working with summary or key

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

Project portfolio management asks the following questions:

➢ Are we doing the right things?

➢ Are we doing them the right way?
➢ Are we doing them well?
➢ Are we getting the benefits?

23
Notes
If the answer to any of these questions is no, immediate action is
needed to bring the portfolio back on track.

Need for an Effective Project Portfolio Management System

There are three problems or reasons why we need project portfolio

management system. They are

a) Implementation Gap

In many organizations, top management formulates strategy and

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

b) Organizational Politics

When criteria and processes for selecting projects are ill-defined

and non-aligned with the mission of the firm, projects suffer from not
getting priority and resources. The term ‘sacred cow’ is used to refer to
the worthless projects which are advocated by higher officials. Similarly,
project sponsor can play a significant role in the selection and successful
implementation of projects. Politics can play a role not only in project
selection but also in the aspirations behind the projects. Individuals can
enhance their powers within the organization by managing extraordinary
and critical projects. Thus, project portfolio management system will help
in reducing the organizational politics.

24
 Notes
c) Resource conflicts and multitasking

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

Design of Project Portfolio Management System

Design of project portfolio management system should include the

following:

a) Classification of Project

Most of the organizations may have three kinds of projects in their

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

b) Selection Criteria

Selection criteria for projects may be divided into financial and

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

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

25
Notes
following: a) restoring corporate image or b) enhancing brand image.
Many organizations are committed to corporate citizenship and support
community development projects. Thus, the social desirability of the
projects is also equally important as financial viability.

c) Sources of Project Proposals

Projects should originate from anyone who believes their project

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

d) Evaluation and Selection of Project Proposals

Evaluating many project proposals and selecting the projects

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

e) Managing the Project Portfolio System

Managing portfolio takes the selection system one step higher in that
the merits of a particular project are assessed within the context of existing
projects. At the same time, it involves monitoring and adjusting selection
criteria to reflect the strategic focus of the organization. The priority system
can be managed by a small group of key employees in a small
organization or in a large organizations, it can be managed by the project
office or enterprise management group. Management of a portfolio system
requires two major inputs from senior management, viz.,
a) senior management must provide guidance in establishing selection
criteria that strongly align with the current organizational strategies; and
b) senior management must annual decide how they wish to balance the
available organizational resources among the different types of projects.
Given these inputs, the priority team or project office can carry out its many
responsibilities, which include supporting project sponsors and
representing the interest of the total organization.

26
 Notes
f) Balancing the portfolio for risks and types of projects

A major responsibility of the priority team is to balance projects by

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

Conclusion

Implementing PPM at the enterprise level faces a challenge in

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

Project Management Structures

Organizational structure consists of activities such as task

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

27
Notes
the viewing glass or perspective through which individuals see their
organization and its environment. An organization can be structured in
many different ways, depending on their objectives. The structure of an
organization will determine the modes in which it operates and performs.
Organizational structure allows the expressed allocation of responsibilities
for different functions and processes to different entities. Organizational
structure affects organizational action in two big ways. First, it provides the
foundation on which standard operating procedures and routines rest.
Second, it determines which individuals get to participate in which
decision-making processes, and thus to what extent their views shape the
organization’s actions.

A project management structure provides a framework for launching

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

a) Organizing Projects within the Functional Organization

Employees within the functional divisions of an organization tend

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

28
 Notes
management channels. The functional organization is also commonly used
when, given the nature of project, one functional area plays a dominant role
in completing the project or has a dominant interest in the success of the
project. Under these circumstances, a high ranking manager in that area is
given the responsibility of coordinating the project. The following figure
shows how project is managed within the functional organization.

The advantages in using the existing functional organization include

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

➢ Maximum flexibility in the use of staff.

➢ In-depth expertise of the functional department can be used for

projects

➢ Post-project transition is easy.

The disadvantages in using the existing functional organization include

➢ Lack of focus on the part of functional departments as they have

their own routine work.

➢ Integration across functional units is very difficult.

➢ Projects may take longer time due to slow response by functional

departments.

➢ Motivation level among the people assigned to the project is very

weak as they lack ownership.

29
Notes
b) Organizing Projects as Dedicated Teams

In this structure, a dedicated independent project teams are

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

Managing Projects as dedicated teams

The advantages of dedicated team structure include

➢ It is very simple to establish.

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

The disadvantages of dedicated team structure include

➢ It is expensive

➢ It creates internal strife in the organization. It is referred as

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

30
 Notes
➢ Sometimes, the technological expertise of the specialized project
teams may be very limited and that will affect the project outcomes.

➢ Post project transition is very difficult as after the completion of

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

c) Organizing Projects within a Matrix Structure

Matrix management is a hybrid organizational form in which a

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

Managing Projects within a Matrix Structure

There are different forms of matrix systems depending on the

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

31
Notes
arrangement. Project, heavy weight, or strong matrix is used to describe a
matrix in which the balance of authority is strongly on the side of the
project manager.

Weak/Functional Matrix

A project manager with only limited authority is assigned to oversee

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

Balanced/Functional Matrix

A project manager is assigned to oversee the project. Power is shared

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

Strong/Project Matrix

A project manager is primarily responsible for the project. Functional

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

The advantages of matrix structure include

➢ Efficient allocation of resources to multiple projects is possible

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

➢ Dysfunctional conflict may arise between function managers and

project managers.

➢ Infighting may occur among project managers who are primarily

interested in what is best for their project.

32
 Notes
➢ As the management principle unity of command is violated, project
participants have two bosses at the least and hence it will create
stressful situations.

➢ In case of balanced matrix form, the projects get slow down.

d) Organizing projects within network organizations

There have been a lot of changes in the organizational structures

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

Network of Amazo.com, a Networked Organization

Another example is the film industry where studios such as MGM,

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

33
The advantages of networked organizations include

➢ It reduces cost as overhead costs are dramatically cut.

➢ High level of expertise and technology can be brought by outsourcing

and it will have positive impact on the project.

➢ Lot of flexibility is there as the organizations are no longer

constrained by their own resources but can pursue a wide range
of projects by combining their resources with talents of other
companies.

The disadvantages of networked organizations include

➢ Coordination breakdown may result when coordinating

professionals from different organizations.

➢ Control may be lost on the projects as the core team depends on

other organizations on which they do not have direct authority.

➢ Interpersonal conflicts may arise as project participants do not

share the same values, priorities, and culture.

34
 Thus, managing projects has witnessed a lot of changes depending
on the changes in the organizational structure from hierarchical to
networkedorganizations which are shown in above figure.

Thus, the project characteristics and organizational structure can be

related and the same is shown in the following figure.

Project Characteristics and Organizational Structure

Choosing Appropriate Project Management Structure

Project success directly depends on the level of autonomy and

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

a) Organizational considerations and

b) Project considerations.

a) Organizational Considerations

Depending on how important the project management is to the

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

35
Notes
➢ Number of Projects: If an organization has very few projects, then
a less formal arrangement is sufficient. Temporary task forces can
be created on need based and the organization could outsource
project work also.

➢ Resource Availability: Another important consideration is the

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

b) Project Considerations

Depending on the autonomy the project needs to complete

successfully, the project considerations include the following:

➢ Size of the project

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

Higher the levels of these seven factors, the more autonomy and
authority the project manager and project team need to be successful. This
would lead to using of either a dedicated project team or a project matrix
structure.

Project Management Office

The Project Management Office (PMO) is widely recognized as one

of the most effective business practices used by successful organizations.

36
 Notes
Understand the Impact of Culture on a PMO

Every organization has a unique culture, created through years of

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

A successful project office can range from simple project data

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

Key questions to ask include:

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

Expectations for the success of PMO need to match the maturity of

organization in each of these key areas.

Options for PMO Structures

In a decentralized structure, the PMO would provide a valuable re-

porting service for project status data. Project managers typically contin- ue
to report within their departmental units. There are roles in the project office
for more than just project managers, including schedulers who can

37
Notes
implement and track quality project schedules, and facilitators, who can help
guide projects in conjunction with a project manager.

Often these roles remain in the project office even in a decentral-

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

A decentralized structure is often a lower cost solution with lower

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

Many organizations begin with a decentralized structure when

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

This centralized structure allows organizations to more rapidly

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

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

38
 Notes
The PMO can also get a “project police” reputation, which may not
encourage good project practices outside of the project office. This struc-
ture is effective when an organization is working with a large number of
complex projects and only if the culture of the organization includes well-
developed communication and teamwork skills.

Two structures that every organization should try to avoid: a de-

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

Conclusion

No matter what structure your organization chooses, the

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

****

39
Notes

Lesson 1.3 - Steps in Defining Project and Project Delays

Learning Objectives

➢ To understand the steps in defining project.

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

Steps in Defining Project

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

Step 1: Defining the Project Scope

The first step in defining the project is defining its scope. Project
scope is a definition of the end result or mission of the project – a product
or service for the customer or client. The primary objective is to define as
clearly as possible the deliverables for the end user and to focus project
plans. The scope should be developed under the direction of the project
manager and customer. The project manager is responsible for seeing that
there is agreement with the owner on project objectives, deliverables at each
stage of the project and technical requirements. The project scope definition
is a document that will be published and used by the project owner and
project participants for planning and measuring project success. Scope
describes what the organization expects to deliver to the

40
 Notes
customer when the project is complete. The project scope should define
the results to be achieved in specific, tangible and measurable terms.

To ensure that the scope definition is complete, the following project

scope checklist may be used:

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

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

b) Deliverables: The next step is to define major deliverables – the

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

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

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

d) Technical Requirements: Technical requirements to complete the

project successfully should be clearly spelt out.

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

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

f) Reviews with customer: Completion of the scope checklist ends

with a review with the customer – internal and external. The main
concern here is the understanding and agreement of expectations.
The main concern is the understanding and agreement of
expectations.

The above checklist is generic and different industries and

companies will develop unique checklists and templates to fit their
needs

41
Notes
and specific kinds of projects. Many projects suffer from scope creep, which
is the tendency for the project scope to expand over time – usually by
changing requirements, specifications, and priorities.

Step 2: Establishing Project Priorities

Quality and the ultimate success of a project are traditionally defined

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

Constrain

The original parameter is fixed. The project must meet the

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

Enhance

Given the scope of the project, which criterion should be optimized?

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

Accept

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

accepted like slipping of schedule or reduce the scope and performance or go
over budget.

The following figure shows the project priority matrix in which

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

42
 Notes

Project Priority Matrix

Step 3: Creating the Work Breakdown Structure

The Work Breakdown Structure (WBS) is a tree structure, which

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

Purpose for Creating a WBS for Projects

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

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

43
Notes

Hierarchical Breakdown of the WBS

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

c) Finally, it allows you double check all the deliverables’ specifics

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

Process of Creating a WBS

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

➢ The Project Scope Statement

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

These inputs should give you all the information you and your
team needs to create your WBS. Along with these inputs, you will use

44
 Notes
certain tools as well. Finally, using these inputs and tools you will create
the following outputs:

➢ Work Breakdown Structure

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

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

Work Breakdown Structure

45
Notes
Work Packages

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

Most Project Management Offices (PMOs) have basic WBS

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

Many projects will also find it necessary to create a WBS Dictionary

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

46
 Notes
Pitfalls to Creating WBS

Let’s understand the five common pitfalls in creating a WBS. If you

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

➢ Level of Work Package Detail: When deciding how specific and

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

➢ Deliverables Not Activities or Tasks: The WBS should contain

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

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

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

➢ WBS Updates Require Change Control: The WBS is a formal

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

➢ WBS is not an Organizational Hierarchy: The WBS and

Organizational Hierarchy chart is never the same thing. Although
often similar in appearance, these two documents are very different.
The Organizational Hierarchy shows things like chain of command
and lines of communication, but the WBS is restricted simply to a
project and shows only the deliverables and scope of that project.

47
Notes
The WBS is an extremely valuable tool to the project management
methodology. It can make or break a project. It sets the foundation for
the rest of the project planning. A solid WBS helps ensure proper project
baselines, estimating, resource use, scheduling, risk analysis, and
procurement.

Step 4: Integrating the WBS with the organization

An integral part of WBS is to define the organizational units

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

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

Step 5: Coding the WBS for the Information System

Coding system is very important to gain the maximum benefit of a

work breakdown system. The codes are used to define levels and elements
in the WBS, organization elements, work packages, budget and cost
information. The codes allow reports to be consolidated at any level in the
structure. The most commonly used scheme is numeric indention. Some
organizations use alphabet letters and most of the organizations use the
combination of both.

48
 Notes
Project Roll-Up

The intersection of WBS and OBS represents a control point called

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

Each work package has time, budget, resource, responsibility and

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

Role of Project Rollup in Identifying Project Cost and Schedule

Problems

A project rollup is a very complete breakdown of a project’s cur- rent

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

Process Breakdown Structure

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

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

49
Notes

Process Breakdown Structure

Responsibility Matrix

A Responsibility Matrix (RM) describes the participation by various

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

Role Distinction: There is a distinction between a role and

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

Description of the Responsibility Matrix

Setting up a Responsibility Matrix is about establishing “what”,

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

50
 Notes

Resource 1 Resource 2 Resource 3 Resource 4

Activity 1
Activity 2
Activity 3
Activity 4

The intersection points are used to describe each resource’s level of

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

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

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

As shown in the figure, resources might not have a participation type

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

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

Because the purpose of the matrix is to gain clarity and agreement

on who does what, the columns and rows can be defined with as much detail
as makes sense.

For example, a high-level RM can identify what project team group is

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

51
Notes
RACI

There are a number of ways to create a Responsibility Matrix using

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

Person Person Person Person Person Person

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

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

Here is a detailed explanation of the participation types used in the

RACI matrix:

➢ Responsible - The person or role who is assigned to achieve the task.

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

➢ Accountable – This person or role must sign off on work that

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

52
 ➢ Consulted - Those whose opinions are sought and with whom there
is two-way communication.

➢ Informed - Those who are kept up-to-date on progress, often only

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

Following table is an example of a Responsibility Matrix for the

development of project deliverables.

Project Functional Project Project Steering

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

A=Approve, R=Review, C=Create

It lists the deliverables as activities and uses roles instead of specific

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

Developing a Responsibility Matrix (RM)

Step One: Define Your Deliverables

A Work Breakdown Structure (WBS) is a project planning tool used

to break a project down into smaller, more manageable pieces

53
Notes
of work (deliverables). It’s not a list of every task: rather, it’s a “tree” structure
showing the meaningful groups of activities that make up the main segments
of the project.

Step Two: Identify the People Involved

Map out who is on your project team. By creating a chart of

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

Step Three: Create Your Responsibility Matrix

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

Step Four: Assign Roles

For each group responsible for an activity, assign roles and

responsibility.

Step Five: Communicate

When your Responsibility Assignment Matrix is complete,

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

Project Delays (Overruns)

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

54
 Notes
Let us understand the external causes and internal constraints of project
delays.

External Causes of Delay

There are several reasons, including socio-political, economic,

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

The external causes arise due to the following reasons:global and

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

The external factors include uncontrollable factors, such as:

➢ Government policies
➢ Import regulations
➢ Panic taxation
➢ Resource constraints
➢ Defense expenditure
➢ Political situation
➢ Inflation
➢ Non-development expenditure
➢ Budgetary deficits
➢ Economic stagnation
➢ Natural disasters, like earthquakes, floods, etc.
➢ Labour unrest
➢ Law and order problems
➢ Social turmoil like terrorists’ menace, communal vandalism, etc.
➢ Unscheduled mid-term elections

55
Notes
➢ Global recession, or unrest, and
➢ Interference from unexpected quarters.

Internal Constraints

The internal constraints, which can be anticipated, planned and

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

➢ Inappropriate choice of site

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

56
 Notes
➢ Price escalation because of change in exchange rates
➢ Delay in obtaining import licences
➢ Inadequate or improper liaison with customs, excise, sales tax,
police, octroi, etc.,
➢ Poor monitoring and control, and
➢ Infrequent monitoring and review amongst members and
contractors

The causes of delay can be summarised as being due to site-selection,

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

➢ Delays in receiving information on changes, clarifications, etc.,

finalising tenders, modifications, rework, and inspection results

➢ Unavoidable statutory controls

➢ Over ambitious scheduling targets

➢ Frequent changes in design, and technological up gradation that

hold-up project execution

➢ Inadequate consideration of the choice of technology and design

at planning and development stages

➢ Weak monitoring and control

➢ Not being equipped with force majeure to operate in contingencies

➢ Resistance to the use of innovative techniques and management

principles

➢ Allowing project duration to expand, leading to improper

resource allocation and increased costs, and

➢ Inability to distinguish between critical and non-critical

activities, and inadequate monitoring

Self Assessment Questions

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

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

57
Notes
4) What is project management?
5) Explain the importance of project management.
6) Explain the integrated approach to project management.
7) What is project portfolio management system?
8) Explain the need for project portfolio management system.
9) Explain the design of project portfolio management system.
10) What is pipeline management?
11) Write short notes on
a) White elephants
b) Pearls
c) Oysters
d) bread and butter projects
12) Explain the various organization structure used in managing
projects.
13) How to manage projects in functional organizations?
14) How to manage projects within matrix structure?
15) Explain the various forms of matrix organizational structure for
managing projects.
16) How to manage projects in networked structure?
17) How to manage projects using dedicated project teams?
18) Explain the considerations used while choosing appropriate
project management structure.
19) Explain the options available for project management office
structure.
20) Explain the steps in defining project.
21) What is work breakdown structure?
22) What are work packages?
23) Explain the process of creating work breakdown structure.
24) Explain the pitfalls to work breakdown structure.
25) What is responsibility matrix?
26) Explain the steps in developing the responsibility matrix.
27) What is project roll up?
28) What are project overruns?
29) What is time overrun?

58
 Notes
30) What is cost overrun?
31) What are white elephants?
32) Explain the external causes of project delays.
33) Explain the internal constraints of project delays.

CASE STUDY
AmeriHealth Mercy Driving Results and Increasing Competitive
Advantage

Through Organization Project Management

In 2007, the AmeriHealth Mercy Family of Companies sought

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

59
Notes
invest in its people. That’s what drives us,” says Ms. Guerrero. She adds,
“Since we’ve made the right investments to improve organization project
management, we’ve seen the company meet its strategic and operating
plans. The benefits that we’re reaping from the enhanced PMO are being
used to fund additional project work, including future improvements. The
PMO has truly become a strategic operations center for the organization.
According to Joanne McFall, Chief of Staff for AmeriHealth Mercy’s Chief
Operation Officer, “Our success in achieving our strategic goals is directly
linked to the effectiveness of our overall portfolio management function.
By continuing to enhance our use of organization project management
practices, we expect to see even greater benefits in future years.” Analyse
the importance of PMO.

****

60
 Notes

UNIT - II

The pre-investment phase is a crucial phase where a series of studies

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

➢ Preliminary, initial or opportunity studies;

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

While carrying out the above studies, with progressive increase in

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

Unit Structure

Lesson 2.1 - Various Stages and Components of Project Feasibility

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

61
Notes

Lesson 2.1 - Various Stages and Components of

Project Feasibility Studies

Learning Objectives

➢ To know about opportunity studies.

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

Introduction

The various stages in the project feasibility studies include

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

Let us know the details of opportunity studies and pre-feasibility

studies in this lesson.

Opportunity Studies

Identifying suitable opportunities for investment is an intricate

and involved exercise in developing countries. A variety of constraints,
complexities, risks and uncertainties have to be reckoned with, and their
implications on the project implementation and its subsequent success in
the operational phase have to be carefully and thoroughly examined before
the resources are committed. Efforts in identifying these opportunities
pursued at different levels. The enterprise management is expected to take
all initiative to convince itself about the prospects of the project that it
wishes to launch.

62
 Notes
Governmental agencies, development financial institutions and
other industrial promotion or development corporations are also
continuously engaged in identifying worthwhile investment
opportunities. For instance, the Industrial and Technical Consultancy
Organization of Tamil Nadu Ltd. (ITCOT), a joint venture of national
and state level financial institutions, has brought out a collection of
papers presented by various central research laboratories and other
technology information and financing sources, at two technology
seminars, and a guide book, providing information on technology and
project opportunities.

Where national economic planning is a fairly organized effort, the

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

➢ Availability of requisite natural resources suitable for processing

and manufacture;

➢ The pattern of agricultural activity and scope for agro-based

industries;

➢ Categories of consumer products that have prospects of growing

demand in response to population growth or improvements in
standard of living;

➢ Scope and areas for import substitution;

➢ Manufacturing lines that have been found to be successful by other

entrepreneurs;

➢ Possible inter linkages with other industries in the country or

abroad;

➢ Scope for forward or backward integration with existing activities

of the enterprise;

➢ Scope for diversification into related lines;

➢ Scope for expansion of existing capacity for achieving economies of

scale or for maintaining or improving market share;

63
Notes
➢ The prevailing and expected investment climate in the country;

➢ The industrial policies in vogue;

➢ The availability and the cost aspects of factors of production;

➢ Opportunities for export.

Broad indications on these and other relevant aspects are obtained

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

The opportunity studies can be general or specific in nature.

a) General Opportunity Studies

The government and development institutions carry out these general

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

Area Studies

Identifying locations that require development and investment

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

Sub-Sectoral Studies

The focus of attention being sub sectoral areas, such as consumer

durables, construction materials, etc.

Resource-Based Studies

These involve a survey of the availability of natural resources that can

be processed for making immediate or final products.

b) Specific Project Opportunity Studies

After identification of general investment opportunities, whereby

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

64
 Notes
promotion and development agencies often provide this information for
prospective investors. The Gujarat Industrial Development Corporation,
the Gujarat Industrial Investment Corporation and the Gujarat State
Financial Corporation have an appreciable degree of coordination in
extending all assistance to prospective investors, in terms of information
on available locations, market situation, infrastructural facilities, etc. and
help in launching projects.

The specific opportunity study enables the project idea to graduate

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

Pre-Feasibility Studies

The project idea requires to be expanded with the help of a more

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

➢ Whether, on the basis of the elaborate information obtained during

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

➢ Whether, in the light of the information obtained, it is found

justifiable to go for a very comprehensive scrutiny and analysis of
the project prospects.

➢ There could be some critical aspects pertaining to the specific project

idea which require a very thorough examination and in

65
Notes
depth analysis, through further support or functional studies. Market
surveys may be necessary, or laboratory tests may have to be carried
out to establish the attributes that the product is claimed to possess.
The production process may have to be tried out through pilot plant
tests.

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

that the project idea is not with pursuing further.

The conversion of the project idea into a commercial reality could

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

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

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

Location and site: Alternative locations available with adequate

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

Project engineering: Technology and equipment sources have to

be identified and compared before a decision is taken. Their suitability to
the local or domestic conditions have to be examined carefully and the
availability of requisite skills for their proper maintenance to be ensured.

Overheads: The organization structure will determine the nature

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

66
 Notes
choice of having a sales network or distributing through wholesale outlets,
etc. are aspects on which, at least. Tentative decisions should be taken to
guide the feasibility study.

Manpower: Ready availability of semi-skilled and skilled labour as

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

Project implementation: Whether the implementation will be

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

Financial analysis: Fairly reliable, though aggregate, estimates have

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

Where the investment possibilities and prospects are widely known

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

Functional Studies or Support Studies

These are confined to selected aspects of the project being

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

Market studies: The thrust is on examining the market prospects of

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

67
Notes
Materials input studies: The ready availability of raw materials
and other essential inputs has to be examined, and reliable sources for these
supplies have to be identified. Need for developing proximate sources of
supply for critical items or components through vendor development
initiatives have to be assessed, as this would involve additional project
outlays. The prevailing and anticipated price trends for these items have
also to be studied.

Location studies: Where transportation costs are high in relation

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

Capacity studies: Technology choice is often motivated by the

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

Equipment selection studies: Very large projects with multiple

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

Laboratory and pilot plant tests: To prove the suitability of raw

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

68
 Notes
The functional or support are investigative in nature, with reference
to the specific areas of scrutiny and the conclusions there from provide clear
guidance for proceeding with the subsequent stages of project preparation.
The support studies can precede or follow a pre-feasibility study or a
feasibility study. It is the outcome of the felt need to examine, in depth,
certain aspects that are found to be critical, calling for closer investigation.
Such requirements may arise even after feasibility studies have been
completed.

Components of Project Feasibility Studies

Introduction

The United Nations Industrial Development Organization

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

Components of Techno-Economic Feasibility Studies

Following are the contents of techno-economic feasibility studies:

(a) Project background and history

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

69
Notes
(n) Plant site, within the location
(o) Local conditions
(p) Layout and physical coverage of project
(q) Technology and equipment
(r) Civil engineering
(s) Plant organization
(t) Overhead costs
(u) Labour
(v) Staff
(w) Implementation scheduling
(x) Financial evaluation
(y) Economic evaluation

a) Executive Summary

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

b) Project Background and History

The success of any project is dependent, among other things, on its

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

70
 Notes
interest in the project. The nature of preliminary and subsequent studies
that have proceeded from the feasibility study should be mentioned, giving
the highlights and the costs incurred.

c) Demand and Market Study

After identifying the data requirements of the demand and market

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

Estimated revenue from sales and the estimated costs of marketing

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

In developing countries, where the projects are geared to import

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

The projected sales and income are critical factors affecting the vi-
ability of the project. Optimistic estimates may help launching a project
sooner, but it is an act of self-deception, as the ambitious assumptions fail

71
Notes
to materialize and the project slides down to disaster. We have innumer- able
examples of such projects that had looked splendid paper, but could either
produce the quantities promised, or failed to find the market antici- pated.

The demand analysis should aim at providing the following

essential information:

➢ The geographical boundaries of the market for the product and the
size and composition of the present demand.

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

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

➢ Demand projections of the overall market and of its segments,

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

➢ The market share that the project is likely to achieve, taking note of
the anticipated trends in domestic and international competition
and shifts in consumer needs or preferences.

➢ The pricing structure that is being adopted which is the basis for the
expectations of market penetrations.

d) Demand Projections

Demand projections should take note of domestic potential as also

export possibilities. These projections should cover the following aspects:

➢ The estimate of the potential demand for the product or products;

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

While projecting domestic demand, the following logical steps are

involved:

➢ Gather and analyze available information on current

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

72
 Notes
➢ Identify the major factors that have influenced past demand, and
assess the extent of their influence;
➢ Project the expected impact of these factors on future demand; and
➢ Forecast the demand through extrapolation of the influencing
factors.

Growth in demand for consumer products may be linked to

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

e) Forecasting Techniques

There are different forecasting techniques that can be adopted

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

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

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

f) Exports Projections

The information requirements for assessing export market potential are:

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

➢ The unit export prices for these products;

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

73
Notes
➢ Special aspects concerning these products, such as quality
stipulations, special selling arrangements, etc.

➢ Other countries with export assistance or export incentive provided

by the home country, and the prospects of their being continued or
improved.

➢ Risk of violent shifts in demand due to rapid technological changes,

or changes in political situations.

g) Market Penetration

The market penetration that the proposed product can achieve is

assessed with reference to the following factors:

➢ The degree of domestic and/or foreign competition;

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

There are also strategic levers that can be employed for achieving
market penetration. These include:

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

h) Sensitivity Analysis

There are bound to be a large number of assumptions on a variety

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

➢ Errors in the base data;

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

74
 Notes
➢ Unrealistic assumptions being made with no proper justifications;
➢ Rapid technical and technological changes.

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

Among them are:

➢ Unpredictable shifts in the rates of increase of national and per

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

To reduce the uncertainties from these diverse possibilities to a

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

i) Sales Forecast and Marketing

The demand analysis gets transformed into sales forecasts.

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

Volume of production and sales have a critical bearing on the

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

75
Notes
these have to be clearly defined and properly estimated. It is not uncommon
to come across project estimates where the sales quantities and prices are
overstated thereby boosting up the revenues, intentionally or otherwise.

j) Production Programme

Having arrived at the sales projections for the different stages of

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

k) Plant Capacity

For determination of costs and revenues, the assumptions on plant

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

Feasible Normal Capacity

This represents the capacity that is achievable under normal working

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

Nominal Maximum Capacity

This is technically feasible capacity and frequently corresponds

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

76
 Notes
reach maximum output figure, overtime as well as excessive consumption
of factory supplies, utilities, spare parts, and wear and tear, will inflate
the normal level of production costs. With reference to the nature of
operations, technology and also the resource and input constraints, the
feasible normal plant capacity has to be determined and the production
costs computed on that basis.

Matching Projected Sales and Plant Capacity

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

l) Materials and Inputs

As for the requirements of material and other inputs, detailed

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

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

The major items of materials have to be described, mentioning

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

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Notes
m) Supply Programme

The procurement plan should be linked to the anticipated

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

n) Location

Specific requirements that the locations have to fulfill for smooth

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

o) Plant Site

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

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

p) Local Conditions

A good understanding if the local conditions in terms of infra-

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

78
 Notes
project. It is interesting to note that some of the State Industrial Develop-
ment Corporations, that build international estates and invite promoters
to set up units, work on the premise that it is sufficient of the land for the
factory structure is made available initially and that the infrastructure fa-
cilities such as roads, water, drainage, transports, etc., can be developed in
due course as the number of units in the estate increases. The consequence
has been that the earlier units in these industrial estates were starved of
essential infrastructure facilities and had to struggle for survival.

The socio-economic environment is another factor that has to be

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

q) Layout and Physical Coverage of the Project

Just as it is important to determine the composition and cost of

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

Project layouts have to be determined with reference to:

➢ The production programme;

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

Alternative project layouts should be considered, and the optimal

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

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Notes
r) Technology and Equipment

The feasibility study should also describe the technologies considered

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

s) Civil Engineering

Civil engineering includes the creation of manufacturing facilities

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

t) Plant Organization

Organizational planning is as important as project engineering.

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

u) Overhead Costs

If the plant is organized into production, service and administrative

cost centres,it should be possible to obtain realistic assessment of overhead
costs. The tendency is generally, is to calculate overhead as percentage
surcharge on material cost, or on direct labor cost, or on the sum of the
two. This is too broad an approximation and is inadequate for a proper
assessment of project feasibility.The cost items accruing in the different
production, service and other cost centers should be identified, listed

80
 Notes
and the expenditure under the individual items estimated. Depreciation
charges and financing cost should also be duly reckoned.

v) Labour

After deciding on the projected production capacity and the

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

Keeping the organizational layout in view, the labour requirements

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

w) Staff

Lack of qualified and competent supervisory and managerial staff

has very often been a major handicap for many a project. Advance planning
and action is necessary to determine the manpower needs for supervisory
and managerial positions, for the proposed organization structure and plant
layout, and for requiting, inducting and training the key personnel in order
to ensure smooth and efficient operations from the commencement of
commercial production. While determining the manpower requirements
during the production phase, the necessity to requite operators and
managerial staff for certain operations and functions, well in advance, for
training and familiarization with technology and related aspects even
during the construction stage should not be overlooked. At the same
time,the size of such workforce and stuff should be optimal, in order to
avoid excessive pre-production costs.

81
Notes
Where foreign collaboration is involved is involved, the
commitments on foreign experts as per agreed terms and the cost of
training of selected employees at the collaborator’s plant have to be duly
reckoned and included in the estimates. The arrangements for training
should not be confined to preproduction phase, but should be planned
and organized even during the operation phase, since the upgrading of
skills and management development is a continuous process.

x) Implementation Scheduling

The implementation phase commences from the time the decision

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

The feasibility study should spell out the project implementation

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

Though due attention is paid to the determination of the periods

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

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 Notes
y) Financial evaluation

The feasibility study elaborates, as we have seen, element by

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

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

z) Economic Evaluation

In the case of the projects, it is particularly necessary to evaluate the

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

Detailed Project Report (DPR)

Detailed Project Report is one which contains the complete details

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

83
Notes
Detailed project report is a complete document for investment decision-
making, approval. Detailed project report is base document for planning
the project and implementing the project. Preparation of detailed project
report is a step in firming up the proposal. When an investment propos- al
has been approved on the basis of functional report and the proposal is a
major proposal, it would be necessary for detailed project report to firm
up the proposal for the capital cost as well as the various facilities . It
includes:

➢ Examination of technological parameters.

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

Feasibility-cum Detailed Project Report (FDPR)

The interested promoter should submit a Feasibility-cum-Detailed

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

1. Availability of raw materials and tie up (MOU document)/

willingness certification
2. Availability of land and tie up (Lease document)/ willingness
certification
3. Organization type and structure like (Entrepreneur/ Proprietary,
Private limited, Entrepreneur/ Public limited, Co-operative, NGO
etc.
4. Brief project description
5. Tie up with technology, equipment suppliers
6. Financial analysis and profitability study.
7. Incentives, concessions expected from other Government and
public bodies for demonstration and future multiplications.

84
 Notes
8. Initial contribution in terms of finance, technology development,
technical and equipment tie up by the promoter and user agency
(mention separately).
9. Organizations to operate and maintain the demonstration project.
10. Organization to replicate the project in a specific region or
throughout India.
11. Fulfillment of statutory requirements (like PCB clearance,
environmental clearance/ safety, etc.

Conclusion

The Detailed Project Report (DPR) is an essential building block for

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

****

85
Notes

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

Constraints

Learning Objectives

➢ To know the various investment phases from project planning to

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

Investment Phases of a Project

Project life cycle is a complex process consisting of different steps

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

Rondineli, Dennis &ApsyPalia in their book—Project Planning and

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

World Bank Guidelines reveals the following six major steps in the
project life cycle. Conception (identification), Formation (preparation),
Analysis (appraisal), Implementation (Supervision), operation and
evaluation.

86
 Notes
All the steps given in different studies can be grouped into three main
phases viz.,

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

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

a) Pre-investment Phase

The first phase of the cycle describes the preliminary evaluation of

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

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

➢ Plan priorities when planning is done by the government demand

and supply projection of various goods and services;

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

➢ Natural resource which can serve as the base for potential

manufacturing activity;

➢ Scope of extending existing lines of activity consumption pattern in

other countries at comparable stages of economic stage of economic
development.

On the basis of the investment opportunities, it is possible to conceive

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

➢ Project infrastructure and enabling services

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

87
Notes
➢ Licensing and governmental clearances
➢ Finance
➢ Systems and procedure
➢ Identification of project manager
➢ Design basis, general condition for purchase and contracts
➢ Construction resources and materials.
➢ Work packaging

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

More details, through and complete feasibility study results in

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

b) Implementation Phase

The implementation phase of an industrial project involves setting

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

Project and Engineering Design

It consists of site probing and prospecting; preparation of blue prints,

plant design, plant engineering, selection of machinery, equipment.

88
 Notes
Negotiations and Contractions

It covers the activities like project financing, acquisition of

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

Construction

This step involves the activities like site preparation, construction

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

c) Operation Phase

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

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

Project monitoring is a step towards achieving properly identified

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

Project evaluation refers to post-investment analysis. It aims at

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

89
Notes
Project Life Cycle

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

The project life-cycle definition will also determine which

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

The phase sequence defined by most project life cycles generally

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

Project life cycles generally define:

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

Project life-cycle descriptions may be very general or very detailed.

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

Most project life-cycle descriptions share a number of common

characteristics:

90
 Notes
➢ Cost and staffing levels are low at the start, higher toward the end,
and drop rapidly as the project draws to a conclusion. This pattern is
illustrated in the figure below:

➢ The probability of successfully completing the project is lowest, and

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

➢ The ability of the stakeholders to influence the final characteristics

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

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

➢ In the beginning, phases can be overlapped to save time and to have

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

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

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

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

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

own project life cycle.

➢ The typical project life cycle – initiating, implementing and clos-

ing – has critical decision points where the project may continue,
be changed, or be abandoned.

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

91
Notes
Stages of Project Life Cycle

The stages of project life cycle are detailed below:

a) Project Initiation

The first of a project is the initiation phase. During this phase a

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

The project manager begins recruiting a project team and establishes

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

Develop Undertake Establish Appoint Set up Perfor

a a the terms the a m
business Feasibility of projec Projec stag
case t t e
The Project Initiation activities

Develop a business case: The trigger to initiating a project is

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

➢ A detailed description of the problem or opportunity;

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

92
 Notes
➢ A description of the preferred solution;
➢ A summarized plan for implementation.

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

Establish the terms of reference: After the business case and

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

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

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

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

➢ Equipment, such as office furniture, computer equipment, station-

ery and materials;

➢ Communications infrastructure, such as telephones, computer

network, e mail, Internet access, file storage, database storage and
backup facilities;

93
Notes
➢ Documentation, such as a project methodology, standards, pro-
cesses, forms and registers;

➢ Tools, such as accounting, project planning and risk modeling

software.

“Perform a phase review: At the end of the initiation phase, per- form
a phase review. This is basically a checkpoint to ensure that the project has
achieved its objectives as planned.”

b) Project Planning

➢ Once the scope of the project has been defined in the terms of
reference, the project enters the planning phase. This involves
creating a:

➢ Project plan outlining the activities, tasks, dependencies and

timeframes;

➢ Resource plan listing the labor, equipment and materials required;

➢ Financial plan identifying the labor, equipment and materials costs;

➢ Quality plan providing quality targets, assurance and control

measures;

➢ Risk plan highlighting potential risks and actions to be taken to

mitigate those risks;

➢ Acceptance plan listing the criteria to be met to gain customer

acceptance;

➢ Communications plan describing the information needed to inform

stakeholders;

➢ Procurement plan identifying products to be sourced from external

suppliers.

At this point the project will be planned in some detail and is

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

94
 Notes

Create a Create Create Create Perform

project a a a Risk stage gate
plan Financi Quality Plan
al Plan Plan

Create an Create a Create a Contact

Acceptanc Communica procureme the
e Plan ti on plan n tplan suppliers

Project Planning Activities

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

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

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

A schedule is assembled for each type of resource so that the project

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

Create a financial plan: A financial plan is created to identify the

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

95
Notes
the project. Detailed financial planning is an extremely important activity
within the project, as the customer will expect the final solution to have been
delivered within the allocated budget.

Create a quality plan: Meeting the quality expectations of the

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

➢ Defines the term ‘quality’ for the project.

➢ Lists clear and unambiguous quality targets for each deliverable.

Each quality target provides a set of criteria and standards to be
achieved to meet the expectations of the customer.

➢ Provides a plan of activities to assure the customer that the quality

targets will be met (in other words, a quality assurance plan).

➢ Identifies the techniques used to control the actual quality level of

each deliverable as it is built (in other words, a quality control plan).

Not only is it important to review the quality of the deliverables

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

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

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

Create an acceptance plan: To deliver the project successfully, you

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

96
 Notes
provide the customer with the opportunity to assess each deliverable and
provide formal acceptance that it meets the requirements as originally stated.

Create a communications plan: Prior to the execution phase, it is

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

Create a procurement plan: The last planning activity within the

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

Contract the suppliers: Although external suppliers may be ap-

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

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

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

97
Notes
c) Project Execution

This phase involves implementing the plans created during the

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

Build Deliverables
Perform stage
gate
Monitor & Control

Perform time Perform risk

mgt. mgt.

Perform cost Perform issue

mgt. mgt.

Perform quality Perform procurement

mgt. mgt.

Perform change Perform acceptance

mgt. mgt.

Perform
communication
s management

Project Execution activities

98
 Notes
The execution phase is typically the longest phase of the project
in terms of duration. It is the phase within which the deliverables are
physically constructed and presented to the customer for acceptance.

To ensure that the customer’s requirements are met, the project

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

Build the deliverables: This phase involves physically constructing

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

Activities may be undertaken in a ‘waterfall’ fashion, where each

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

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

Time Management: Time management is the process of recording

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

Cost management: Cost management is the process by which

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

99
Notes
expenses such as labor, equipment and materials costs. Expense forms are
approved by the project manager and recorded within an expense register for
auditing purposes.

Quality management: Quality is defined as the extent to which the

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

Change management: Change management is the process by

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

Risk management: Risk management is the process by which risks

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

Issue management: Issue management is the method by which

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

Procurement management: Procurement management is the

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

100
 Notes
Acceptance management: Acceptance management is the process
of gaining customer acceptance for deliverables produced by the project.
Acceptance forms are used to enable project staff to request acceptance for
a deliverable, once complete. Each acceptance form identifies the
acceptance criteria, review methods and results of the acceptance reviews
undertaken.

Communications management: Communications management is

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

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

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

d) Project Closure

Project closure involves releasing the final deliverables to the

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

The activities outlined in the following figure are undertaken.

Perform Project Review Project

Closure Completion
The project closure activities

101
Notes
Perform project closure: Project closure, or ‘close out’, essentially
involves winding up the project. This includes:

➢ Determining whether all of the project completion criteria have

been met;

➢ Identifying any outstanding project activities, risks or issues;

➢ Handing over all project deliverables and documentation to the

customer;

➢ Canceling supplier contracts and releasing project resources to the

business;

➢ Communicating the closure of the project to all stakeholders and

interested parties.

A project closure report is documented and submitted to the

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

Review project completion: The final activity within a project is the

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

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

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

To determine how well the project conformed, an assessment is

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

102
 Notes
Project Constraints

Defining Project Constraints

To prioritize and define the scope of the application deployment

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

Resources: Identify the equipment, software, staff, and space that are
available for the project.

Time: Identify the date by which the application deployment project

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

Organizational issues: If the project will not involve the entire

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

Access to developers: Identify applications that were developed in-

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

The technological constraints relate to the sequence in which

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

Resource constraints relate to the lack of adequate resources which

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

103
Notes
Physical constraints are caused by contractual or environmental
conditions. For example, due to space limitations an activity such as
painting a wall may have to be performed by only one person (Gray and
Larson, 2003).

In general, from a scheduling perspective, projects can be classified

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

Identifying Risk Factors

By identifying risk factors, you can identify the potential barriers

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

104
 Notes
Self Assessment Questions

1) What are opportunity studies? Explain.

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

CASE STUDY
Feasibility Study on Hainan Project

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

Lippo is one of the fastest growing multinational companies. Lippo

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

105
Notes
More about the company, Lippo is one of the major business conglomerates
in Asia with businesses geographically diversified in Hong Kong, Singapore,
China, Korea, Macau, Philippines, Malaysia, Thailand, and other countries.
Property and retailing are the key focus. Lippo also has interests in other
businesses, e.g., hotels, food business, securities broking and banking. The
Client proposes is to build a unique mixed use development in a landmark
building in Lingshui area. The project focused on four main property
markets: Residential; Serviced apartment; Hotel and Retail (Shopping malls
including dining and retail facilities).

Submit feasibility report which will give client a complete

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

****

106
 Notes

UNIT - III

Project Evaluation

The main purpose of project evaluation or investment appraisal

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

Unit Structure

Lesson 3.1 - Project Evaluation under Certainty and Uncertainty

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

107
Notes

Lesson 3.1 - Project Evaluation under Certainty and Uncertainty

Learning Objectives

➢ To understand the tradition techniques of evaluating projects

financially.

➢ To understand the sophisticated techniques of evaluating projects

financially.

➢ To understand the general techniques of evaluating projects

under risky conditions.

➢ To understand the quantitative techniques of evaluating projects

under risky conditions.

Method of Project Evaluation under Certainty

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

Following are the main methods generally used:

1) Traditional Methods

a) Pay-back Period Method

b) Accounting Rate of Return Method.

2) Sophisticated/Discounted Cash Flow Methods

a) The Net Present Value Method

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

108
 Notes
1) Traditional Methods

a) Pay-back Period Method

In Case of Even Cash Flows

The term pay-back (or pay-out or pay-off) refers to the period in which
the project will generate the necessary cash to recoup the original investment.

For example, if a project need ` 40,000 as initial investment and it will

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

Pay-back period = Initial Investment

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

The annual cash inflow is calculated by taking into account the

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

Unadjusted rate of Return = Annual Return x 100

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

In Case of Uneven Cash Inflows

In case the cash flow is not even, i.e., if each year’s cash inflows are
different, cumulative cash inflows will be calculated and by interpolation,
the exact pay-back-period can be calculated. For example, if the project
needs an original investment of ` 1,00,000 and the annual cash inflows for
5 years are ` 30,000, ` 40,000, ` 25,000, ` 20,000 and ` 20,000 respectively, the
pay-back-period will be calculated as follows:

109
Notes

Year Cash Inflows (`) Cumulative Cash Inflows (`)

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

The above table shows that in three years ` 95,000 has been recovered.
` 5,000 is left out of initial investment. In the fourth year the cash inflow is `
20,000. It means the pay-back period is between three to four years, which is
calculated as below:

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

The decision rule is

a) Shorter the payback Period – Accept the project

b) Longer the payback period – Reject the project

The pay-back period can be used as a criterion to accept or reject an

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

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

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

Example: A company is considering purchase of a new machine.

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

110
 Notes

Details Machine X Machine Y

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

Ignore taxation.

Solution

Statement Showing Annual Cash Inflows

Machine X (`) Machine Y (`)

Estimated saving in scrap 1,000 1,600

Estimated saving in Direct Wages 12,000 16,000

Total Savings (1) 13,000 17,600

Additional cost of maintenance 1,600 2,000

Additional cost of supervision 2,400 3,600

Total additional costs (2) 4,000 5,600

Net cash inflow (1 – 2) 9,000 12,000

Pay-back period = Initial Investment

Annual Cash Inflow

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

Machine X has a shorter pay-back period; hence it should be

preferred to Machine Y.

111
Notes
Advantages of Payback Method

The pay-back method has the following advantages:

➢ The method is very useful in evaluation of those projects which

involve high uncertainty. Political instability, rapid technological
development of cheap substitutes, etc., are some of the reasons
which discourage one to take up projects having long gestation
period. Pay-back method is useful in such cases.

➢ The method makes it clear that no profit arises till the pay-back
period is over. This helps new companies in deciding when they
should start paying dividends.

➢ The method is simple to understand and easy to work out.

➢ The method reduces the possibility of loss on account of obsolescence

as the method prefers investment in short-term projects.

Disadvantages of Payback Method

The pay-back method has the following disadvantages:

➢ The method ignores the returns generated by a project after its pay-
back period. Projects having longer gestation period will never be
taken up if this method is followed though they may yield high
returns for a long period.

➢ The method does not take into account the time value of money.

Suitability of Payback Method

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

ably be used in each of the following cases:

➢ Firms having to take up projects in uncertain situations will prefer

payback method.

➢ Firms suffering from liquidity crisis will consider payback method

more appropriate as it gives importance for recouping the original
investment.

➢ Firms which aim at short term earning performance will prefer pay
back method.

112
 Notes
b) Accounting or Average rate of Return (ARR) Method

In this method, the capital investment proposals are judged on the

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

Annual Average Net Earnings

x 100

Annual Average Net Earnings

x 100
Average Investment

The term “average annual net earnings” is the average of the

earnings (after depreciation and tax) over the whole of the economic life of
the project and is calculated by using the formula

Increase in expected future annual net earnings

x 100

The amount of “average investment” can be calculated according

to any of the following methods.

x 100

113
Notes
Decision Criterion

The Decision Rule is

➢ Higher the ARR or ARR above minimum expected rate of return –

Accept the project

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

Reject the project

Normally, business enterprises fix a minimum rate of return. Any

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

Advantages of ARR Method

The following are the advantages of ARR method:

➢ The method takes into account savings over the entire economic life
of the asset. Hence, it provides a better comparison of the projects
as compared to the pay-back method.

➢ The method embodies the concept of ‘net earnings’ while evaluating

capital investment projects, which is absent in case of all other
methods.

Disadvantages of ARR Method

The following are the disadvantages of this method:

➢ The method does not take into account the time value of money.
Thus, it has the same fundamental defect as that of pay-back
method.

➢ There are different methods for calculating the Accounting Rate of

Return due to diverse concepts of investments as well as earnings.

114
 Notes
Each method gives different results. This reduces the reliability of the
method.

On account of the above disadvantages, the Accounting Rate of

Return Method is not much in use these days.

2. Sophisticated or Discounted Cash Flow Methods

The discounted cash flow technique is an improvement on the pay-

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

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

(preferably after tax) over the full life of the asset.

➢ Discounting the cash flows so calculated by a discount factor.

➢ Aggregating of discounted cash inflows and comparing the total

with the discounted cash outflows.

Discounted cash flow technique thus recognizes that ` 1 of today (the

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

Discounted cash flow methods for evaluating capital investment

proposals are of three types.

a) The Net Present Value (NPV) Method.

This method is considered to be the best method for evaluating

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

115
Notes
outflow in the year the project starts commercial production. Profit after tax
before depreciation represents cash inflows. The Net Present Value (NPV) is
the difference between the total present value of future cash inflows and the
total present value of future cash outflows.

The formula for calculating the NPV in case of conventional cash

flows can be put as follows:

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

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

Where: NPV = Net Present Value, NCF = Cash Inflows at different

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

Decision Criterion

The Decision Rule is

➢ NPV is Positive – Accept the project

➢ NPV is Zero or Negative – Reject the project

The Net Present Value can be used as an ‘accept or reject’ criterion.

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

Example

A company is considering the purchase of a new machine. Two

alternative machines (X and Y) have been suggested, each having an initial

116
 Notes
cost of ` 20,00,000 and requiring ` 1,00,000 as additional working capital at
the end of 1st year. Earnings after taxation are expected to be as follows:

Cash flows (`)

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

The company has target of return of capital of 10% and on this

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

Note: the following table gives the present value of ` 1 due in ‘n’
number of years.

Year 1 2 3 4 5
PV of ` 1 at 20% .91 .83 .75 .68 .62

Solution

Statement Showing the Profitability of the Two Machines

Machine X (`) Machine Y (`)
Discount
Year Cash Present Cash Present
Factor
Inflow Value Inflow Value
1 .91 200000 182000 600000 546000
2 .83 600000 498000 800000 664000
3 .75 800000 600000 1000000 750000
4 .68 1200000 816000 600000 408000
5 .62 800000 496000 400000 248000
Total PV of Cash inflows 3600000 2592000 3400000 2616000
Total PV of cash outflows 2091000 2091000
(` 2000000 + ` 100000*.91)
Net Present Value 501000 525000

117
Notes
Recommendations

Machine Y is preferable to Machine X. Though total cash inflow of

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

b) Benefit Cost Ratio or Excess present Value Index

This is a refinement of the net present value method. Instead of

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

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

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

Excess Present Value Index provides ready comparison between

investment proposals of different magnitudes.

Decision Criterion

The Decision Rule is

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

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

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

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

Project Amount Profitability Index

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

118
 Notes

Project Amount Profitability Index

4 1350000 1.18
5 600000 1.2
6 1200000 1.05

Which of the above investments should be undertaken? Assume that

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

Solution

Statement of Ranking of Projects on the Basis

of Profitability Index
Project Amount Profitability Index Rank
1 900000 1.22 1
2 450000 0.95 5
3 1050000 1.2 2
4 1350000 1.18 3
5 600000 1.2 2
6 1200000 1.05 4
Since projects are indivisible and there is no alternative use of the
money allocated for capital budgeting on the basis of Profitability Index,
the company is advised to undertake investment in projects 1, 3 and 5.
However, in case of alternative projects, the allocation should be made to
the project which, adds the most to the shareholder’ wealth. The NPV
method in such a case will give the best results.

Calculation of NPV
Amount Profitability Cash inflows NPV of Project
Project
(in `) Index of project (`) (in `)
A B C D=A*B E= D - B
1 9,00,000 1.22 10,98,000 1,98,000
2 4,50,000 0.95 4,27,500 -22,500
3 10,50,000 1.2 12,60,000 2,10,000
4 13,50,000 1.18 15,93,000 2,43,000

119
Notes

Amount Profitability Cash inflows NPV of Project

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

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

c) Internal Rate of Return

Internal Rate of Return is that rate at which the sum of discounted

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

Cash Inflows = 1
Cash
Outflows

Thus, in case of this method the discount rate is not known but the
cash outflows and cash inflows are known. Rate of Return is calculated as
follows:

I=R/I+r

Where I = Cash Outflow i.e., Initial Investment,

R = Cash Inflow, r = Rate of return yielded by the Investment (or
IRR).

120
 Notes
Decision Criterion

The Decision Rule is

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

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

Internal Rate of return is the maximum rate of interest which an

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

Where cash inflows are uniform

In the case of those projects which result in uniform cash inflows, the
internal rate return can be calculated by locating the factor in Annuity The
factor is calculated is as follows:

F=I/C

Where F = Factor to be located, I = Original Investment and C =

Cash inflow per year.

Where cash inflows are not uniform

When cash inflows are not uniform, the internal rate of return is
calculated by making trial calculations in an attempt to compute the correct
interest rate which equates the present value of cash inflows with the
present value of cash outflows. In the process, cash inflows are to be
discounted by a number of trial rates. The first trial rate may be calculated
on the basis of the same formula which is used for determining the internal
rate of return when cash inflows are uniform, as explained above. However,
in this case ‘C’ stands for ‘annual average cash inflow’, in place of ‘annual
cash inflow’.

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

121
Notes
total present value of cash outflows. In case the total present value of cash
inflows is less than the total present value of cash outflows. In case the total
present value of cash inflows is less than the total present value of cash
outflows, the second trial rate taken will be lower than the first rate. In case
the present total value of cash inflows exceeds the present total value of
cash outflows, a trial rate higher than first trial rate will be used. This
process will continue till the two flows more or less set off each other. This
will be the ‘internal rate of return’.

Example

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

Project A (`) Project B (`)

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

Using the Internal Rate of Return method suggests which project is

preferable.

Solution

The cash flows are not uniform and hence the Internal Rate of
Return will have to be calculated by the Trial and Error Method. In order
to have an approximate idea about such rate, it will be better to find out the
“Factor”. The factor reflects the same relationship of investment and ‘cash
inflows’ as in case of pay-back calculations. Thus,

F=I/C

Where F = Factor to be located, I = Original Investment and C =

Average cash inflow per year.

122
 Notes
The factor in case of Project A would be:

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

The factor in case of Project B would be:

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

The factor thus calculated will be located in Present Value Table on

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

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

it comes to 15%.

Project A

Discounting
Year Cash inflow (`) Present Value (`)
Factor at 10%
1 12,000 .909 10,908
2 4,000 .826 3,304
3 2,000 .751 1,502
4 10,000 .683 6,830
Total Present Value 22,544
Cash outflow 22,000
Net Present Value +544

The present value at 10% comes to ` 22,544. The initial investment is

` 22,000. Internal rate of Return may be taken approximately at 10%.

123
Notes
In case more exactness is required another trial rate which is
slightly higher than 10% (since at this rate the present value is more than
initial investment) may be taken. Taking a rate of 12%, the following
results would emerge:

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

The internal rate of return is thus more than 10% but less than 12%.
The exact rate may be calculated as follows:

IRR = Lower Rate +

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

22544 -22000
= 10% + x2
22544 - 21688

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

Alternatively, the exact internal rate of return can also be calculated

as follows:

NPV of lower rate

IRR = Lower Rate + x Difference in rate
NPV of both rates
At 10% the Net present value is + 544.
At 12% the Net present value is - 312.

The internal rate would, therefore, be between 10% and 12%

calculated as follows:

124
 Notes
544
= 10 + x2
544+312
= 10 + 1.3 = 11.27%

Project B

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

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

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

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

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

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

In order to have more exactness, the internal ret of return can be

interpolated as done in case of Project A.

125
Notes
At 10% the present value is + 134
At 15% the present value is – 2,676
10% + 134 x 5
134 + 2676
= 10 + 0.24 = 10.24%
IRR of Project A is 11.27%
IRR of Project B is 10.24%

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

compared to Project B. Hence Project A is preferable.

Advantages of Discounted Cash Flow Method

The advantages of discounted cash flow method are as follows:

➢ Discounted cash flow technique takes into account time value of

money.

➢ The method takes into account directly the amount of expenses and
revenues over the project’s life.

➢ The method automatically gives more weight to those money values

which are nearer to the present period than those which are farther
from it.

➢ The method makes possible comparison of projects requiring

different capital outlays, having different lives and different timings
of cash flows, at a particular moment of time because of discounting
of all cash flows.

Disadvantages of Discounted Cash Flow Method

The disadvantages of discounted cash flow method are as follows:

➢ The method is difficult to understand and work out.

➢ The method takes into account only the cash inflows on account of
a capital investment decisions. As a matter of fact, the profitability
or otherwise of a capital investment proposal can be judged only
when the net income (and not the cash inflow) on account of
operations is considered.

126
 Notes
➢ The method is based on the presumption that cash inflow can be
invested at the discounting rate in the new projects. However, this
presumption does not always hold well because it all depends upon
the available investment opportunities.

Project Evaluation under Uncertainty

Incorporation of Risk Factor

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

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

General Techniques

a) Risk Adjusted Discount Rate

The risk adjusted discount rate is based on the presumption that

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

(i) Risk-free rate and

(ii) Risk premium rate. Risk-free rate is the rate at which the future cash
inflows should be discounted had there been no risk.

127
Notes
Risk premium rate is the extra return expected by the investor over the
normal rate (i.e., the risk-free rate) on account of the project being risky. Thus,
risk adjusted discounted rate is a composite discount rate that takes into
account both the time and risk factors. A higher discount rate will be used for
more risky projects and lower rate for less risky projects.

Advantages of Risk Adjusted Discount Rate Method

➢ It is simple to calculate and easy to understand.

➢ It incorporates the risk-averse attitude of investors.

Disadvantages of Risk Adjusted Discount Rate Method

➢ The determination of appropriate discount rates keeping in view

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

➢ The method results in compounding of risk over time, since the

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

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

In spite of these disadvantages the method is most widely used on

account of its simplicity.

b) Certainty Equivalent Coefficient

According to this method the estimated cash flows are reduced to

conservative level by applying a correction factor termed as certainty
equivalent coefficient. The correction factor is the ratio of riskless (or
certain) cash flows to risky cash flows.

Riskless cash flow

Certainty equivalent coefficient =
Risky cash flow

128
 Notes
Riskless cash flow means the cash flow which the management is
prepared to accept in case there is no risk involved. Naturally, this will be
lower than the cash flow which will be there in case the project is risky.
Certainty equivalent coefficients can be calculated for estimated cash flows
of each year. They are then multiplied with the cash flows to ascertain cash
flows which may be used for the purpose for determining IRR or NPV for
capital budgeting decisions.

Quantitative Techniques
a) Sensitivity Analysis

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

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

It explains how sensitive the cash flows are under these different
situations. The larger is the difference between the pessimistic and optimistic
cash flows, the more risky is the project and vice versa.

b) Probability Assignment

Sensitivity analysis suffers from a limitation. No doubt it provides

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

129
Notes
c) Standard Deviation

The probability assignment approach for risk analysis in capital

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

The following steps are taken for calculating the standard deviation of
the possible cash flows associated with a project:

➢ Mean value of possible cash flows is computed;

➢ Deviations between the mean value and the possible cash flows are
found out;

➢ Deviations are squared;

➢ Squared deviations are multiplied by the assigned probabilities

which give weighted squared deviations;

➢ The weighted squared deviations are totaled and their square root
is found out. The resulting figure is the standard deviation;

d) Coefficient of Variation

Standard deviation is an absolute measure. It is unfit for comparison

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

Standard Deviation
Coefficient of variation =
Expected (or Mean) Cash flow

130
 Notes
(e) Decision Tree Analysis

Decision Tree Analysis is another technique which is helpful in

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

The sequence of event is mapped out over time in a format resem-

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

An outstanding feature of decision tree analysis technique is that

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

Constructing a Decision Tree

The following steps are taken for constructing a decision tree:

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

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

b) Identification of Alternatives: Every proposal will have at least two

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

c) Graphing the Decision Tree: The decision tree is then laid down
showing decision point (i.e., the cash outlay), decision branches
(i.e., alternatives available and other data).

d) Forecasting Cash Flows: The forecasted cash flows regarding each

decision branch are also shown along with the branch. Probabilities
are also assigned to each cash flow. Expected values of future returns
are calculated and the total expected value for the decision is
determined.

e) Evaluating Results: Having determined the expected value for each

decision, the results are analysed. Some alternatives may look

131
Notes
to be acceptable while others may be weak or unacceptable. The firm
may proceed with the profitable alternative or alternatives or may
decide to reconsider them because of incomplete data or other reasons.

The technique of decision tree analysis has the advantages of giving

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

****

132
 Notes

Lesson 3.2 - Appraisal of Project Evaluation, Commercial and

Social Cost Benefit Analysis

Learning Objectives

➢ To know the parameters of technical evaluation of projects.

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

Project Evaluation Methodology

The financial institutions have a detailed appraisal of the project

proposal in the following components:

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

a) Technical Evaluation

The financial institutions have a closer look at the various technical

parameters concerning the project.

➢ The proposed product range and the technical specifications per-

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

133
Notes
➢ It is essential to get information on the process know how and that
is available, as also the basic engineering package and the associated
technical services covering the quality control, pollution control
effluent and wastage disposal, collaboration arrangements for the
process licence and the consultant services for detail engineering.

➢ Plant locational aspects also deserve detailed attention, and include

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

➢ Proper scrutiny is needed in respect of the source of supply of plant

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

➢ Raw material requirements, availability, cost, items to imported,

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

➢ Detailed information is also sort on the requirements of building for

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

The project team of the financial institution may consult specialist on

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

b) Commercial Evaluation

The projected market demands for the products proposed to be

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

The market projections in the project could also be cross checked with

➢ Demand forecast of industry associations;

➢ The capacity licensed and utilised in the industry;

134
 Notes
➢ Market surveys done on the specific products;
➢ Forecast of the planning commission
➢ Projections of the directorate of technical development and other
specialised bodies

Where the review establishes the need, the promoter may be asked to
revise the estimates of the cost, time and other technical significant
parameters.

c) Financial Evaluation

Financial evaluation has the objective of ascertaining the financial

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

Debt-equity ratio: the equity shareholding in the total capital

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

Promoters’ contribution: The promoter is expected to bring in his

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

Debt-service coverage: The cash flow represented but the profit

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

Repayment schedule: Usually, the institutions allow a moratorium

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

135
Notes
Syndication: where a group of institutions participate in financing
the project, they come to an understanding on the proportion in which they
will be providing funds. IDBI is generally expected to take a substantial
share in such joint financing.

Conversion: The financial institutions stipulate that they will

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

Nominee directors: Nominee directors should be appointed on the

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

➢ The unit has run into rough weather and is likely to become sick.
➢ The financial institution holds more than 26% of the share capital.
➢ Where the stake of the financial institution by way of loan/
investments exceeds ` crores.

Operating Costs and Revenue: Projects of operating costs and

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

Extent of financing: The amount and modes of financing depend

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

Returns: Financial institution use the different techniques of financial

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

136
 Notes
return on investment etc. depending on the nature of projects being
reviewed. It is expected that the project will have a debt service ratio
ranging from 1.5 to 2 and will be able to pay a dividend on equity of not less
than 10 % within three years of commencement of production

Risks: Careful assessment of the risk is associated with the project is

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

Eventually financial evaluation of project has 4 important aspects

➢ The appropriateness of the capital cost estimate;

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

d) Economic Evaluation

The acceptability of the project from a national perspective also has

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

Applying the stipulated social rate of discount, the NPV is

determined, and if it is positive, the project is considered to be socially
desirable. The commonly used method of economic analysis is known as
partial Little-Mirrleesmethod. Discounted cash flow analysis with
reference to social cause and social benefits and determination for the
internal rate of return on these values will give the economic rate of return.
If this is in excess of the social rate of discount, the project merits
acceptance.

137
Notes
e) Management Evaluation

Management capabilities that will guide the project need also to be

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

Government Consents

The financial institutions would also insist on confirmation that the

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

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

Commercial Vs. National Profitability

Public projects like road, railway, bridge and other transport

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

138
 Notes
or national profitability analysis which is nothing but the socio-economic
cost benefit analysis done at the national level.

Steps Involved in Determination of Social or National Profitability

1) Real Direct Cost and Real Direct Benefits

National/Social profitability analysis takes into account the real cost

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

2) Indirect Costs and Indirect Benefits

National/Social profitability analysis takes into account the indirect

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

Suppose construction of a bridge over a river is taken up. Its indirect

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

National/Social profitability analysis can thus be regarded as a

refinement over commercial appraisal taking the hidden factors into
account. National/Social profitability analysis is mainly used for evaluating
public investment projects. From the society’s standpoint, the project
should maximize the aggregate consumption or the addition to the flow of
goods and services in the economy. While the individual investor looks for
maximization on his individual basis, the society’s interest should look
for maximization of the total output of the economy. The need thus

139
Notes
arises to have an analysis done of social costs and social benefits. The
various inputs required for the project are drawn out of the resources of
the economy and constitute social costs. The outputs of the project represent
the social benefits. The inputs of goods and services and the outputs should
be valued with reference to their relative value to society.

Commercial or Financial Profitability

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

Projects emanate from diverse and dispersed sources, such as

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

Commercial or financial profitability as the sole deciding factor has

two major limitations viz.

a) Financial or market values seldom match with social values and

b) What is beneficial to one segment of society may not necessary be
so to the entire society.

In financial analysis the market values of input and outputs are

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

140
 Notes
values fail to reflect the relative worth on the society’s value scale. From
society’s stand point, goods and services should be valued in terms of
relative contributions to consumption. In the same manner the social
value of resource should be reckoned in terms of its opportunity cost,
represented by the output or consumption value that it is capable of
yielding in its next best alternative use.

In a free market economy the dominance of the forces of demand and

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

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

Social Cost Benefit Analysis (SCBA)

Cost-benefit analysis is a process for evaluating the merits of a

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

Social Cost Benefits Analysis means to analyze the social cost

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

141
Notes
completing the big project, we need big investment. In social cost benefit
analysis (SCBA), we see whether return or benefits on this investment are
more than its cost from point of view of society in which we are living. In
public investment, we analyze and compare government expenditure with
total benefits to society through SCBA. It is also a good technique of
financial evaluation of a project because we reject those projects whose
benefits to society are less than their total cost because all the resources are
drawn from the society.

The market prices, in the case of developing countries particularly, are

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

Rationale for SCBA

a) Market imperfection: The following factors are to be considered to

understand the market imperfection.

➢ Rationing factor: It means some of raw material prices are

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

➢ Regulation for providing minimum wage factor: It also affects

social cost and benefits of any project.

➢ Foreign Exchange Regulations factor: Sometime, projects

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

b) Externalities: Externalities are non-cash or benefits which an

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

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

142
 Notes
Arriving Net Benefit of Project to Society

With United Nations Development Organization (UNIDO) approach,

we can evaluate net benefit from any project. Formula is given below:

Factors which Complicate SCBA

There are a variety of factors which make SCBA complicate:

➢ Benefits and costs may accrue to different sets of people. If this is so

we need some way to aggregate and compare different benefits and
costs across people.

➢ Benefits and costs may occur at different points in time. In this case
we need to compare the value of outcomes at different points in time.

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

➢ Benefits and costs may be uncertain.

➢ Benefits and costs may be difficult to calculate and, as a result, there

may be widely differing views about their sizes. One might

143
Notes
think this could be considered under uncertainty, however the two
points are rather different: two people agreeing that an outcome
follows some probability distribution are different from them
arguing about its mean and variance.

The Basic Model

We are considering a project with known (though perhaps uncertain)

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

Importance of Social Cost-Benefit Analysis

The elements of costs and benefits are identified both from the point
of view of undertaking, implementation and managing the project, and from
the point of view of the society. The Project Appraisal Division of the
Planning Commission is the main agency that scrutinizes and evaluates all
projects after the Public Investment Board has carried out the scrutiny
from the financial angle. Together, these two agencies have the
responsibility for the planned and the coordinated development of the
country.

Maximization of social welfare is the national objective. Public

Enterprises constitute an instrument for achieving this objective and, as

144
 Notes
such, the selection of their projects requires to be synchronized with the
national plan. This synchronization process has two stages.

➢ First, the sectoral allocation of the resources has to be effected on

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

Projects are the building blocks of the sectoral investment plans.

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

Government investments aim at:

➢ Growth
➢ Equitable distribution of gains
➢ Self-reliance

Social cost benefit analysis enables the qualification of the gains of

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

The Methodologies used for SCBA

The most favoured among the methods of Social Cost-Benefit

Analysis (SCBA) are:

➢ Little and Mirrlees (L-M) method;

➢ UNIDO method.

a) Little and Mirrlees (L-M) Method

The Project Appraisal Division (PAD) has adopted a modified

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

145
Notes
b) UNIDO Method

The UNIDO approach has emphasis in incorporating non-

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

SCBA Considerations for Various Categories of Investments/Projects

The investment could be in any of three categories:

➢ Capital intensive industrial investment;

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

a) Capital Intensive Industrial Projects

The prime consideration in appraising industrial projects in this

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

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

➢ Value all tradable inputs and outputs at border prices or international

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

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

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

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

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

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

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

146
 Notes
b) Infrastructural Investment

In the case of infrastructure projects, the classical SCBA is adopted

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

c) Agriculture, Rural Development and Related Projects

As distinct from the ‘growth’ projects referred to above, these

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

The Social Rate of Discount

The choice of the social rate of discount is a matter of debate. A

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

Conclusion

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

Self Assessment Questions

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

2) Explain the method of evaluating projects financially.

147
Notes
3) What are the sophisticated methods of evaluating projects
financially?
4) What is Payback method? What are its advantages and
disadvantages?
5) What is ARR method? What are its advantages and disadvantages?
6) What is NPV method?
7) What is PI or BC ratio?
8) What is IRR method?
9) Evaluate the discounted cash flow methods.
10) The initial cost of the project is ` 5000. What is the payback period
for this investment if the projected cash flows from a proposed
investment are ` 1000, ` 2000 and ` 5000 in the 1st, 2nd and 3rd years
respectively.
11) Following are the details of two projects, calculate NPV and PI at
10% and rank them using both the methods. Also calculate IRR of
both the projects and rank them.

Project A (`) Project B (`)

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

12) What is risk adjusted discount rate?

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

148
 Notes
20) Explain the project evaluation methodology followed by financial
institutions.
21) What are the dimensions of technical evaluation of projects?
22) What are the dimensions of financial evaluation of projects?
23) What are the dimensions of economic evaluation of projects?
24) What are the dimensions of management evaluation of projects?
25) What is commercial/financial profitability?
26) What are the steps involved in determination of social or
national profitability?
27) What are externalities?
28) What is social cost benefit analysis?
29) Explain the rationale for SCBA?
30) How to arrive at net benefit of project to the society?
31) Explain the factors which complicate SCBA.
32) Explain the importance of SCBA.
33) Explain the methodologies used for SCBA.
34) Explain the SCBA considerations used for appraising various
categories of investments/projects.

CASE STUDY
Financial Evaluation of Projects

The following information belongs to four investment opportunities:

1 2 3 4
Funds needed (960,000) (720,000) (540,000) (900,000)
Present value 1,134,540 866,800 672,280 1,045,940
of cash inflows
Net present $174,540 $146,800 $132,280 $145,940
value
Project life 6 years 12 years 6 years 3 years
Internal rate of 16% 14% 18% 19%
return (IRR)
Due to limited funds, all projects cannot be accepted.

149
Notes
Required

1. Compute profitability index (present value index) for all the

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

****

150
 Notes

UNIT - IV

The project network tool is used for planning, scheduling and

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

Unit Structure

Lesson 4.1 - Developing Project Network using PERT and CPM

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

151
Notes

Lesson 4.1 - Developing Project Network Using PERT and CPM

Learning Objectives

➢ To learn how to develop the project networks

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

Developing the Project Network

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

The network is the framework that will be used by the project

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

152
 Notes
with the computer. These revisions can be communicated to all project
participants quickly (for example, via e-mail or project Web site).

Objectives of Project Network

The project network provides invaluable information and insights

above the following:

➢ Basis for scheduling labour and equipment;

➢ Enhances communication that brings together all managers and

groups in meeting the time, cost, and performance objectives of
the project;

➢ Provides an estimate of the time the project will take (duration);

➢ gives the times when activities can start or finish and when they can
be delayed;

➢ Provides the starting point for budgeting the cash flow (when money
needs to be received and spent on various elements) of the project.

➢ Identifies which activities are “critical” and, therefore, should not be

delayed if the project is to be completed as planned.

➢ Highlights which activities to consider if the project needs to be

compressed to meet a deadline.

Basically, project networks minimize surprises by getting the plan

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

153
Notes
shows dependency and project flow. The following diagram shows the WBS/
Work packages to network for a software project:

WBS/Work packages to Network

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

154
 Notes
work packages. Developing a network requires sequencing tasks from all
work packages that have measurable work.

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

Integrating the work packages and the network represents a point

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

(1) Different groups (people) are used to define work packages and
activities and
(2) The WBS is poorly constructed and not deliverable/output-
oriented.

Integration of the WBS and project network is crucial to effective

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

Networks provide the project schedule by identifying dependencies,

sequencing, and timing of activities, which the WBS is not designed to do.
The primary inputs for developing a project network plan are work
packages. Remember, a work package is defined independently of other
work packages, has definite start and finish points, requires specific
resources, includes technical specifications, and has cost estimates for the
package. However, dependency, sequencing, and timing of each of these
factors are not included in the work package. A network activity can include
one or more work packages.

155
Notes
Constructing a Project Network

Terminology

Every field has its jargon that allows colleagues to communicate

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

Activity: For project managers, an activity is an element of the

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

Merge activity: This is an activity that has more than one activity
immediately preceding it (more than one dependency arrow flowing to it).

Parallel activities: These are activities that can take place at the same
time, if the manager wishes. However, the manager may choose to have
parallel activities not occur simultaneously.

Path: A sequence of connected, dependent activities.

Critical path: When this term is used, it means the path(s) with the
longest duration through the network; if an activity on the path is delayed,
the project is delayed the same amount of time.

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

is started or completed. It does not consume time.

Burst activity: This activity has more than one activity immediately
following it (more than one dependency arrow flowing from it).

156
 Notes
Two Approaches

The two approaches used to develop project networks are known as

Activity-On-Node(AON) and Activity-On-Arrow (AOA). Both methods
use two building blocks—the arrow and the node. Their names derive from
the fact that the former uses anode to depict an activity, while the second
uses an arrow to depict an activity. From the first use of these two
approaches in the late 1950s, practitioners have offered many
enhancements; however, the basic models have withstood the test of time
and still prevail with only minor variations in form. In practice, the
Activity-On-Node (AON) method has come to dominate most projects.
Hence, this lesson will deal primarily with AON.

There are good reasons for students of project management to be

proficient in both methods. Different departments and organizations
have their “favorite” approaches and are frequently loyal to software
that is already purchased and being used. New employees or outsiders
are seldom in a position to govern choice of method. If subcontractors
are used, it is unreasonable to ask them to change their whole project
management system to conform to the approach you are using. The points
that a project manager should feel comfortable moving among projects
that use either AON or AOA.

Basic Rules in Developing Project Networks

The following eight rules apply in general when developing a project

network:

1. Networks flow typically from left to right.

2. An activity cannot begin until all preceding connected activities
have been completed.
3. Arrows on networks indicate precedence and flow. Arrows can
cross over each other.
4. Each activity should have a unique identification number.
5. An activity identification number must be larger than that of any
activities that precede it.
6. Looping is not allowed (in other words, recycling through a set of
activities cannot take place).

157
Notes
7. Conditional statements are not allowed (that is, this type of
statement should not appear: If successful, do something; if not, do
nothing).
8. Experience suggests that when there are multiple starts, a common
start node can be used to indicate a clear project beginning on the
network. Similarly, a single project end node can be used to indicate
a clear ending.

Activity-on-Node (AON) Fundamentals

The wide availability of personal computers and graphics

programs has served as an impetus for use of the activity-on-node (AON)
method (sometimes called the precedence diagram method). An activity
is represented by a node (box). The node can take many forms, but in
recent years the node represented as a rectangle(box) has dominated. The
dependencies among activities are depicted by arrows between the
rectangles (boxes) on the AON network.

The arrows indicate how the activities are related and the sequence
in which things must be accomplished. The length and slope of the arrow
are arbitrary and set for convenience of drawing the network. The letters in
the boxes serve here to identify the activities while you learn the
fundamentals of network construction and analysis. In practice, activities
have identification numbers and descriptions.

The following figure shows a few typical uses of building blocks for
the AON network construction.

There are three basic relationships that must be established for

activities included in a project network. The relationships can be found by
answering the following three questions for each activity:

1) Which activities must be completed immediately before this

activity? These activities are called predecessor activities.
2) Which activities must immediately follow this activity? These
activities are called successor activities.
3) Which activities can occur while this activity is taking place? This
is known as a concurrent or parallel relationship.

158
 Notes

Activity-on-Node Network Fundamentals

Sometimes a manager can use only questions 1 and 3 to establish

relationships. This information allows the network analyst to construct a
graphic flow chart of the sequence and logical interdependencies of project
activities.

Part A of the figure is analogous to a list of things to do where you

complete the task at the top of the list first and then move to the second task,
etc. This figure tells the project manager that activity A must be completed
before activity B can begin, and activity B must be completed before activity
C can begin. Part B of the figure tells us that activities Y and Z cannot begin
until activity X is completed. This figure also indicates that activities Y and
Z can occur concurrently or simultaneously if the project manager wishes;
however, it is not a necessary condition. For example,

159
Notes
pouring a concrete driveway (activity Y) can take place while landscape
planting (activity Z) is being accomplished, but land clearing (activity X)
must be completed before activities Y and Z can start. Activities Y and Z are
considered parallel activities. Parallel paths allow concurrent effort, which
may shorten time to do a series of activities. Activity X is sometimes referred
to as a burst activity because more than one arrow bursts from the node. The
number of arrows indicates how many activities immediately follow activity
X.

Part C of the figure shows the activities J, K, and L can occur

simultaneously if desired, and activity M cannot begin until activities J,
K, and L are all completed. Activities J, K, and L are parallel activities.
Activity M is called a Merge activity because more than one activity must
be completed before M can begin. Activity M could also be called a
milestone—a significant accomplishment.

In Part D of the figure, activities X and Y are parallel activities that

can take place at the same time; activities Z and AA are also parallel
activities. But activities Z and AA cannot begin until activities X and Y are
both completed.

Network Analysis Techniques

A convenient analytical and visual technique of PERT and CPM

prove extremely valuable in assisting the managers in managing the projects.

PERT stands for Project Evaluation and Review Technique and

developed during 1950’s.The technique was developed and used in
conjunction with the planning and designing of the Polaris missile project.

CPM stands for Critical Path Method which was developed by

DuPont Company and applied first to the construction projects in the
chemical industry.

Though both PERT and CPM techniques have similarity in terms of

concepts, the basic difference is that the CPM has single time estimate and
PERT has three time estimates for activities and uses probability theory to
find the chance of reaching the scheduled time.

160
 Notes
Components of PERT/CPM Network

PERT / CPM networks contain two major components:

➢ Activities, and
➢ Events

Activity: An activity represents an action and consumption of

resources (time, money, energy) required to complete a portion of a project.
Activity is represented by an arrow.

Event: An event (or node) will always occur at the beginning and end
of an activity. The event has no resources and is represented by a circle. The
ith event and jth event are the tail event and head event respectively.

Merge and Burst Events: One or more activities can start and end
simultaneously at an event.

Preceding and Succeeding Activities: Activities performed before

given events are known as preceding activities, and activities performed after
given events are known as succeeding activities.

In the following figure, Activities A and B precede activities C and D

respectively.

161
Notes

Dummy Activity: An imaginary activity which does not consume any

resource and time is called a dummy activity. Dummy activities are simply
used to represent a connection between events in order to maintain logic in
the network. It is represented by a dotted line in a network, see the following
figure:

Critical Path Analysis

The critical path for any network is the longest path through the
entire network. Since all activities must be completed to complete the entire
project, the length of the critical path is also the shortest time allowable
for completion of the project. Thus, if the project is to be completed in
that shortest time, all activities on the critical path must be started as soon
as possible. These activities are called critical activities.

If the project has to be completed ahead of the schedule, then the time
required for at least one of the critical activity must be reduced. Further, any
delay in completing the critical activities will increase the project duration.
The activity, which does not lie on the critical path, is called non-critical
activity. These non-critical activities may have some slack time. The slack is
the amount of time by which the start of an activity may be delayed without
affecting the overall completion time of the project. But a critical activity has
no slack. To reduce the overall project

162
 Notes
time, it would require more resources (at extra cost) to reduce the time taken
by the critical activities to complete.

c) Scheduling of Activities: Earliest Time (TE) and Latest Time (TL)

Before the critical path in a network is determined, it is necessary to

find the earliest and latest time of each event to know the earliest expected
time (TE) at which the activities originating from the event can be started
and to know the latest allowable time (TL) at which activities terminating
at the event can be completed.

➢ Procedure for Forward Pass Computations (to calculate Earliest

Time - TE)

Step 1: Begin from the start event and move towards the end event.
Step 2: Put TE = 0 for the start event.
Step 3: Go to the next event (i.e., node 2) if there is an incoming activity for
event 2, add to calculate TE of previous event (i.e., event 1) and
activity time.

Note: If there are more than one incoming activities, calculate TE for
all incoming activities and take the maximum value. This value is the TE for
event 2.

Step 4: Repeat the same procedure from step 3 till the end event.

➢ Procedure for Backward Pass Computations (to calculate Latest

Time TL)

Step 1: Begin from end event and move towards the start event. Assume that
the direction of arrows is reversed.
Step 2: Latest Time TL for the last event is the earliest time, TE of the last
event.
Step 3: Go to the next event, if there is an incoming activity, subtract the
value of TL of previous event from the activity duration time. They
arrived value is TL for that event. If there are more than one
incoming activities, take the minimum TE value.
Step 4: Repeat the same procedure from step 2 till the start event.

163
Notes
d) Determination of Float and Slack Times

As discussed earlier, the non-critical activities have some slack or

float. The float of an activity is the amount of time available by which it is
possible to delay its completion time without extending the overall project
completion time. Consider,

tij = duration of activity

TE = earliest expected time
TL = latest allowable time
ESij = earliest start time of the activity
EFij = earliest finish time of the activity
LSij = latest start time of the activity
LFij = latest finish time of the activity

Total Float TFij: The total float of an activity is the difference

between the latest start time and the earliest start time of that activity.

TFij = LS ij – ESij .............................(1)

or
TFij = (TL – TE) – tij .............................. (2)

Free Float FFij: The time by which the completion of an activity can
be delayed from its earliest finish time without affecting the earliest start time
of the succeeding activity is called free float.

FF ij = (Ej – Ei) – tij .................................. (3)

FFij= Total float – Head event slack

Independent Float IFij: The amount of time by which the start of an

activity can be delayed without affecting the earliest start time of any
immediately following activities, assuming that the preceding activity has
finished at its latest finish time.

IF ij = (Ej – Li) – tij. ................................ (4)

IFij= Free float – Tail event slack
Where tail event slack = Li – Ei

The negative value of independent float is considered to be zero.

164
 Notes
Critical Path: After determining the earliest and the latest
scheduled times for various activities, the minimum time required to
complete the project is calculated. In a network, among various paths,
the longest path which determines the total time duration of the project
is called the critical path. The following conditions must be satisfied in
locating the critical path of a network.

An activity is said to be critical only if both the conditions are satisfied.

1. TL – TE = 0
2. TLj – tij – TEj = 0

Example: A project schedule has the following characteristics as

shown in Table below:

a) Construct PERT network.

b) Compute TE and TL for each activity.
c) Find the critical path.

a) From the data given in the problem, the activity network is

constructed as shown in Figure given below

165
Notes
b) To determine the critical path, compute the earliest time TE and latest
time TL for each of the activity of the project. The calculations of TE
and TL are as follows:,

To calculate TE for all activities

TE1 = 0
TE2 = TE1 + t1, 2 = 0 + 4 = 4
TE3 = TE1 + t1, 3 = 0 + 1 =1
TE4 = max (TE2 + t2, 4 and TE3 + t3, 4)
= max (4 + 1 and 1 + 1) = max (5, 2)
= 5 days
TE5 = TE3 + t3, 6 = 1 + 6 = 7
TE6 = TE5 + t5, 6 = 7 + 4 = 11
TE7 = TE5 + t5, 7 = 7 + 8 = 15
TE8 = max (TE6 + t6, 8 and TE7 + t7, 8)
= max (11 + 1 and 15 + 2) = max (12, 17)
= 17 days
TE9 = TE4 + t4, 9 = 5 + 5 = 10
TE10 = max (TE9 + t9, 10 and TE8 + t8, 10)
= max (10 + 7 and 17 + 5) = max (17, 22)
= 22 days

To calculate TL for all activities

TL10 = TE10 = 22
TL9 = TE10 – t9,10 = 22 – 7 = 15
TL8 = TE10 – t8, 10 = 22 – 5 = 17
TL7 = TE8 – t7, 8 = 17 – 2 = 15
TL6 = TE8 – t6, 8 = 17 – 1 = 16
TL5 = min (TE6 – t5, 6 and TE7 – t5, 7)
= min (16 – 4 and 15 –8) = min (12, 7)
= 7 days
TL4 = TL9 – t4, 9 = 15 – 5 =10

166
 TL3 = min (TL4 – t3, 4 and TL5 – t3, 5 )
= min (10 – 1 and 7 – 6) = min (9, 1)
= 1 day
TL2 = TL4 – t2, 4 = 10 – 1 = 9
TL1 = Min (TL2 – t1, 2 and TL3 – t1, 3)
= Min (9 – 4 and 1 – 1) = 0

Activity Normal Earliest Time (TE) Latest Time (TL) Total

Activity
Name Time (tij) Start(ES) Finish(EF) Start(LS) Finish(LF) Float
1-2 A 4 0 4 5 9 5
1-3 B 1 0 1 0 1 0
2-4 C 1 4 5 9 10 5
3-4 D 1 1 2 9 10 8
3-5 E 6 1 7 1 7 0
4-9 F 5 5 10 10 15 5
5-6 G 4 7 11 12 16 5
5-7 H 8 7 15 7 15 0
6-8 I 1 11 12 16 17 5
7-8 J 2 15 17 15 17 0
8-10 K 5 17 22 17 22 0
9-10 L 7 10 17 15 22 5

c) From the Table, we observe that the activities 1 – 3, 3 – 5, 5 – 7, 7– 8

and 8 – 10 are critical activities as their floats are zero.

167
Notes
Project Evaluation Review Technique (PERT)

In the critical path method, the time estimates are assumed to be

known with certainty. In certain projects like research and development, new
product introductions, it is difficult to estimate the time of various activities.
Hence, PERT is used in such projects with a probabilistic method using three
time estimates for an activity, rather than a single estimate, as shown in the
following figure.

Optimistic time (tO): It is the shortest time taken to complete the

activity. It means that if everything goes well then there is more chance of
completing the activity within this time.

Most likely time (t m ):It is the normal time taken to complete an

activity, if the activity were frequently repeated under the same conditions.

Pessimistic time (t p):It is the longest time that an activity would

take to complete. It is the worst time estimate that an activity would take if
unexpected problems are faced.

Taking all these time estimates into consideration, the expected time
of an activity is arrived at. The average or mean (Ta) value of the activity
duration is given by,

168
 Notes

The variance of the activity time is calculated using the formula,

Probability for Project Duration

The probability of completing the project within the scheduled time

(Ts) or contracted time may be obtained by using the standard normal
deviate where Te is the expected time of project completion.

Probability of completing the project within the scheduled time is,

Example

An R & D project has a list of tasks to be performed whose time

estimates are given in the Table as follows.

a) Draw the project network.

b) Find the critical path.
c) Find the probability that the project is completed in 19 days. If the
probability is lessthan20%, find the probability of completing it in
24 days.

169
Notes

Solution

Time expected for each activity is calculated using the formula (5):

Similarly, the expected time is calculated for all the activities.

The variance of activity time is calculated using the formula:

Similarly, variances of all the activities are calculated.

170
 Notes

The Network Diagram:

Calculate the time earliest (TE) and time Latest (TL) for all the activities.

From the network diagram Figure, the critical path is identified as1-
4, 4-6, 6-7, with project duration of 22 days.

The probability of completing the project within 19 days is given by, P

(Z<Z0):

To find Z0,

171
Notes

We know, P (Z <Z Network Model 0) = 0.5 – z (1.3416) (from normal

tables, z (1.3416) = 0.4099)= 0.5 – 0.4099

= 0.0901
= 9.01%

Thus, the probability of completing the R & D project in 19 days is

9.01%.

Since the probability of completing the project in 19 days is less than

20% as in question, we find the probability of completing it in 24 days.

****

172
 Notes

Lesson 4.2 - Crashing and Resource Levelling of Projects

Learning Objectives

➢ To learn how to crash project networks

➢ To learn the technique of resource leveling
➢ To learn the technique of resource allocation.

Crashing of Project Network

Crashing refers to a particular variety of project schedule

compression which is performed for the purposes of decreasing total period
of time (also known as the total project schedule duration). The diminishing
of the project duration typically take place after a careful and thorough
analysis of all possible project duration minimization alternatives in which
any and all methods to attain the maximum schedule duration for the least
additional cost.The objective of crashing a network is to determine the
optimum project schedule. Crashing may also be required to expedite the
execution of a project, irrespective of the increase in cost. Each phase of the
project consumes some resources and hence has cost associated with it. In
most of the cases cost will vary to some extent with the amount of time
consumed by the design of each phase. The total cost of project, which is
aggregate of the activities costs will also depends upon the project duration,
can be cut down to some extent. The aim is always to strike a balance
between the cost and time and to obtain an optimum project schedule. An
optimum minimum cost project schedule implies lowest possible cost and
the associated time for the project management.

Activity Time-Cost Relationship

A simple representation of the possible relationship between the

duration of an activity and its direct costs appears in the following figure.
Shortening the duration on an activity will normally increase its direct
cost. A duration which implies minimum direct cost is called the normal
duration and the minimum possible time to complete an activity is called

173
Notes
crash duration, but at a maximum cost. The linear relationship shown
above between these two points implies that any intermediate duration
could also be chosen.

Linear time and cost trade-off for an activity

It is possible that some intermediate point may represent the ideal or

optimal trade-off between time and cost for this activity. The slope of the
line connecting the normal point (lower point) and the crash point (upper
point) is called the cost slope of the activity. The slope of this line can be
calculated mathematically by knowing the coordinates of the normal and
crash points:

Cost slope = (crash cost-normal cost)/ (normal duration crash

duration)

As the activity duration is reduced, there is an increase in direct cost.

A simple case arises in the use of overtime work and premium wages to be
paid for such overtime.

Also overtime work is more prone to accidents and quality

problems that must be corrected, so indirect costs may also increase. So,
do not expect a linear relationship between duration and direct cost but
convex function as shown in the following figure.

174
 Notes

Non-linear time and cost trade-off for an activity

Project Time-Cost Relationship

Total project costs include both direct costs and indirect costs of
performing the activities of the project. If each activity of the project is
scheduled for the duration that results in the minimum direct cost (normal
duration) then the time to complete the entire project might be too long and
substantial penalties associated with the late project completion might be
incurred. At the other extreme, a manager might choose to complete the
activity in the minimum possible time, called crash duration, but at a
maximum cost.

Thus, planners perform what is called time cost trade-off analysis to

shorten the project duration. This can be done by selecting some activities
on the critical path to shorten their duration. As the direct cost for the project
equals the sum of the direct costs of its activities, then the project direct cost
will increase by decreasing its duration. On the other hand, the indirect cost
will decrease by decreasing the project duration, as the indirect cost are
almost a linear function with the project duration.

The below figure shows the direct and indirect cost relationships with
the project duration. The project total time-cost relationship can be
determined by adding up the direct cost and indirect cost values together. The
optimum project duration can be determined as the project duration that
results in the least project total cost.

175
Notes

Project time-cost relationship

Materials and Method:

Step1: Calculate Earliest time Estimates for all the activities. It is calcu- lated
as

Step 2: Calculate Latest time Estimates for all the activities. It is calcu- lated
as

Step 3: After knowing the TE and TL values for the various events in the
network, the critical path activities can be identified by applying the
following conditions:

176
 Notes
Step 4: Find the project cost by the formula

Project cost = (Direct cost + (Indirect cost*project duration)

Step 5: Find the minimum cost slope by the formula

Cost slope = (Crash cost - Normal cost)/(Normal time - Crash time)

Step 6: Identify the activity with the minimum cost slope and crash that
activity by one day. Identify the new critical path and find the cost of
the project by formula
Project Cost = ((Project Direct Cost + Crashing cost of crashed activity)
+ (Indirect Cost*project duration))

Iteration Step

Step 7: In the new Critical path select the activity with the next minimum cost
slope, and crash by one day, and repeat this step until all the activities
along the critical path are crashed up to desired time.
Step 8: At this point all the activities are crashed and further crashing is not
possible. The crashing of non critical activities does not alter the
project duration time and is of no use.
Step 9: To determine optimum project duration, the total project cost is
plotted against the duration time given by figure.

Further Modification: Un-Crashing

Step10: Now see if the project cost can be further reduced without affect-
ing the project duration time. This can be done by un-crashing
the activities which do not lie along the critical path. Un-crashing
should start with an activity having the maximum cost slope. An
activity is to be expanded only to the extent that it itself may be-
come critical, but should not affect the original critical path.

Proposed Work

Step 1: Find earliest time estimates for all the activities, it is denoted as TE
Step 2: Find latest time estimates for all the activities, it is denoted as TL
Step 3: Determine the Critical Path.

177
Notes
Step 4: Compute the cost slope (i.e., cost per unit time) for each activity
according to the following formula:Cost slope = (Crash cost-
Normal cost)/(Normal time-Crash time)
Step 5: Among the critical path identify the activity with the minimum cost
slope, and crash the activity by 1 day.
Step 6: Calculate the project cost. Identify new critical path. Project Cost=
[(Project Direct Cost + Crashing cost of crashed activity)
+ (Indirect Cost*project duration)]
Step 7: Now in the new critical path select the activity with the next
minimum cost slope, and crash by one day.
Step 8: Repeat this process until all the activities in the critical path have
been crashed by 1 day.
Step 9: Once all the activities along the critical path are crashed by one day,
repeat the process again i.e., goes tostep5.
Step 10: Find the minimum project cost and identify the activities which do
not lie along the critical path
Step 11: Now perform un crashing, i.e., un crash the activities which do
not lie along the critical path.

Crashing Example: The network and durations given below

shows the normal schedule for a project. You can decrease (crash) the
durations at an additional expense.

The Table given below summarizes the time-cost information for

the activities. The owner wants you to finish the project in 110 days. Find
the minimum possible cost for the project if you want to finish it on 110
days. (Assume that for each activity there is a single linear, continuous
function between the crash duration and normal duration points).

178
 Notes

Solution

Assume that the duration-cost relationship for each activity is a

single linear, continuous function between the crash duration and normal
duration points. Using the normal duration (ND), crash duration (CD),
normal cost (NC), and crash cost (CC), the crash cost slope for each
activity can be determined as follows:

SA = CC – NC
ND – CD
14000 – 12000
S= = ` 100/day
A
120 - 100
SB = ` 200/day
SC= ` 600/day
SD= ` 60/day
SE = ` 120/day
SF = ` 300/day

The normal cost for the project is the sum of a normal cost for each
activity. The normal cost for the project is ` 48300 and the normal duration
is 140 days. The activity which should be crashed is the one on the critical
path which will add the least amount to the overall project cost. This will
be the activity with the flattest or least-cost slope. The duration can be
reduced as long as the critical path is not changed or a new critical path is
created. In addition, the activity duration cannot be less than the crash
duration.SD = ` 60/day (least-cost slope) Maximum of 10 days can be cut
from this schedule by reducing the duration of activity D to the crash
duration of 20 days.

179
Notes

Overall duration is 130 days and there are multiple critical paths (B-
F-E and B-C-D-E). Total project cost at this duration is the normal cost of
` 48300 plus the cost of crashing the activity D by 10 days (60 * 10 =` 600)
for a total of ` 48900.The next activity to be crashed would be the activity
E, since it has the least-cost slope (` 120per day) of any of the activities on
the critical path. Activity E can be crashed by a total of 10 days. Crashing
the activity E by 10 days will cost an additional ` 120 per day or ` 1200.

The project duration is now 120 days and the total project cost is
` 50100. There are now three critical paths (A, B-C-D-E, and B-F-E). The
next stage of crashing requires a more thorough analysis since it is
impossible to crash one activity alone and achieve a reduction in the overall
project duration. Activity A is paired with each of the other activities to
determine which has the least overall cost slope for those activities which
have remaining days to be crashed.

Activity A (` 100) + activity B (` 200)

Activity A (` 100) + activity C (` 600) + activity F (` 300)

180
 Notes
The least-cost slope will be activity A + activity B for a cost increase
of ` 300 per day. Reducing the project duration by 5 days will add 5*300
= ` 1500 dollar crashing cost and the total project cost would be ` 51600.
Activity B cannot be crashed any more.

Final step in crashing the project to 110 days would be accomplished

by reducing the duration of activity A by 5 days to 110 days, reducing
activity C by 5 days to 35 days, and reducing activity F by 5 days to 55 days.
The combined cost slope for the simultaneous reduction of activity A,
activity C, and activity F would be ` 1000 per day. For 5 days of reduction
this would be an additional ` 5000 in total project cost. The total project
cost for the crashed schedule to 110 days of duration would be ` 56600.

Resource Leveling and Resource Allocation

Resource Leveling

Resource Leveling is a project management technique used to

examine unbalanced use of resources (usually people or equipment) over
time, and for resolving over-allocations or conflicts. When performing project
planning activities, the manager will attempt to schedule certain

181
Notes
tasks simultaneously. When more resources such as machines or people are
needed than are available, or perhaps a specific person is needed in both
tasks, the tasks will have to be rescheduled concurrently or even
sequentially to manage the constraint. Project planning resource leveling is
the process of resolving these conflicts. It can also be used to balance the
workload of primary resources over the course of the project[s], usually at
the expense of one of the traditional triple constraints (time, cost, scope).
When using specially designed project software, leveling typically means
resolving conflicts or over allocations in the project plan by allowing the
software to calculate delays and update tasks automatically. Project
management software leveling requires delaying tasks until resources are
available. In more complex environments, resources could be allocated
across multiple, concurrent projects thus requiring the process of resource
leveling to be performed at company level. In either definition, leveling
could result in a later project finish date if the tasks affected are in the
critical path.

Resource Leveling is also useful in the world of maintenance

management. Many organizations have maintenance backlogs. These
backlogs consist of work orders. In a “planned state” these work orders have
estimates such as 2 electricians for 8 hours. These work orders have other
attributes such as report date, priority, asset operational requirements, and
safety concerns. These same organizations have a need to create weekly
schedules. Resource-leveling can take the “work demand” and balance it
against the resource pool availability for the given week. The goal is to
create this weekly schedule in advance of performing the work. Without
resource-leveling the organization (planner, scheduler, supervisor) is most
likely performing subjective selection. For the most part, when it comes to
maintenance scheduling, there are very few logic ties and therefore no need
to calculate critical path and total float.

Resource Allocation

Resource allocation is used to assign the available resources in an

economic way. It is part of resource management. In project management,
resource allocation is the scheduling of activities and the resources
required by those activities while taking into consideration both the
resource availability and the project time. In strategic planning, resource
allocation is a plan for using available resources, for example human

182
 Notes
resources, especially in the near term, to achieve goals for the future. It is
the process of allocating resources among the various projects or business
units. The plan has two parts: Firstly, there is the basic allocation decision
and secondly there are contingency mechanisms. The basic allocation
decision is the choice of which items to fund in the plan, and what level
of funding it should receive, and which to leave unfunded: the resources are
allocated to some items, not to others. There are two contingency
mechanisms. There is a priority ranking of items excluded from the plan,
showing which items to fund if more resources should become available;
and there is a priority ranking of some items included in the plan, showing
which items should be sacrificed if total funding must be reduced.

Ways to Avoid Time and Cost Overruns

Correct identification of the causes of delays can help the project

team to eliminate the same, as per the adage, a problem well formulated
is half solved. The most important reason for delay in cost and time overrun:
planning, organising and monitoring; hence, the need to plan the
resources adequately and estimate the need scientifically. Right choice of
project manager, project oriented organisation, project team and delegation
of authority commensurate with responsibility will go a long way to reduce
the overruns. Proper project management information system and effective
coordination with all concerned will ensure timely project completion. The
other reasons that help completing the project without delay are listed
hereunder. These are:

➢ Detailed planning and implementation schedule

➢ Sound monitoring

➢ Resource-planning based on time schedules and anticipated

progress

➢ Ensuring safety measures while preparing contracts

➢ Reward and incentive schemes for the project staff

➢ Selection of appropriate, feasible technology

➢ Listing engineering parameters and designs

➢ Mobilising community participation in planning and

implementa- tion

➢ Decentralised decision-making for fast implementation

183
Notes
➢ Continuity of the project manager, at least till the start of the plant

➢ Adequate training of the workers, supervisors involved

➢ Anticipating omissions, mistakes and preparing the organisation

to face crisis

➢ Minimising managerial lapses

➢ Identifying transport bottlenecks by proper liaison

➢ Communication, and following-up with vendors and

subcontractors to know the latest status and location of project
material

➢ Regular follow-up with local, national and international

financial agencies

➢ Innovative attitude and skills of the project team

➢ Adequate project information system

➢ Maintaining ecological balance and avoiding environmental

pollution

➢ Clarity of scope on project objectives

➢ Lucid description of team and sub-team tasks

➢ Lucid financial cost estimates

➢ Milestone charts and project audit reports, and

➢ Minutes of the co-ordination committees’ meetings with

contractors and government agencies

Conclusion

The completion of projects without overruns and delays is probably

the most important current problem area for cost engineers and project
managers as well as for the image of the whole professional area of Cost
Engineering / Project Cost Control not to mention the owners/contractors
and users themselves. Commercial Risk Analysis is therefore one of the
basic sub-procedures used by cost engineers.

****

184
 Notes

Lesson 4.3 - Project Appraisal and Control Process

Learning Objectives

➢ To understand the meaning of project appraisal.

➢ To know the steps in project appraisal process by banks and
financial institutions
➢ To know the steps in project control process.
➢ To know the various types of key programme/project monitors,
controls and reports.
➢ To appreciate the project control issues.

Project Appraisal

Project appraisal management is an essential stage of any project,

regardless of its nature, type and size. This stage represents the first point
of the pre-planning or initiation phase. Without having appraised a
project, it is financial and technically unreasonable to proceed with further
planning and development. No matter whether you are going to purchase a
new car (e.g. my neighbour’s project), constructing a building, improving
a business process, updating a network system, conducting a marketing
campaign, building a garage, or any other initiative, you should make a
preliminary assessment and appraisal of your undertaking in order to be sure
that that you will do a required and necessary change to your environment.

Project Appraisal Process by Banks and Financial Institutions

Banks and Financial institutions such as IDBI Bank, ICICI Bank,

and the Industrial Finance Corporation of India (IFCI), and the State
Industrial Development Corporations (SIDCs) and State Financial
Corporations (SFCs) of different States, as also Investment Finance
Institutions such as the Life Insurance Corporation (LIC), the General
Insurance Corporation (GIC) and the Unit Trust of India (UTI) have for
long been actively involved in promoting industrial projects and

185
Notes
participating in their operational phases and have emerged as major
stockholders in most enterprises. They participate in and underwrite equity
and debentures and provide medium and long-term loans, often accounting
for the major part of funds employed in enterprises. Before they commit
their funds, they have to necessarily satisfy themselves about the feasibility
of the projects to be assisted.

The Application

The applicant for institutional finance has to provide a com-

prehensive statement of the nature and purpose of the assistance being
sought the cost of the project, the financing mix contemplated the market
prospects for the product or products, the expected profitability and the
managerial and technical arrangements effected for operating the project.
Over the years, the leading financial institutions, IDBI, ICICI and IFCI,
have evolved a common format for the application form, which is being
used by most State level industrial development and financial institutions.

The application form provides for very elaborate information to be

given on all relevant aspects of the project, and the delay in furnishing the
requisite details can cause delay in appraisal.

The Appraisal Process

Small projects get assistance from a single institution, and in the case
of larger projects, the institutions extend assistance jointly through
syndication.

Single Institution Assistance - The Process

The evaluation proceeds in the following sequence, where a single

financial institution is involved:

➢ Application is received from the promoter.

➢ The institution deputes a financial expert and technical expert to

carry out the project appraisal;

➢ After a preliminary review, the team submits its report to the

management, recommending acceptance or rejection. If accepted

186
 Notes
in principle, further details for closer scrutiny are obtained from the
promoter.

➢ The crucial aspects of the project proposal are subjected to in- depth
study. Elaborate discussions are held with the promoter, and the
underlying assumptions get certified and substantiated.
Comparisons with similar projects, assessment of the technical
suitability of the basic engineering package, verification of the
collaboration agreements, scrutiny of price bids of contractors and
suppliers’ quotations, verification of market studies, inspection of
the site, and seeking expert opinions where required are all essential
steps in this in-depth analysis.

➢ Detailed evaluation of the technical, commercial, financial,

economic and management aspects are taken up for ascertaining the
project’s viability, and its acceptability for project financing.

➢ The senior executives of the institution have a close look at the

proposal, with reference to available reports and comments.

➢ Further discussions are held with the promoter and necessary

modifications are agreed upon.

➢ The final appraisal memorandum is prepared and submitted to the

managing director.

➢ The final appraisal memorandum goes to the board of directors for

approval.

➢ The promoter is informed of board’s approval.

Loan Syndication – The Process

Where the project, of a magnitude that calls for joint financing by a

group of institutions, is under consideration, the evaluation proceeds on
following lines:

➢ The project application is received by the financial institution.

➢ The institution’s project team carries out the preliminary review of

the technical, commercial, financial, economic and management
aspects of the proposal.

➢ The appraisal team holds further discussions with the promoter

and obtains required clarifications.

187
Notes
➢ The appraisal team prepares flash report on the project and
circulates it to the senior executives of the participating institutions
for their consideration.

➢ The acceptability of the project is discussed at the Senior Executive

Meeting (SEM).

➢ At the SEM, the lead institution is identified from among the

participating institutions.

➢ The lead institution takes up a detailed evaluation of the project

appraisal. It has elaborate discussions with the promoter, getting
evidences and clarifications to support the critical assumptions
in the proposal. This detailed evaluation will involve an in depth
examination of the diverse aspects of the project proposal, by
comparison with similar projects, site inspection, scrutiny of the
collaboration agreements, obtaining expert opinion as may be
necessary and such other procedures that can help in proper
assessment of the project’s viability and desirability.

➢ The lead institution prepares the evaluation report and circulates it

to the participating institutions for consideration.

➢ At the Inter-Institutional Meetings (IIM), the project is jointly

evaluated, and discussions are held with the promoter, and site
inspections are carried out. Project up to ` 10 crores have their
evaluation reports considered by SEM, and those that exceed ` 10
crores get considered at IIM.

➢ Changes or modifications that are found necessary are effected with

the consent of the promoter.

➢ Approvals for financing the project are obtained from the respective
sanctioning authorities of the participating institutions.

➢ The lead institution takes over the administrative responsibilities

and informs the promoter of the approval of the project.

The SEM or IIM, as the case may be, decides on the extent of
participation by the member institutions of the syndicate, as also the extent
of assistance from the concerned commercial banks and terms of
assistance. The commitment of assistance by each institution can be
formalized through the scheme of participation certificates. Over the years,
the institutions have been able to evolve uniform approaches to

188
 Notes
the methods of appraisal and approval, though there can be variations in
emphasis on specific aspects depending on the nature of the project.

Project Control Process

Project Controls

It is a management action, either planned to achieve the desired

result or taken as a corrective measure prompted by the monitoring
process. Project controls are mainly concerned with the metrics of the
project, such as quantities, time, cost and other resources. Apart from
these, project revenues and cash flow can also be part of the project metrics
under control.

The successful performance of a project depends on appropriate

planning. The execution of a project is based on a robust project plan and
can only be achieved through an effective schedule control methodology.
The development of a suitable Project Control system is an important part
of the project management effort. Furthermore, it is widely recognized that
planning and monitoring plays a major role as the cause of project failures.
It has been proved time and again that Project performance can be improved
if dedicated Project Controls systems are in place.

Project Control Process

Control is the process of comparing actual performance against plan

to identify deviations, evaluate possible alternative courses of actions, and
take appropriate corrective action. The steps in the project control process
for measuring and evaluating project performance are listed below:

➢ Setting a baseline plan.

➢ Measuring the actual performance
➢ Comparing actual with baseline plans.
➢ Taking corrective action.

Step 1: Setting a Baseline Plan

The baseline plan provides with the elements for measuring

performance. The baseline is derived from the cost estimates; information

189
Notes
relating to duration is derived from the work breakdown structure (WBS)
database; and time-sequence data are derived from the network and resource
scheduling decisions. The WBS defines the work in discrete work packages
that are tied to deliverables and organization units. In addition, each work
package defines the work, duration, and budget. From the WBS, the project
network schedule is used to phase all work, resources, and budgets into a
baseline plan.

Step 2: Measuring the Actual Performance

Time and budgets are quantitative measures of performance that

readily fit into the integrated information system. Qualitative measures
such as meeting customer technical specifications and product function are
most frequently determined by on-site inspection or actual use.
Measurement of time performance is relatively easy and obvious.
Examples: the critical path, early on schedule or late; is the slack of near
critical-paths decreasing to cause new critical activities, etc. For measuring
performance, earned value is necessary to provide a realistic estimate of
performance against a time-phased budget. Earned value will be defined as
the budgeted cost of the work performed (EV).

Step 3: Comparing Actual with Baseline Plan

All the baseline plans seldom materialize as expected and hence,

it becomes imperative to measure deviations from plan to determine if
action is necessary. Periodic monitoring and measuring the status of the
project allow for comparisons of actual versus expected plans. It is crucial
that the timing of status report be frequent enough to allow for early
detection of variations from plan and early detection of causes. Usually,
status reports should take place every one to four weeks to be useful and
allow for proactive correction.

Step 4: Taking Corrective Action

If deviations from plans are significant, corrective actions will be

needed to bring the project back in line with original or revised plan. In some
cases, conditions or scope can change, which, in turn, will require a change
in the baseline plan to recognize new information.

190
 Notes
Key Programme/Project Monitors, Controls and Reports

Following are the various types of project controls and reports:

a) Business Case: The Business Case effectively describes what is the

value of project outcome to the sponsoring organization. Managing
the Business Case is about value management of benefits, costs,
timescales and risks.

b) Project Plan: A comprehensive plan which clearly defines the

products to be produced, resources and time needed for all activities,
any dependencies between activities and points at which progress
will be monitored and controlled with any agreed tolerances.

c) Project Initiation Document (PID): This document defines all

major aspects of the project and forms the basis for its management
and the assessment of overall success. There are two primary uses
of the document:

➢ To ensure that the project has a complete and sound basis

before there is any major commitment to the project

➢ To act as a base document against which the project can assess

progress, change management issues, and ongoing viability
questions.

For construction projects, the content of the Project Initiation

Document is set out in the Project Execution Plan.

d) Stage Plan: Provides detail of how and when the objectives for the
stage are to be met by showing the deliverables, activities and
resources required. The Stage Plan provides a baseline against which
stage progress will be measured and is used as the basis of
management control throughout the stage.

e) Work Package: Sets out all information needed to deliver one or

more specialist products. The necessary information is collated by
the Project Manager and used to formally pass responsibility for
work or delivery to a team leader or member.

f) Change Control Strategy: The Strategy documents the procedure

to ensure that the processing of all Project Issues is controlled,
including the submission, analysis and decision making.

191
Notes
g) Highlight Reports: The highlight reports are used to provide the
Project Board (and possibly other stakeholders) with a summary of
the stage status at intervals defined by them and to monitor stage and
project progress. The Project Manager also uses it to advise the
Project Board of any potential problems or areas where the Project
Board could help.

h) Checkpoint Report: From the Team Manager to the Project

Manager at a frequency defined in the stage plan and/or work
package detailing the status of work for each member of a team.

i) Project Issue Log: A project issue is a generic term for any mat- ter
that has to be brought to the attention of the Project Team and
requires an answer. An issue can have a negative or positive impact
on the project and includes items such as requests for change, off-
specifications (this is an item not included in the original specifica-
tion or errors or omissions found in work already completed which
would result in the agreed specification or acceptance criteria not
being met), questions and statements of concern.

j) Risk Management Log: Risks can be threats to the successful

delivery of the Project. Usually they are recorded in a risk register
which is used to manage the project’s exposure to risk that is the
probability of specific risks occurring and the potential impact if
they did.

k) End Stage Report: It Summarizes progress to date and provides an

overview of the project as a whole, including impact of the stage on
the project plan, the business case and identified risks. The project
board uses the information to decide what action to take with the
project; approve the next stage; ask for revised plans, amend the
project scope or stop the project.

l) End Project Report: A report sent from the Project Manager to the
Project Board, which confirms the hand-over of all deliverables,
provides an updated business case, and an assessment of how well
the project has done against its Project Initiation Document.

m) Lessons Learned Report: A report which describes the lessons

learned in undertaking a project and which includes statistics from
the quality control of the project’s management products. It is

192
 Notes
approved by the Project Board then held centrally for the benefit
of future projects. If the project is one of a number attached to
a programme this document will also be used as input to the
programme review.

n) Post Project Review: Documents whether business benefits have

been realized and recommendations for future improvements have
been recorded. This is viewed as part of the project evaluation review
which includes the End Project Report and Lessons Learned Report.

Project Control Issues

a) Monitoring Time Performance

A major goal of progress reporting is to catch any negative

variances from plan as early as possible to determine if corrective action
is necessary. Fortunately, monitoring schedule performance is relatively
easy. The project network schedule, derived from the WBS/OBS, serves
as the baseline to compare against actual performance. Gantt charts (bar
charts) and control charts are the typical tools used for communicating
project schedule status.

Gantt Charts

Gantt and control charts serve well as a means for tracking and
trending schedule performance. Their easy-to-understand visual formats
make them favorite tools for communicating project schedule status-
especially to top management who do not usually have time for details.
Adding actual and revised time estimates to the Gantt chart gives a quick
overview of project status on the report date. The following figure shows
the sample of multi-color Gantt chart.

Control Charts

Control chart is another tool used to monitor past project schedule

performance and current performance and to estimate future schedule
trends. Control charts are also frequently used to monitor progress toward
milestones, which mark events and as such have zero duration. The
following figure shows the sample control chart.

193
Notes

b) Need for an Integrated Information System

There are many customized monitoring and control systems used in

practice. The disparity among monitoring systems is usually found in the
lack of connections with a time-phased baseline plan. Such systems fail to
compare actual work completed for any time period against budgeted
scheduled costs for the same time period. Without matching time-phased
budgets to actual cost of work completed, it is impossible to reliably
measure cost performance.

Development of an Integrated Cost/Schedule System

The earned value cost/schedule system uses several acronyms and

equations for analysis. Following five careful steps ensures that the cost/
schedule system is integrated.

➢ Define the work using a WBS. This step involves developing

documents that include the following information about Scope,

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 Notes
Work packages, Deliverables, Organization units, Resources and
Budgets for each package.

➢ Develop work and resource schedules. This is done by scheduling

resources to activities and time-phasing work packages into a
network.

➢ Develop a time-phased budget using work packages included in an

activity. The cumulative values of these budgets will become the
baseline and will be called the planned time-phased baseline of the
value of the work scheduled (PV).

➢ At the work package level, collect the actual costs for the work
performed. These costs will be called the actual cost of the work
completed (AC).

➢ Compute the schedule variance using the formula, Schedule

Variance = Earned Value – Planned time-phased base line of the
value of the work scheduled (SV = EV – PV).

➢ Compute the cost variance using the formula, Cost Variance =

Earned Value – Actual cost of the work completed (CV = EV – AC).

Development of Project Baselines

The baseline (PV) serves as an anchor point for measuring

performance. The baseline is a concrete document and commitment; it is the
planned cost and expected schedule performance against which actual cost
and schedule are measured. It can also serve as a basis for developing cash
flows and awarding progress payments. Development of the project baseline
is part of the planning process. The baseline is the major input to the
cost/schedule system to be described.

Costs to be included in Baselines

The baseline PV is the sum of the cost accounts, and each cost account
is the sum of the work packages on the cost account. Three costs are typically
included in baselines, viz., labour, equipment, and materials. Sometimes
project direct overhead costs are also included.

195
Notes
Rules for Placing Costs in Baselines

The major reasons for creating a baseline are to monitor and report
progress and to estimate cash flow. Therefore, it is crucial to integrate the
baseline with the performance measurement system. Costs are placed in the
baseline exactly as managers expect them to be “earned”.

This approach facilitates tracking costs to their point of origin. In

practice, the integration is accomplished by using the same rules in
assigning costs to the baseline as those used to measure progress using
earned value. Percent Complete Rule is the best method for assigning costs
to the baseline in order to establish frequent check points over the
duration of the work package and assign completion percentages in
monetary terms.

Methods of Variance Analysis

Generally the method for measuring accomplishments centers on two

key computations:

➢ Comparing earned value with the expected schedule value;

➢ Comparing earned value with actual costs.

c) Indices to Monitor Progress

In corporate world, project management professionals prefer to use

schedule and cost indices over the absolute values of SV and CV, because
indices can be considered as efficiency ratios. Graphed indices over the
project life cycle can be very illuminating and useful. The trends are easily
identified for deliverables and the whole project.

Performance Indexes

There are two indices of performance efficiency. The first index

measures cost efficiency of the work accomplished to date:

Cost Performance Index (CPI) = EV/AC

Scheduling Performance Index (SPI) = EV/PV

196
 Notes
Project Percent Complete Index

There are two project percent complete indices, which are used
depending on the nature of project. The first index assumes the origi- nal
budget of work complete, which is the more reliable information to measure
project percent complete. The second index assumes the actual costs-to-
date and expected cost at completion, which is the most reliable measure
for measuring project percent complete. These indices compare the up-to-
date progress to the end of the project. The implications un- derlying the
use of these indices are that conditions will not change, no improvement or
action will be taken, and the information in the database is accurate.

Percent Complete Index for Budget = PCIB = EV/BAC

Percent Complete Index for Cost = PCIC = AC/EAC

Technical Performance Measurement

Measuring technical performance is equally important as measur- ing

schedule and cost performance. The consequences of poor technical
performance will be very adverse. Assessing technical performance of a
system, facility, or product is often accomplished by examining the docu-
ments found in the scope statement and/or work package documentation.

Software for Project Cost/Schedule Systems

Software developers have created sophisticated schedule/ cost

systems for projects that track and report budget, actual, earned, committed,
and index values. These values can be labour hours, materials, and/or
dollars. This information supports cost and schedule progress, performance
measurements, and cash flow management.

Additional Earned-Values Rules

Although the percent complete rule is the most-used method of

assigning budgets to baselines and for cost control, there are two
additional rules that are very useful for reducing the overhead costs of
collecting detailed data on percent complete of individual work packages.
These rules are the 0/100 percent rule and the 50/50 rule. These two rules
are typically used for short-duration activities and/or small-cost activities.

197
Notes
Forecasting Final Project Cost

There are basically two methods used to revise estimates of future

project costs. In many cases both methods are used on specific segments of
the project. The result is confusion of terms in texts, in software, and among
practitioners in the field.

➢ The first method allows experts in the field to change the original
baseline durations and costs because new information tells them
the original estimates are not accurate.

➢ The second method is used in large projects where the original

budget is less reliable. This method uses the actual costs to-date
plus an efficiency index, (CPI = EV/AC) applied to the remaining
project work. When estimate for completion uses the CPI as the
basis for forecasting cost at completion, acronym ‘(EAC)’ -
Estimated total cost At Completion’- is used.

d) Other Control issues

Baseline changes

Changes during the life cycle of projects are inevitable and will occur.
Some changes can be very beneficial to project outcomes; changes having a
negative impact are the ones to be avoided. Careful project definition can
minimize the need for changes. The price for poor project definition can be
changes that result in cost overruns, late schedules, low morale and loss of
control. Change comes from external sources or from within. Externally, for
example, the customer may request changes that were not included in the
original scope statement and that will require significant changes to the
project and thus, to the baseline.

Contingency Reserve

In reality, plans seldom materialize as per estimates. Identified and

unidentified risks occur, estimates go wrong, customer wants changes,
technology changes. Because, perfect planning does not exist, some
contingency funds should be created before the project commences to cover
the unexpected. The size of the contingency reserve should be related

198
 Notes
to the uncertainties and risk of schedule and cost estimate inaccuracies.
Contingency reserve is not a free lunch for all who come. Reserve funds
should only be released by the project manager on a very formal and
documented basis. Budget reserve contingency funds are not for scope
changes. Scope changes are covered by management reserve fund.

The Costs and Problems of Data Acquisition

For large projects, there is no substitute for using a percent complete

system that depends on data collected through observation at clearly defined
monitoring points.

Scope Creep

Large changes in scope are easily identified. It is the ‘minor refine-

ments’ that eventually build to be major scope changes that can cause
problems. These small refinements are known in the field as scope creep.

Ways to Deal with Project Control Issues

Having understood the key control issues, setting up appropriate

controls will help assure the project is a success. Following are some of the
ways to deal with project control issue:

a) Change management: Request that a member of senior management

announce the project to all stakeholders, why the project has been
launched and the impact on those affected. By involving those
affected, there will be a less resistance to change.

b) Schedules: Make sure the project starts on time and that tasks are
completed on a timely basis. To help assure project completes by the
planned completion date, employ the critical path method. This
method defines critical and non-critical tasks that impact timely
project completion.

c) Costs: Break down budgeted costs into easy-to-track categories.

Make sure costs are recorded as soon as they are incurred so that
there is a clear understanding of actual costs. Instruct project team
members who are responsible for approving bills; otherwise costs
can quickly escalate.

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Notes
d) Requirements: Use a structured approach for defining requirements
so that the delivered project matches the expectations of project
stakeholders. Rather than waiting until the end of a project to deliver
what stakeholders want, provide interim deliverables to make sure
the organization and the stakeholders are in agreement with project
progress. Waiting until the end of the project to share information
with users could result in project cost overruns if changes must be
made in what was delivered.

e) Communications: Make sure communications to the project team

and stakeholders is clear and understandable. Breakdowns in
communications can quickly derail a project and impact team
members’ morale.

f) Staffing: Make sure the project is staffed with people who have the
required skills to achieve project objectives. Have weekly meetings
with project staff so you can quickly address any project team or
stakeholder problems.

g) Checklist: Prepare a checklist of all areas you need to monitor and

control. Decide on what you will monitor and how often. Do not
delay acting on issues that are not under control.

h) Monitoring, Reporting & Control: Monitoring is about assessing

what work has been completed for a Project including costs, risks
and issues. In addition the Board will routinely monitor if the
business case continues to be viable in terms of alignment with
strategic objectives. This usually takes the form of the production
of documentation and reports at key stages. Reporting provides
the Project Board with a summary of the status of the project at
intervals defined by them.

Conclusion

Controls usually relate to stages in projects and are established to

control the delivery of the project’s products (outputs). In project
management controls take two forms - event driven and time driven. Event
driven means that the control occurs because of a specific event has taken
place. Examples of event driven controls include End-Stage Reports,
completion of a Project Initiation Document (PID) and creation of an

200
 Notes
exception plan. Time driven controls are regular progress feedbacks.
Examples of time driven controls include checkpoint and highlight
reporting. This does not replace the need for the Board to maintain an
overall view of progress. Monitoring is used to oversee progress of
products, outputs, and outcomes. Reporting advises the correct people at
the correct time of positive and negative events, allowing for progression or
remedial action as appropriate. Controls then assist with both monitoring
and reporting by provision of required review points such as End Stage
Assessments.

****

201
Notes

Lesson 4.4 - Project Audit and Evaluation of Project Team and its
Manager

Learning Objectives

➢ To understand the meaning of project audits.

➢ To know the steps in project audit process.
➢ To understand the conditions of project closure.
➢ To know the steps in project closure process
➢ To appreciate the importance of evaluation of project team, team
member and manager.

Project Audits

Project audits are more than the status reports which check on
project performance. Project audits use performance measures and
forecast data. But project audits are more inclusive. Project audits review
why the project was selected. It includes a reassessment of the project’s role
in the organization’s priorities. It includes a check on the organizational
culture to ensure that it facilitates the type of project being implemented.
It assesses if the project team is functioning well and it is appropriately
staffed. Audits of projects in process should include a check on external
factors that might change where the project is heading on the right path
– for example, technology, government regulations, and competitive
products. It includes a review of all factors relevant to the project and to
managing future projects. It can be performed while a project is in process
and after a project is completed. There are only a few minor differences
between these audits.

In-Process Project Audits

In-process project audits allow for corrective changes, if they are

needed, on the audited projects or others in progress. It concentrates on
project’s progress and performance and checks if conditions have changed.

202
 Notes
Post Project Audits

These audits tend to include more detailed and depth than in-
process project audits. Project audits of completed projects emphasize
improving the management of future projects. These audits are more
long term oriented than in-process audits. Post project audits check on
the project performance, but the audit represents a broader view of the
project’s role in the organization.

Factors Influencing Audit Depth and Detail

The depth and detail of the project audit depends on many factors:

➢ Organization size
➢ Project importance
➢ Project type
➢ Project risk
➢ Project size
➢ Project problems

Project Audit Guidelines

The Guidelines for conducting project audits include the following:

a) The philosophy must be that the project audit is not a punishing

exercise.
b) Comments about individuals or groups participating in the project
should not be revealed.
c) Audit activities should be intensely sensitive to human emotions
and reactions.
d) Accuracy of data should be verifiable or noted as subjective or
judgmental.
e) Senior management should announce support for the project audit
and see that the audit group has access to all information, project
participants and project customers.
f) Objective of the project audit is to learn and conserve valuable
organizational resources.

203
Notes
g) The audit should be completed quickly.
h) The audit leader should be given access to senior management
above the project managers.

Project Audit Process

Following the steps in the project audit process:

Step 1: Initiation and Staffing

Initiation of the audit process depends primarily on organization

size and project size along with the other factors. However, every effort
should be made to make the project audit a normal process rather than a
surprise notice. In small organizations and project where face to face
contact at all levels is prevalent, an audit may be informal and only
represent another staff meeting. But even in these environments, the
content of a formal project audit should be examined and covered with
notes made of the lessons learned.

In medium sized organizations that have several projects occurring

simultaneously, initiation can come from a formal project review group,
from the project priority team or be automatic. A major tenet of the project
audit is that the outcome must represent an independent, outside view of the
project. Maintaining independence and an objective view is difficult, given
that audits are frequently viewed as negative by project stakeholders.

It is imperative that the audit leader possesses the following

characteristics:

➢ No direct involvement or direct interest in the project

➢ Respect of senior management and other project stakeholders
➢ Willingness to listen
➢ Independence and authority to report audit results without fear of
recrimination from special interests.
➢ Perceived as having the best interest of the organization in
making decision.
➢ Broad based experience in the organization or industry.

204
 Notes
Step 2: Data Collection and Analysis

The traditional content model for a project audit represents two

perspectives. One evaluates the project from the view of the organization.
The second perspective represents the project team’s evaluative view. The
organization perspective is developed by a small group primarily made
up of persons not having a direct interest in the project. The project team
perspective is developed by a group composed primarily of team members
along with persons independent of the project to ensure the evaluation is
objective. Each organization and project is unique. Therefore, many fac-
tors need to be considered like the industry, project size, newness of tech-
nology and project experience that can influence the nature of the audit.

Step 3: Reporting

The major goal of the audit report is to improve the way future
projects are managed. Concisely, the report attempts to capture needed
changes and lessons learned from a current or finished project. The
report serves as a training instrument for project managers of future
projects. Audit reports needs to be customized to the specific project and
organizational environment. Nevertheless, a generic format for all audit
reports and the managers who read and act on their content. Usually, the
following items are included in the reports:

➢ Classification of project based on nature, type, size, number of staff

and technology level.
➢ Analysis of information gathered such as project’s mission,
objectives, procedures, systems and organizational resources used.
➢ Recommendation of positive successes that should be continued
and used in future projects.
➢ Lessons learned to avoid pitfalls in future.
➢ Appendix of data or details of analysis of the project.

Core Constituents to be analyzed during Project Audit

a) Time Management

➢ Time schedule development and control measures

➢ Activity duration analysis in terms, including inter-team
dependency

205
Notes
b) Resource Management

➢ Resource planning and control in terms of allocation of resources,

criteria for distribution, analysis of consumption patterns and
➢ Measures to control resource abuse

c) Personnel Management

➢ Allocation of staff and establishment of recruiting policies

➢ Division of responsibilities regarding team development and
training needs

d) Information Management

➢ Policies regarding Preparing and Collecting information

➢ Principles used for Classifying and Distributing information
➢ Methods used for Filing, Updating and Retrieving information

The purpose of the audit is not just analyzing various project man-
agement resources and functionalities but also to help the organization
understand the performance of each of them. For this purpose, most audit
processes use a grading system to rank each audited project constituent:

➢ Critically Deficient — suggests a serious inability to match project

guidelines.

➢ Weak — unable to entirely comply with project objectives.

➢ Satisfactory — basic project management principles are followed

but the overall performance has room for improvement.

➢ Good — the compatibility with the project goals and effectiveness

of management tools, both are appreciable and committed to project
goal.

➢ Very Good — the process defines ideal project performance and

adheres to planning/monitoring expectations and performs as per
project expectations

206
 Notes
Project Closure

Every project comes to an end eventually. On some projects the end

may not be as clear as would be hoped. Although the scope statement
defines a clear ending for a project, the actual ending may or may not
correspond. Fortunately, a majority of projects are blessed with a well-
defined ending. Regular project audits and a priority team will identify
those projects that should have endings different from those planned.

Thus, closure is the final stage in the project life cycle and is
triggered when the sponsor formally accepts the project. The objectives of
this stage are to: transition the product, services and deliverables to
operations and support; logically complete administrative and logistical
close-out activities including contracts; release project resources and
capture performance information that will help improve future projects.

Conditions for Project Closure

a) Normal

The most common condition for project closure is simply a

completed project. In the case of ‘turnkey’ projects, such as building a
new production facility or creating a customized information system, the
finish is marked by the transfer of ownership to the customer. For many
development projects, the end involves handing over of the final design to
production and the creation of a new product or service line.

For other internal projects, such as system upgrades or creation of

new inventory control systems, the end occurs when the output is
incorporated into ongoing operations. Some modifications in scope, cost,
and schedule probably occurred during implementation.

b) Premature

For a few projects, the project may be completed early with some
parts of the project being eliminated. If early project closure happens, it
should have the support of all project stakeholders. The decision should be
left to the audit group, project priority team or senior management.

207
Notes
c) Perpetual

Some projects never seem to end. The project appears to develop

a life of its own. Although these projects are plagued with delays, they are
viewed as desirable when they are finally completed. The major
characteristic of this kind of project is constant ‘add-ons’. The owner or
others continuously require more small changes that will improve the
project outcome-product or service. These changes typically represent
‘extras’ perceived as being part of the original project intent.

d) Failed Project

In rare circumstances, projects simply fail, for a variety of reasons.

e) Changed Priority

The priority team continuously revises project selection priorities

to reflect changes in organizational direction. Normally these changes are
small over a period of time, but periodically major shifts in organization
require dramatic shifts in priorities. In this transition period, projects in
process may need to be altered or cancelled. Thus, a project may start with
a high priority but see its rank erode or crash during its project life cycle
as conditions change.

Closure Process

As the project nears the end of its life cycle, people and equipment are
directed to other activities or projects. Carefully managing the closure phase
is as important as any other phase of the project. Getting the project manager
and team members to wrap up the odds and ends of closing down the project
is sometimes difficult. The typical close-out plan includes answers to
questions like:

➢ What tasks are required to close the project?

➢ Who will be responsible for these tasks?
➢ When will closure begin and end?
➢ How will the project be delivered?

208
 Notes
Implementing the closedown plan includes several wrap-up
activities. Many organizations develop lengthy lists for closing projects as
they gain experience. These are very helpful and ensure everything is taken
care of. Implementing closedown includes the following five major
activities:

➢ Getting delivery acceptance from the customer.

➢ Shutting down resources and releasing to new ones.
➢ Reassigning project team members.
➢ Closing accounts and seeing all bills are paid.
➢ Evaluating the project team, project team members, and the project
manager.

Team, Team Member and Project Manager Evaluation

Auditing includes performance evaluations of the project team,

individual team members, and the project manager.

Team Evaluation

Some conditions should be established or agreed upon before

auditing the project team. Some conditions include the following:

➢ Whether standards for measuring performance exist? Are the goals

clear for the team and individuals? Challenging? Attainable? Lead
to positive consequences?

➢ Whether individual and team responsibilities and performance

standards are known to all team members?

➢ Whether team rewards are adequate? Do they send a clear signal

that senior management believes in synergy of teams?

➢ Whether a clear career path for successful project managers is in

place?

➢ Whether the team has discretionary authority to manage short- term

difficulties?

➢ Whether there is a relatively high level of trust emanating from the

organization culture?

209
Notes
Team evaluation should be beyond time, cost, and specifications.
Whether there are any other conditions beyond these three criteria? The
“characteristics of highly effective teams” can easily be adapted as
measurements of team effectiveness.These “in-place conditions” will
support any evaluation approach for teams and their members.

Team’s project performance should be evaluated in one of two ways:

➢ Team members should evaluate themselves and each other.

➢ Team members should evaluate each other and team leaders should
evaluate individual team members.

Do’s of Team Evaluation

Each team member should also be allowed to evaluate him or her-

self.To begin with, team members and leaders use the Project Team Evalu-
ation Templates. Following are the guidelines for evaluating project teams:

a) Analyze Evaluations - Analyze how individual team members

evaluated themselves and each other to get a better feel for how the
team feels as a whole.

b) Analyze the Difficulties - How difficult have team projects been?

Were tasks new or known? In either case did the team rise to the
degree of difficulty? If not, why? If you feel the team lacked on
certain tasks, instead of berating the team in your evaluations,
discuss a past project where they performed well, point out what was
different this time around.

c) Analyze Performance - How well did the team perform? Don’t

confuse performance with potential. Stick to the actual results of the
team.

d) Analyze Achievement - Did the team achieve the project goal? If

so, point out contributions and results.

e) Life Cycle - How well did the team perform within the life cycle of
the project? Were deadlines met? If not, identify overruns. Try to
analyze what happened if the life cycle of the project was longer than
anticipated. What could have been done differently?

210
 Notes
f) Judge Individuality - By looking at individual evaluations, analyze
what each individual contributed to the project. How well did each
team member do? Keep in mind that some team members succeed in
some areas while others succeed in different areas. Did the
individuals perform at a level that was helpful to the team as a whole?

g) Be honest - You probably are pleased with your team most of the
time. Don’t use this as your guide in evaluating your team. All
employees have room for improvement including teams. Not every
project is a job well done. This is by far the hardest part of evaluating
your team. If negatives are identified and must be discussed, start
by talking about a past project that flowed well. Next, discuss past
success and compare it to the current project. How could things
have been improved upon?

Do not’s of Team Evaluation

Following are the not to be followed while evaluating project teams:

➢ Don’t be too lenient. Don’t be the project manager who says

everything is fine when it’s not.

➢ Everyone has room to improve. If you don’t identify these areas,

your team will never improve.

➢ Don’t judge everything on an “average” basis. Some things worked

and some things didn’t. If a team feels they are average in
performance, what are you really telling them?

➢ Do not judge individuals’ performance based on their personality

➢ If a team member or the team as a whole did one wrong thing, don’t
make this the focus of your evaluation. Evaluate performance for the
entire project.

Evaluations are not the most popular thing for project managers.
Evaluating team project performance is a key if team has to succeed or
improve on future projects. Keep in mind that if weak areas are not
identified, your team may just think everything is fine. If you feel you need
help on evaluating your team, talk with mentors, other project managers
and human resources department.

211
Notes
Individual Team Member and Project Manager Evaluation

Team evaluation is crucial, but at some point a project manager

is likely to be asked to evaluate the performance of individual members.
Such an evaluation will typically be required as part of the closure process
and will then be incorporated in the annual performance appraisal system
of the organization. These evaluations constitute a major element of an
individual’s personnel file and often form the basis for making the
decisions about promotions, future job assignments, merit pay increases,
and other rewards.

Peer Evaluation

Peer evaluations offer an opportunity for team to comment on the

performance of their peers. For example, the team may ask its members
at a midpoint in the project to self-evaluate their improving team
effectiveness. The goal is to provide information during the project that
will allow the participants to modify their behaviour for the success of the
project. In the recent times, 360 degree feedback is gaining momentum
in the organizations. 360 degree feedback is a multi-rater approach and
involves soliciting feedback relating to the performance of team members
from all the stakeholders of the project. This includes not only the project
and area managers but also peers, subordinates and customers.

Self Assessment Questions

1) What are the objectives of project network?

2) What are the rules for developing a project network?
3) What are the approaches used to develop project networks?
4) Explain the fundamentals of AON.
5) What are network analysis techniques?
6) Explain Critical Path Method with an example.
7) Explain PERT with an example.
8) What are the three time estimates used in PERT?
9) What is crashing of project network?
10) Explain the relationship between activity time and cost.

212
 Notes
11) Explain the relationship between project time and cost.
12) Explain the crashing of project network with an example.
13) What is resource leveling?
14) What is resource allocation?
15) How to avoid cost and time overruns?
16) What is project appraisal?
17) Explain the steps in project appraisal process by banks and
financial institutions.
18) What is loan syndication?
19) What are project controls? Explain the steps in Project Control
Process.
20) What are the key project monitors, controls and reports used?
21) Explain the various project control issues.
22) What are the tools used for communicating project schedule
status?
23) Explain the need for an integrated information system for project
monitoring and control.
24) What are the steps in developing an integrated cost/schedule
system?
25) What are project baselines? What are the costs included in
baselines?
26) Explain the indices used to monitor progress.

CASE STUDY
Refurbishing Heathrow Airport Terminal 1, On Time, Within
Budget, With No Disruptions to Travelling Public

Terminal 1 had been out of date and badly in need of refurbishment,

with the 40-yearold building not seeing any significant updates since
it was built in the 60s. With serious refurbishment going elsewhere at
Heathrow Airport, as well as the upcoming opening of Terminal 5 and the
introduction of international passengers to Terminal 1, it was in need of
a major overhaul. “There were a number of factors associated

213
Notes
with this project that made success a big challenge. Managing multiple
stakeholders, suppliers, and contractors within a strict deadline and budget
would ordinarily be difficult, but doing this alongside keeping the terminal
continuously open for passengers was a huge issue that required strict
planning and coordination. “Risk had to be tightly managed and identified
early on to ensure that a solution could be found before it turned into a major
issue that would take the project off-time and off-budget. David Buisson,
PMP, Project Manager ensured that communications management was
strictly adhered to and regular meetings are conducted. This large-scale
project had to be delivered whilst remaining completely operational for
customers—challenging enough in any circumstances, but this was
particularly the case for Terminal 1 at Heathrow Airport given the fact
that some 20 million people a year travel through the airport.
£6.3million worth of additional work was added without an increase to the
original project budget.

The use of PMI software played a vital role in communications

management for the project, allowing the entire project team to have
visibility of all activity on the project almost in real time, minimising time
wasting or duplication of work. This was a part of the commitment to
good communications between the team and allowed for easier access to
the project plans. Weekly coordination meetings were held to ensure that
any problems or issues were picked up immediately and dealt with. Each
meeting would examine a five week look ahead at the work schedule
anticipating any future issues before they might happen. Project manager
David Buisson would examine the top five risks every week with various
contractors, visiting them onsite to determine a solution to the problem.
“This project was a huge success despite considerable odds against it. It
was completed on-time, within budget with no major problems and whilst
remaining open to the public. The success of this project is due to excellent
management. Analyse how the project was completed without time and
cost overruns.

****

214
 Notes

UNIT – 5

Project Management

One of the prerequisite to become an effective project manager is

building cooperative relationship among different groups of people to
successfully complete the project. The success of any project depends not
only on the performance of project teams but also on the contributions on
top management, functional managers, customers, suppliers, contractors
and others. In this chapter, let us understand the difference between man-
aging and leading a project, how to manage the various project stakehold-
ers, the importance of social network building, qualities of an effective
project manager, stages in team development model, situational factors
affecting team development and project team pitfalls.

Unit Structure

Lesson 5.1 - Project Managing Versus Leading of Project

Lesson 5.2 - Qualities of Project Manager and Managing Project
Teams
Lesson 5.3 - Team Building Models and Performance Teams and
Team Pitfalls

215
Notes

Lesson 5.1 - Project Managing Versus Leading of Projects

Learning Objectives

➢ To appreciate the difference between managing and leading a

project.
➢ To understand the various stakeholders to project, both internal
and external,
➢ To learn how to manage the project stakeholders.
➢ To learn the ways to build social network to succeed in projects.

Managing Vs. Leading of a Project

In a perfect world, the project manager would simply implement the

project plan and the project would be completed. The project manager
would work with others to formulate a schedule, organize a project team,
keep track of progress and announce what needs to be done next week and
then everyone would follow. But in reality, no one lives in a perfect world
and not all things are going as per the plans. The following may likely to
happen in reality:

a) Project Participants Get Impatient

b) Project Team Members Fail To Complement Each Other
c) Service Departments Are Unable To Fulfill Their Commitments
d) Technical Problems Arise
e) Work Completion Take Longer Time Than Expected
f) Cost May Overrun.

216
Differences between a Leader and Manager

Let us now take a look at the difference between a manager and leader
which is presented in the following table.

Differences between a manager and leader

Differences in ➢ Managers ➢ Leaders

➢ Emphasize rationality and ➢ Are perceived as brilliant, but

control; sometimes lonely;

➢ Problem-solvers (focusing on ➢ Achieve control of themselves

goals, resources, organization before they try to control others;
Personality structures, or people);
➢ Can visualize a purpose and
style
➢ Persistent, tough-minded, hard generate value in work;
working, intelligent,
➢ Imaginative, passionate, non-
analytical, tolerant and
conforming risk-takers.
➢ Have goodwill toward others

➢ Adopt impersonal, almost ➢ Tend to be active since they

passive, attitudes towards goals; envision and promote their
ideas instead of reacting to
➢ Decide upon goals based on
current situations;
necessity instead of desire and
are therefore deeply tied to ➢ Shape ideas instead of
Attitude
their organization’s culture; responding to them
towards
goals ➢ Tend to be reactive since they ➢ Have a personal orientation
focus on current information towards goals;

➢ Provide a vision that alters the

way people think about what is
desirable, possible and
necessary

217
 ➢ View work as an enabling ➢ Develop new approaches to
process; long-standing problems and
open issues to new options;
➢ Establish strategies and makes
decisions by combining people ➢ First, use their vision to excite
and ideas; people and only then develop
choices which give those im-
➢ Continually coordinate and
ages substance;
balance opposing views;
Conception ➢ Focus people on shared ideals
➢ Are good at reaching compro-
of work and raise their expectations;
mises and mediating conflicts
between opposing values and ➢ Work from high-risk positions
perspectives; because of strong dislike of
mundane work.
➢ Act to limit choice;
➢ Tolerate practical, mundane
work because of strong surviv-
al instinct which makes them
risk-averse.
➢ Prefer working with others; ➢ Maintain inner perceptiveness
that they can use in their rela-
➢ Report that solitary activity
tionships with others;
makes them anxious; are col-
laborative; ➢ Relate to people in intuitive,
empathetic way;
➢ Maintain a low level of emo-
tional involvement in relation- ➢ Focus on what events and deci-
ships; sions mean to participants;

➢ Attempt to reconcile differ- ➢ Attract strong feelings of iden-

ences, seek compromises, and tity and difference or of love and
Relations
establish a balance of power; hate;
with others
➢ Relate to people according to ➢ Create systems where human
the role they play in a sequence relations may be turbulent, in-
of events or in a decision- tense, and at times even disor-
making process; ganized.

➢ Focus on how things get done;

maintain controlled, rational,
and equitable structures;
➢ May be viewed by others as in-
scrutable, detached, and ma-
nipulative.

218
 ➢ Report that their adjustments to ➢ Reportedly have not had an easy
life have been straightfor- ward time of it;
and that their lives have been
➢ Lives are marked by a continual
more or less peaceful since
struggle to find some sense of
birth;
order;
➢ Have a sense of self as a guide
➢ Do not take things for granted
to conduct and attitude which
and are not satisfied with the
is derived from a feeling of
status quo;
being at home and in harmony
with their environment; ➢ Report that their “sense of self ”
is derived from a feeling of
➢ See themselves as conservators
profound separateness;
Influence and regulators of an existing
of past order of affairs with which they ➢ May work in organizations, but
personally identify and from they never belong to them;
experience
which they gain rewards; ➢
on self Report that their sense of self is
identify ➢ Report that their role harmo- independent of work roles,
nizes with their ideals of re- memberships, or other social
sponsibility and duty; indicators of social identity;

➢ Perpetuate and strengthen ex- ➢ Seek opportunities for change

isting institutions; display a life (i.e. technological, political, or
development process which fo- ideological);
cuses on socialization. ➢ Support change; find their
purpose is to profoundly alter
human, economic, and political
relationships;
➢ Display a life development
process which focuses on
personal mastery.
Source: http://www.au.af.mil/au/awc/awcgate/sba/leadvmanage.htm

Role of Project Manager

Thus, the project manager’s job is to set the project back on the right
track. A manager accelerates certain activities, finds out ways to solve
technical problems, acts as peacemaker when pressures arise and makes
appropriate trade-offs among time, cost and scope of the project. However,
in reality, project managers do a lot of things to keep the proj-

219
Notes
ect on track. They also innovate and adapt to ever changing situations.
They often come across deviations from plans and introduce considerable
changes in the scope of the project and counter the unexpected threats or
opportunities.

For example, the scope of the project may have to be modified dur-
ing the course of implementation, taking into consideration the change
in the customer’s needs. Competitors may release new products that dic-
tate switching the time, cost, and scope priorities of the project. Work-
ing relationships among project participants may break down, requiring
rejuvenating the project tem. Ultimately, there may be a wide difference
between what was planned in the beginning and what was achieved at the
end of the project.

The project managers are responsible for the following:

a) Integrating the resources assigned for the project.

b) Initiate changes in plans and schedules in tune with internal con-
straints and external unexpected problems.
c) Keeps the project going while making necessary adjustments along
the way. According to Kotter, these two different activities repre-
sent the distinction between management and leadership.

Managing Vs. Leading a Project

Thus, management is about coping with complexity, while leader-

ship is about coping with change. Good management brings about order and
stability by formulating plans and objectives, designing structures and
procedures, monitoring result against plans and taking corrective at- tention
when necessary. Leadership involves recognizing and articulating the need
to significantly alter the directions and operations of the proj- ect, aligning
the people to new directions and motivating them to work together to
overcome hurdles produced by the change and realize new objectives.
Strong leadership is only desirable and is not always necessary to
successfully complete a project.

Well-defined projects that encounter no significant surprises re-

quire little leadership,. Example: Constructing a conventional apartments
building in which the project manager simply administrates the project

220
 Notes
plan. In contract, more leadership is required when the degree of uncer-
tainty encountered on projects is higher in terms of changes in project scope,
technological problems, breakdown of relationship and coordina- tion
between people, etc. For example, strong leadership is required for a
software development project where the parameters are always changing
to meet the developments in the industry.

It is a rare mix to see a person who can perform both the role of
leader and manager well. Some people may be great visionaries and inspire
others but fail in the day to day management. On the other side, there are
some other people, who may not inspire others but are well-organized and
methodical and very successful in execution. Thus, people with good
leadership qualities need the help of good managers who can oversee and
manage the projects successfully. Otherwise, people with poor leadership
qualities have to count the help of managers who are good in leading and
help the leader in understanding the need to change and coordinating the
project stakeholders. Still, one of the things that make good project
managers so valuable to an organization is that they have the ability to both
manage and lead a project. In this process, they recognize the need to
manage project interfaces and build a social network that allows them to
complete the project successful by ensure cooperation.

Managing Project Stakeholders

Project stakeholders are those entities within or outside an

organization which:

1. Sponsor a project, or
2. Have an interest or a gain upon a successful completion of a project;
3. May have a positive or negative influence in the project completion.

Normally, project managers are eager to implement their own ideas

and manage their people successfully to complete their project. By
experience, they understand that project success depends on cooperation of
a wide range of individuals, many of whom do not report to them. For
example, during the course of a system integration project, a project
manager was surprised by how much time she was spending negotiating
and working with vendors, consultants, technical specialists and other
functional managers.

221
Notes
When new project managers do find time to work directly on the
project, they adopt a hands-on approach to managing the project. They
choose this style not because they are power hungry people but eager to
achieve the results. They quickly become frustrated by the slow process and
non-cooperation of various groups. Unfortunately, as this frustration builds,
the natural temptation is to exert more pressure and get more heavily
involved in the project. These project managers quickly earn the reputation
of ‘micro managing’ and begin to lose sight of the real goal they play in
guiding a project.

Working with a number of different groups of stakeholders is

a prerequisite for any significant project. First, there is a core group of
specialists assign to complete the project. This group is likely to be
supplemented at different times by professionals who work on specific
segments of the project. Second, there are the groups of the people within
the performing organizations who are either directly or indirectly involved
with the project. The most notable is top management, to whom the project
manager is accountable. There are also other project managers, functional
managers who provide resource and or may be responsible for specific
segments of the project and administrative support service success human
resources, finance etc.

Project Stakeholders

Depending on the nature of the project, there are a number of

different groups outside the organization that influence the success of the
project. Examples of project stakeholders include the customer, the user
group, the project manager, the development team, the testers, etc.
Stakeholder is anyone who has an interest in the project. Project
stakeholders are individuals and organizations that are actively involved
in the project, or whose interests may be affected as a result of project
execution or project completion.

They may also exert influence over the project’s objectives and
outcomes. The project management team must identify the stakeholders,
determine their requirements and expectations, and, to the extent possible,
manage their influence in relation to the requirements to ensure a
successful project. Each of the group of stakeholders brings different
expertise, standards, priorities, and agendas to the project. The sheer

222
 Notes
breadth and complexity of the relationships that need to be managed
distinguishes project management from regular management. The project
stakeholders include the following:

a) Project Managers: They compete with each other for the available
scarce resources and the support of top management. They also have
to share resources and exchange information.

b) Project Team: The project team manages and completes project

work. Most participants want to do a good job, but they are also
concerned with their other obligations and how their involvement
on the project will contribute to their personal goals and aspirations.

c) Administrative Support Group: Administrative support groups,

such as human resources, information systems, purchasing agents,
and maintenance, provide valuable support services. At the same
time they impose constrains and requirements on the project such as
the documentation of expenditures and the timely and accurate
delivery of information.

d) Functional Managers: Functional managers, depending on how

the project is organized, can play a minor or major role toward
project success. In matrix arrangement, they may be responsible
for assigning project personnel, resolving technical dilemmas, and
overseeing the completion of significant segments of project work.
Even in dedicated project teams, the technical input from function-
al managers may be useful, and acceptance and completed project
work may be critical to in-house project. Functional managers want
to co-operate up to a point, but only up to a certain point. They are
also concerned with preserving their status within the organization
and minimizing the disruptions the project may have on their own
operations.

e) Top Management: Top management approves funding of the proj-

ect and establishes priorities within the organization. They define
success and adjudicate rewards for accomplishments. Significant
adjustments in budget, scope, and schedule typically need their ap-
proval. They have a natural vested interest in the success of the
project, but at the same time want to be responsive to what is best to
the entire organism.

223
Notes
f) Project sponsors: Project sponsors champion the project and use
their influence to get approval of the project. Their reputation is tied
to the success of the project, and they need to be kept informed of
any major developments. They defend the project when it comes
under attack and are a key project partner.

g) Sub-contractors: Subcontractors may do all the actual work, in

some cases, the project team merely coordinating their contribu-
tions. In other cases, they are responsible for ancillary segments
of the project scope. Poor work and schedule slips can affect work
of the core project team. While contractors’ reputations rest with
doing good work, they must balance their contributions with their
own profit margins and their commitments to other clients.

h) Government Agencies: Government agencies place constraints on

project work. Permits need to be secured. Construction work has
to be built to code. Products have to meet safety standards, for ex-
ample, Occupational Safety and Health Administration standards.

i) Other Organizations: Other organizations, depending on the na-

ture of the project may directly or indirectly affect the project. For
example, suppliers provide necessary resources for completion of
the project work. Delays, shortages, and poor quality can bring a
project to a standstill. Public interest groups may apply pressure on
government agencies. Customers often hire consultants and audi-
tors to protect their interests on the project.

j) Customers: Customers define the scope of the project, and ulti-

mate project success rests in their satisfaction. Project managers
need to be responsive to changing customer need and requirements
and to meeting their expectations. Customers are primarily con-
cerned with getting good deal and this naturally breed tension with
the project team.

Managing Project Stakeholders: 6 Steps to Success

To successfully manage project shareholders, following 6 steps

(called as INFORM model – source: http://pmtips.net/managing-
stakeholders-6-steps-success) are followed:

224
 Notes
a) Identify: Who are the stakeholders on your project? A stakeholder
is anyone who has a vested interest in the project – someone who
wants it to succeed but equally someone who doesn’t. You cannot
start managing stakeholders until you know who they are. Who are
the main groups or departments affected by your project?
Stakeholders can also be external to your organization like the
government and third party providers as well. The identification
exercise should not be done in a vacuum: you will not be able to
complete the list yourself, so get your project team involved too.

b) Nominate: In each groups you have identified, pick someone to be

the key individual. Choose carefully! You may find that key people
nominate themselves, which makes your role easier: it is better to
work with people who want to be involved than those who you have
to be dragged into the project compulsorily. Your key, nominated
stakeholders should ideally be people who are directly affected, with
enough authority to make decisions about things that touch their
departments. They are the person who you will use to channel
communication back to their group.

c) Feel: Begin to analyze the attitudes of the people who have been
identified as your key stakeholders: those named individuals who
represent each stakeholder group. Contact them and explain about
the project. Get them onboard and coming to project meetings if
necessary. All this will help you understand how they feel about the
work you are doing. Do they support the project? Or would they
rather it was stopped now? Are they ambivalent? This group can
often be the hardest to manage effectively. Your initial stakeholder
analysis is now complete.

d) Observe: Having established where your key stakeholders sit in

relation to the project you can start to influence their attitudes. The
aim is to watch people over time, and help them move towards a
positive way of thinking: a way that will help you achieve your aims.
Keep a close eye on people as their opinions will swing between
positive and negative over the life of a project. A one-off analysis
exercise is never enough: you have to continually monitor how
people are reacting and manage accordingly.

225
Notes
e) Review: People and job roles change. So do projects. The person
who put themselves forward to represent the marketing team six
months ago may not be the right person today. If you notice that their
influence is slipping away, or they are less inclined to come to
meetings or respond to emails, then ask them if they still want to
be involved. If they say no, they could suggest someone else who
would be a relevant addition to the team. Make sure you brief any
new stakeholder representative on their roles and responsibili- ties,
decisions in the pipeline and what decisions you will expect of them
in future.

f) Manage: The last step is to monitor and manage your stakeholders

and their expectations as the project progresses – not just at the outset
and when you need something from them. Put a note in your diary to
give your key stakeholder representatives a quick call every now and
then just to keep them up to date. This will help promote the project
and also ensure the stakeholder concerned is mindful of the work
being done. It can also help build your reputation as an excellent
project manager! At the end of the project, thank them and manage
them out of the team. You want a good relationship with them that
could last over many projects but you don’t want to be their personal
helpline six months after the project has finished, so make sure they
know who now has operational responsibility now the project has
closed.

Social Network Building

In building the social network, there are four steps, viz., mapping
dependencies, managing by wandering around, managing upward rela-
tions and leading by example.

a) Mapping Dependencies

First step to building a social network is to identify those on whom the

project depends on success. The project manager and his or her key assistants
need to ask the following questions,

➢ Whose cooperation is needed?

➢ Whose agreement or approval is needed?
➢ Whose opposition would keep us from accomplishing the project?

226
 Notes
It is always better to overestimate rather than under estimate de-
pendencies on too often, otherwise talented and successful project man- agers
have been de-railed because they were blindsided by some who’s position or
power that they had not anticipated. After identifying who you are dependent
on, you are ready to “step into their shoes”, and see their project from their
perspectives. To help you do that asks yourself the fol- lowing questions:

➢ What differences exist between me and the people on whom I

depend? (Goals, Values, Pressures, Risks)
➢ How these different people do knew the project? (supporters in
different antagonists)
➢ What is the current status of the people I depend on?
➢ What sources of influence do I have relative to whose on whom I
depend?

Once, you begin this analysis, you can begin to appreciate what
others value and what currencies you are able to offer on the basis on
which to build a mutually satisfying relationship. Likewise, you begin to
realize where potential problems lie, relationships in which you have a
current debit or n 0 convertible currency, furthermore, diagnosing others
point of view as well as the basis for their positions will help you anticipate
the reactions and feelings about your decisions and actions. This informa-
tion is vital for selecting the appropriate influence strategy and tactics and
conducting win-win negotiations.

b) Management by Wandering Around

Once you have established who the keep players are that will deter-
mine success. Then you initiate contact and begin to build a relationship with
those players. Building this relationship requires a management style referred
as management by wandering around (MBWA) to reflect that managers spend
the majority of the time outside their offices. MBWA is somewhat of a
misnomer in that there is a purpose or pattern behind the wandering. Through
face to face interactions, project managers are able to stay in touch with what
is really going on in the project and build coopera- tive relationship essential
to project success.

227
Notes
Effective project managers initiate contact with key payers to keep
abreast of developments, anticipate potential problems, provide encour-
agement and re-enforce the objectives and vision of the project. They are able
to intervene to resolve conflicts and prevent stalemates from occur- ring. In
essence, they “manage” the project. By staying in touch with the various
aspects of the project, they become the focal point for information on the
project. Participants turn to them, to obtain the most current and
comprehensive information about the project, which re-enforces as cen- tral
role as project manager.

While a significant amount of their time is devoted to the project

team, effective project managers find the time to regularly interact with
more important stakeholders. They keep in touch with suppliers, ven- dors,
top management and other functional managers. In doing so, they maintain
familiarity with different parties, sustain friendship, discover opportunities
to do favours and understand the motives and needs of oth- ers. They remind
people of commitment and champion the cause of their project. They also
shape people’s expectations. Through frequent com- munication, they
reduce people’s concern about project dispel romours, warn people of
potential problems and lay the ground work for dealing with setbacks in
more effective manner.

Experienced project managers build relationships before they need

them. They initiate contact with the key stakeholders at times when there
are no outstanding issues or problems and therefore no anxieties and sus-
picions. On the social occasions they engage in small talk and responsive
chitchat. Smart project managers also seek to make deposit in their rela-
tionships with potentially important stake holders. They are responsive to
others request for aid provide supportive counsel and exchange informa-
tion. In doing so they are establishing credit in those relationships which
will allow them to deal with more serious problems down the road. When
one person views another as pleasant, credible and helpful based on past
contact, he or she is more likely to be responsive to request for help and
less confrontational when problem arise.

c) Managing Upward Relations

Project success is strongly affected by the degree to which a proj- ect

has the support of the top management. Such support is reflected in

228
 Notes
an appropriate budget, responsiveness to unexpected needs, and a clear
signal to others in the organization about the importance of cooperation.
Visible top management support is not only critical for securing the sup-
port of other managers within an organization, but it also is a key factor
in the project manager’s ability to motivate the project team. Nothing es-
tablishes a manager’s right to lead more tan his/her ability to defend. To
win the loyalty of team members, project managers have to be effective
advocates for their projects. They have to be able to get top management to
withdraw unreasonable demand, provide additional resources and
recognize the accomplishment of team members. Working relationship
with top management is a common source of concern. While it may seem
difficult for a subordinate to manage a superior, smart project managers
devote considerable time and attention to influencing and garnering the
support of top management. Project managers have to accept profound
differences in perspective and become skilled at the art of persuading su-
periors.

d) Leading by Example

A highly visible, interactive management style is not only essential

to building and sustaining cooperative relationships, it also allows proj- ect
managers to utilize their most powerful leadership tool – their own
behaviour. Often, when faced with uncertainty, people look to others for
clues as to how to respond and demonstrate a propensity to imitate the
behaviour of superiors. A project manager’s behaviour symbolizes how
other people should work on the project. Through her behaviour a project
manager can influence how other \s act and respond to a variety of issues
related to the project. To be effective, project managers must “walk the
talk”. Six aspects of leading by example include setting the priorities, com-
municating the urgency, help in problem solving, ensuring cooperation,
ensuring standards of performance and responding to ethical dilemmas
properly.

****

229
Notes

Lesson 5.2 - Qualities of Project Manager and Managing Projects

Learning Objectives

➢ To know the qualities of an effective project manager.

➢ To learn the ground rules of project team.
➢ To understand the steps in managing project teams.

Qualities of Project Manager

The above diagram shows the qualities of a successful project

manager. What qualities are most important for a project leader to be
effective? With the unique opportunity to ask some of the most talented
project leaders in the world on their Project Leadership courses, the top 10
qualities of project managers are arrived based on their rank order according
to frequency listed.

a) Inspires a Shared Vision: An effective project leader is often

described as having a vision of where to go and the ability to
articulate it. Visionaries thrive on change and being able to draw new
boundaries. It was once said that a leader is someone who “lifts us
up, gives us a reason for being and gives the vision and spirit to
change.” Visionary leaders enable people to feel they have a real

230
 Notes
stake in the project. They empower people to experience the vision
on their own. According to Bennis “They offer people opportunities
to create their own vision, to explore what the vision will mean to
their jobs and lives, and to envision their future as part of the vision
for the organization.” (Bennis, 1997).

b) Good Communicator: The ability to communicate with people at

all levels is almost always named as the second most important skill
by project managers and team members. Project leadership calls for
clear communication about goals, responsibility, performance,
expectations and feedback. There is a great deal of value placed on
openness and directness. The project leader is also the team’s link to
the larger organization. The leader must have the ability to
effectively negotiate and use persuasion when necessary to ensure
the success of the team and project. Through effective
communication, project leaders support individual and team
achievements by creating explicit guidelines for accomplishing
results and for the career advancement of team members.

c) Integrity: One of the most important things a project leader must

remember is that his or her actions, and not words, set the modus
operandi for the team. Good leadership demands commitment to,
and demonstration of, ethical practices. Creating standards for
ethical behaviour for oneself and living by these standards, as well as
rewarding those who exemplify these practices, are responsibilities
of project leaders. Leadership motivated by self-interest does not
serve the well being of the team. Leadership based on integrity
represents nothing less than a set of values others share, behaviour
consistent with values and dedication to honesty with self and team
members. In other words the leader “walks the talk” and in the
process earns trust.

d) Enthusiasm: Plain and simple, we don’t like leaders who are

negative - they bring us down. We want leaders with enthusiasm,
with a bounce in their step, with a can-do attitude. We want to
believe that we are part of an invigorating journey - we want to feel
alive. We tend to follow people with a can-do attitude, not those who
give us 200 reasons why something can’t be done. Enthusiastic
leaders are committed to their goals and express this commitment
through optimism. Leadership emerges as someone expresses such

231
Notes
confident commitment to a project that others want to share his or her
optimistic expectations. Enthusiasm is contagious and effective
leaders know it.

e) Empathy: They are, in fact, mutually exclusive. According to

Norman Paul, in sympathy the subject is principally absorbed in his
or her own feelings as they are projected into the object and has
little concern for the reality and validity of the object’s special
experience. Empathy, on the other hand, presupposes the existence
of the object as a separate individual, entitled to his or her own
feelings, ideas and emotional history (Paul, 1970). As one student so
eloquently put it, “It’s nice when a project leader acknowledges that
we all have a life outside of work.”

f) Competence: Simply put, to enlist in another’s cause, we must

believe that that person knows what he or she is doing. Leadership
competence does not however necessarily refer to the project
leader’s technical abilities in the core technology of the business.
As project management continues to be recognized as a field in
and of itself, project leaders will be chosen based on their ability
to successfully lead others rather than on technical expertise, as
in the past. Having a winning track record is the surest way to be
considered competent. Expertise in leadership skills is another
dimension in competence. The ability to challenge, inspire, enable,
model and encourage must be demonstrated if leaders are to be
seen as capable and competent.

g) Ability to delegate task: Trust is an essential element in the

relationship of a project leader and his or her team. You demonstrate
your trust in others through your actions - how much you check and
control their work, how much you delegate and how much you
allow people to participate. Individuals who are unable to trust other
people often fail as leaders and forever remain little more that
micro-managers, or end up doing all of the work themselves. As one
project management student put it, “A good leader is a little lazy.”
An interesting perspective!

h) Cool Under Pressure: In a perfect world, projects would be delivered

on time, under budget and with no major problems or obstacles to
overcome. But we don’t live in a perfect world - projects have

232
 Notes
problems. A leader with a hardy attitude will take these problems in
stride. When leaders encounter a stressful event, they consider it
interesting, they feel they can influence the outcome and they see it
as an opportunity. “Out of the uncertainty and chaos of change,
leaders rise up and articulate a new image of the future that pulls the
project together.” (Bennis 1997) And remember - never let them see
you sweat.

i) Team Building Skills: A team builder can best be defined as a strong

person who provides the substance that holds the team together in
common purpose toward the right objective. In order for a team
to progress from a group of strangers to a single cohesive unit, the
leader must understand the process and dynamics required for
this transformation. He or she must also know the appropriate
leadership style to use during each stage of team development.
The leader must also have an understanding of the different team
players styles and how to capitalize on each at the proper time, for
the problem at hand.

j) Problem Solving Skills: Although an effective leader is said to

share problem-solving responsibilities with the team, we expect our
project leaders to have excellent problem-solving skills them-
selves. They have a “fresh, creative response to solve problems and
not much concern with how others have performed them. (Kouzes
1987).

The other qualities include the following: a) effective time

management; b) optimist; c) systems thinker; and d) proactive.

Managing a Project Team

Managing project teams is the art and science of managing relatively

short-term efforts having finite beginning and ending points. The concept
of project management involves two equally important components of
hardware and software. The hardware of tools and systems make it a
science. However, there are other things in managing projects than just
applying analytical tools to help monitor, track and control. In managing
a project team, a Project Manager needs to possess excellent analytical
and organizational skills. A technical proficiency in the specialist area of
their project is also a distinct advantage. Remember, though, that projects

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Notes
achieve their outcomes through people – a variety of people working
together in a coordinated way to produce the desired results. How are you
encouraging peak performance from your project team? As with any
manager getting the best out of their people, you will need to pay attention
to your general leadership and management skills. Some of these skill areas
that you will need to pay attention to are:

➢ Clarifying project team member roles

➢ Setting team and individual goals
➢ Monitoring and measuring team and individual performance
➢ Feeding back team and individual performance
➢ Resolving conflicts between team members constructively
➢ Delegating responsibilities and tasks
➢ Motivating using a combination of intrinsic and extrinsic rewards
➢ Developing the skills of team members
➢ Coaching team members

Effective teams are so much more productive than groups working

on the same task because they are able to leverage off each others’ strengths
and compensate for each others’ weaknesses. Making sure that you have
the right mix of team members in your project team is therefore an
important consideration. Conducting a team profiling exercise is also an
effective method for getting each project team member to appreciate their
respective strengths and weaknesses.

Team Ground Rules

If your project team gets stuck in a problem with lots of unproductive

conflict, there are a number of things you can try. If you haven’t already
done so, get your team together to clarify and agree the “ground rules”
that govern the team’s behavior. Your “ground rules” should cover these
five key areas of team operation:

➢ Team meetings
➢ Team working
➢ Team communication
➢ Team member relationships
➢ Team decision-making

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 Notes
Discussing the ground rules will uncover hitherto unspoken
assumptions. Each team member will come to see more clearly where
other team members are coming from and what they need from the team
to get their job done. Be sure to post the agreed ground rules in a visible
place where the teams meet regularly. The bigger problems for project
managers are those associated with the human element: conflict resolution,
team building, coaching, mentoring and negotiation. This workshop is
intended to provide team leaders with fundamental skills necessary to
copy with this element of the art of managing project teams.

Blended Learning – Maximum Benefits with Minimum Time

The goal of blended learning is to provide the most efficient and

effective instruction experience by combining delivery modalities. Blended
learning offers a range of learning tools and experiences, which in total
focuses on the best learning style for all learners. With a combination of
online e-learning and classroom training, learners will enjoy an all rounded
learning experience.

Learning Outcomes

➢ Communicate information to team members in accordance with

organizational and project requirements.

➢ Implement training and development for project team to meet

project specifications.

➢ Monitor and evaluate team performance in accordance with

performance measures.

➢ Monitor and manage team dynamic to ensure smooth executing of

project.

Steps in Managing the Team

a) Define the Scope: The first, and most important, step in any project
is defining the scope of the project. What is it you are supposed to
accomplish by managing this project? What is the project objective?
Equally important is defining what is not included in the scope of
your project. If you don’t get enough definition from your boss,
clarify the scope yourself and send it back upstairs for confirmation.

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Notes
b) Determine Available Resources: What people, equipment, and
money will you have available to you to achieve the project
objectives? As a project manager, you usually will not have direct
control of these resources, but will have to manage them through
matrix management. Find out how easy or difficult that will be to
do.

c) Check the Timeline: When does the project have to be completed?

As you develop your project plan you may have some flexibility in
how you use time during the project, but deadlines usually are fixed.
If you decide to use overtime hours to meet the schedule, you must
weigh that against the limitations of your budget.

d) Assemble Your Project Team: Get the people on your team

together and start a dialogue. They are the technical experts. That’s
why their functional supervisor assigned them to the project. Your
job is to manage the team.

e) List the Big Steps: What are the major pieces of the project? If you
don’t know, start by asking your team. It is a good idea to list the
steps in chronological order but don’t obsess about it; you can
always change the order later.

f) List the Smaller Steps: List the smaller steps in each of the larger
steps. Again, it usually helps you remember all the steps if you list
them in chronological order. How many levels deep you go of more
and more detailed steps depends on the size and complexity of your
project.

g) Develop a Preliminary Plan: Assemble all your steps into a plan.

What happens first? What is the next step? Which steps can go on
at the same time with different resources? Who is going to do each
step? How long will it take? There are many excellent software
packages available that can automate a lot of this detail for you. Ask
others in similar positions what they use.

h) Create Your Baseline Plan: Get feedback on your preliminary plan

from your team and from any other stakeholders. Adjust your
timelines and work schedules to fit the project into the available
time. Make any necessary adjustments to the preliminary plan to
produce a baseline plan.

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 Notes
i) Request Project Adjustment: There is almost never enough time,
money or talent assigned to a project. Your job is to do more with the
limited resources than people expect. However, there are often limits
placed on a project that are simply unrealistic. You need to make
your case and present it to your boss and request these unrealistic
limits be changed. Ask for the changes at the beginning of the
project. Don’t wait until it’s in trouble to ask for the changes you
need.

j) Work Your Plan, But Don’t Die For It: Making the plan is
important, but the plan can be changed. You have a plan for
driving to work every morning. If one intersection is blocked by an
accident, you change your plan and go a different way. Do the same
with your project plans. Change them as needed, but always keep
the scope and resources in mind.

k) Monitor Your Team’s Progress: You will make little progress at the
beginning of the project, but start then to monitor what everyone is
doing anyway. That will make it easier to catch issues before they
become problems.

l) Document Everything: Keep records. Every time you change from

your baseline plan, write down what the change was and why it was
necessary. Every time a new requirement is added to the project
write down where the requirement came from and how the timeline
or budget was adjusted because of it. You can’t remember
everything, so write them down so you’ll be able to look them up at
the end-of-project review and learn from them.

m) Keep Everyone Informed: Keep all the project stakeholders

informed of progress all along. Let them know of your success as
you complete each milestone, but also inform them of problems as
soon as they come up. Also keep you team informed. If changes are
being considered, tell the team about them as far ahead as you can.
Make sure everyone on the team is aware of what everyone else is
doing.

****

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Notes

Lesson 5.3 - Team Building Models, Performance

Teams and Team Pitfalls

Learning Objectives

➢ To understand the stages in Team Development model.

➢ To understand the situational factors affecting team development.
➢ To learn how to develop high performance teams.
➢ To identify area of team pitfalls

Five Stages of Group Development

The following figure shows the five stages team development model.

Stage 1: Forming

In the Forming stage, personal relations are characterized by

dependence. Group members rely on safe, patterned behavior and look to
the group leader for guidance and direction. Group members have a desire
for acceptance by the group and a need to be known that the group is

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 Notes
safe. They set about gathering impressions and data about the similarities
and differences among them and forming preferences for future sub
grouping. Rules of behavior seem to be to keep things simple and to avoid
controversy. Serious topics and feelings are avoided. The major task
functions also concern orientation. Members attempt to become oriented
to the tasks as well as to one another. Discussion centers around defining
the scope of the task, how to approach it, and similar concerns. To grow
from this stage to the next, each member must relinquish the comfort of
non-threatening topics and risk the possibility of conflict.

Stage 2: Storming

The next stage, called Storming, is characterized by competition and

conflict in the personal relations dimension an organization in the task-
functions dimension. As the group members attempt to organize for the
task, conflict inevitably results in their personal relations. Individuals have
to bend and mold their feelings, ideas, attitudes, and beliefs to suit the
group organization. Because of “fear of exposure” or “fear of failure,” there
will be an increased desire for structural clarification and commitment.
Although conflicts may or may not surface as group issues, they do exist.
Questions will arise about who is going to be responsible for what, what the
rules are, what the reward system is, and what criteria for evaluation are.
These reflect conflicts over leadership, structure, power, and authority.
There may be wide swings in members’ behavior based on emerging issues
of competition and hostilities. Because of the discomfort generated during
this stage, some members may remain completely silent while others
attempt to dominate. In order to progress to the next stage, group members
must move from a “testing and proving” mentality to a problem-solving
mentality. The most important trait in helping groups to move on to the next
stage seems to be the ability to listen.

Stage 3: Norming

In the Norming stage, interpersonal relations are characterized

by cohesion. Group members are engaged in active acknowledgment of all
members’ contributions, community building and maintenance, and solving
of group issues. Members are willing to change their preconceived ideas or
opinions on the basis of facts presented by other members, and they actively
ask questions of one another. Leadership is shared, and

239
Notes
cliques dissolve. When members begin to know-and identify with-one
another, the level of trust in their personal relations contributes to the
development of group cohesion. It is during this stage of development
(assuming the group gets this far) that people begin to experience a sense
of group belonging and a feeling of relief as a result of resolving
interpersonal conflicts. The major task function of stage three is the data
flow between group members: They share feelings and ideas, solicit and
give feedback to one another, and explore actions related to the task.
Creativity is high. If this stage of data flow and cohesion is attained by the
group members, their interactions are characterized by openness and
sharing of information on both a personal and task level. They feel good
about being part of an effective group. The major drawback of the norming
stage is that members may begin to fear the inevitable future breakup of the
group; they may resist change of any sort.
Stage 4: Performing

The Performing stage is not reached by all groups. If group members

are able to evolve to stage four, their capacity, range, and depth of personal
relations expand to true interdependence. In this stage, people can work
independently, in subgroups, or as a total unit with equal facility. Their roles
and authorities dynamically adjust to the changing needs of the group and
individuals. Stage four is marked by interdependence in personal relations
and problem solving in the realm of task functions. By now, the group
should be most productive. Individual members have become self-assuring,
and the need for group approval is past. Members are both highly task
oriented and highly people oriented. There is unity: group identity is
complete, group morale is high, and group loyalty is intense. The task
function becomes genuine problem solving, leading toward optimal
solutions and optimum group development. There is support for
experimentation in solving problems and an emphasis on achievement. The
overall goal is productivity through problem solving and work.

Stage 5: Adjourning

The final stage, adjourning involves the termination of task

behaviors and disengagement from relationships. A planned conclusion
usually includes recognition for participation and achievement and an
opportunity for members to say personal goodbyes. Concluding a group

240
 Notes
can create some apprehension - in effect, a minor crisis. The termination of
the group is a regressive movement from giving up control to giving up
inclusion in the group. The most effective interventions in this stage are
those that facilitate task termination and the disengagement process.

Situational Factor Affecting Team Development

Experience and research indicate that high-performing project teams

are much more likely to develop under the following conditions:

➢ There are 10 or fewer members per team

➢ Members volunteer to serve on the project team
➢ Members serve on the project from beginning to end.
➢ Members are assigned to the project full-time.
➢ Members are part of an organizational culture that fosters
cooperation and trust all relevant functional areas are represented
on the team
➢ The project involves a compelling objective
➢ Members are located within conversational distance of each other

In reality, is rare that a project manager is assigned a project that

meets all of these conditions. It is important for project managers and team
members to recognize the situational constraints; they are operat- ing under
and do the best they can. It would be naive to believe that every project
theme has the same potential to evolve into a high performing team. Under
less than ideal conditions it may be a struggle just to meet project objectives.
Ingenuity, discipline and sensitivity to team dynamics are essential to
maximize the performance of the project team.

Team Focus

All the team members need to understand the direction you’re

headed and work toward that end. It is paramount that the team members
know and understand the objectives of the project. After all, that is the
reason they have been brought together in the first place. Keep in mind
that people see and hear things from their own perspective. It is the job of
project manager to make certain the team members understand the objec-
tives and their assignments correctly.

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Notes
Effective Team Characteristics

Effective teams are typically very energetic teams. Their enthusi- asm
is contagious, and it feeds on itself. They generate a lot of creativity and
become good problem solvers. Teams like this are every project man- ager’s
dream. Investing yourself in team building as well as relationship building,
especially when you don’t think you have the time to do so, will bring many
benefits.

Factors in Leadership

One of the markers of an effective leader is the ability to size up

a situation and make decisions based on what is the best thing to do. A
leader who is able to adjust his response to fit the situation is ahead of one
who cannot shift between leadership styles. Factors in situational deci-
sions include the motivation and level of competency of the followers.
There are four developmental levels of followers who have significant im-
pact on the final outcomes of the situation. The four levels are: the enthu-
siastic beginner, the disillusioned learner, the reluctant contributor and the
peak performer.

a) Enthusiastic Beginner

An enthusiastic beginner has a high level of enthusiasm and

commitment and a low level of experience and competence. Leaders who are
faced with followers such as this need to be direct and autocratic in their
leadership style as the followers are eager and want to please, but often do not
know how. The autocratic leadership style provides goals, strategies and
deadlines for followers to meet.

b) Disillusioned Learner

Someone who is a disillusioned learner exhibits both low

competence and enthusiasm or commitment. Individual or groups of
disillusioned followers are difficult to motivate as they believe there is
no way to change the situation; that it is hopeless. A leader who has
disillusioned followers may be most successful adopting an autocratic
leadership style that provides leadership expectations that could override
low motivation and competence.

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 Notes
c) Reluctant Contributor

A reluctant contributor is someone who has a high level of com-

petency with low commitment. In this situation, utilizing a participative style
of leadership may provide the motivation to participate. The partici- pative
leadership style brings everyone’s opinion and ideas into the deci- sion-
making process. Many competent individuals have low motivation because
they feel under-utilized and under-appreciated. The participative style of
leadership often makes them feel valued and ready to contribute.

d) Peak Performer

Someone functioning at the peak performance level has high

motivation and high competence. Using an autocratic leadership style with
this individual is ill-advised and generally only causes resentment and low
morale. A laissez faire leadership style is sometimes successful, as this
individual has the capability to take the lead and manage the situation
herself. The participative leadership style works quite effectively with the
peak performer and actually results in a situation being resolved quickly
and effectively.

Building High-Performance Project Teams

The project managers play a key role in developing high-perfor-

mance project teams. They recruit members, conduct meetings, estab- lish
team identity, create a common sense of purpose or a shared vision, manage
a reward system that encourage teamwork, orchestrate decision making,
resolve conflicts that emerge within the team, and rejuvenate the tem when
energy diminishes. The project managers take advantage of situational
factors that naturally contribute to team development while improvising
around those factors that inhibit team development. By this process, they
exhibit a highly interactive management style that exempli- fies teamwork
and manage the interface between the team and the rest of the organization.

a) Recruiting Project Members

The process of selecting and recruiting project members vary across

organizations. Two important factors which affect recruitment are

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Notes
the importance of the project and the management structure being used to
complete the project. For high priority projects which are critical to the
future of the organizations, the project manager will be given complete
freedom to choose whomever he or she deems necessary. For less
significant projects, the project manager will have to persuade personnel
from other areas within the organization to join the team. When selecting
team members, project managers look for individuals with the necessary
experience and knowledge/technical skills critical for project completion.
At the same time they are less obvious considerations that need to be
factored into the recruitment process such as a) problem solving ability,
availability, technological expertise, credibility, political connections,
ambition, initiative and energy.

b) Conducting Project Meetings

The first project kick-off meeting is critical to the early functioning of

the project team. The first team meeting sets the tone for how the team will
work together. If it is crisply run, focusing on real issues and concerns in an
honest and straightforward manner, members become excited about being
part of the project team. There are three objectives project managers try to
achieve during the first meeting of the project team:

a) Providing an overview of the project, including the scope and

objectives, the general schedule, method, and procedures;

b) Address some of the interpersonal concerns captured in the team

development model; and

c) Model how the team is going to work together to complete the

project. The project manager must recognize that first impressions
are most important and his/her behavior will be carefully monitored
and interpreted by team members. This meeting should serve as an
exemplary role model for subsequent meetings and reflect the
leader’s style.

c) Establishing Ground Rules

The establishment of operational ground rules for how the tea will
work together is the important duty of project manager and this can be done
as part of an elaborate first meeting or during follow-up meetings.

244
 Notes
These ground rules involve not only organizational and procedural issues
but also normative issues on how the team will interact with each other.
Though specific procedures will vary across organizations and projects,
some of the major issues that need to be addressed include:

a) Planning decisions
b) Tracking decisions
c) Managing change decisions; and
d) Relationship decisions

During the course of establishing these operational procedures, the

project manager, through word and deed, should begin working with
members to establish the norms for team interaction. One of the ways
making the norms more tangible is by creating a project team charter that
goes beyond the scope statement of the project and states in explicit teams
the norms and values of the team. This charter should be a collaborative
effort on the part of the team. Project managers can lead by proposing
certain tenets, but they need to be open to suggestions from the team. Once
there is general agreement to the rules of conduct, each member signs the
final document to symbolize commitment to the principles it contains. Very
important thing is that this should not become ritual and the charter has to
be a legitimate part of the project monitoring system. Just as the team
reviews the progress toward project objectives, the team assesses the extent
to which members are adhering to the principles in the charter.

d) Managing Subsequent Project Meetings

The project kick-off meeting is one of the several kinds of meetings

required to complete a project. Other meetings include status report
meetings, problem-solving meetings, audit meetings. Meetings are often
considered a disturbance to productivity, but this does not have to be the
case. The most common complaint is that meetings last too long. By
establishing proper guidelines to conduct various projects related meetings
and careful and consistent application of these guidelines can make the
meetings a vital part of projects. This will also help in real time
communication process.

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Notes
e) Establishing a Team Identity

One of the challenges project managers often face in building a team

is the lack of full-time involvement of team members. Specialists work on
different phases of the project and spend the majority of their time and
energy elsewhere. They are often members of multiple teams, each
competing for their time and commitment. Project managers need to try to
make the project team as tangible as possible to the participants by
developing a unique team identity to which participants can become
emotionally attached. Team identity can be established by

a) Effective use of meeting;

b) Co-location of team members
c) Creation of project team name; and
d) Having team rituals.

f) Creating a Shared Vision

Once the project manager accepts the importance of building a

shared vision, the next question is how to get a vision for a particular
project. First, project managers do not get visions. They act as catalysts
and midwives for the formation of a shared vision of a project team. In
many cases, visions are inherent in the scope and objectives of the project.
People get naturally excited about being the first ones to bring a new
technology to the market or solving a problem that is threatening their
organization.

g) Managing Project Reward System

Project managers are responsible for managing the reward system

that encourages team performance and extra effort. One advantage they
have is that often project work is inherently satisfying, whether it is
manifested in an inspiring vision or simple sense of accomplishment.
Projects provide participants with a change in scenery, a chance to learn
new skills, and an opportunity to break out of their departmental cocoon.

While project managers tend to focus on group rewards, there are

times when they need to reward individual performance. Rewards used

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 Notes
to motivate and recognize individual contributions include letters of
commendation, public recognition for outstanding work, job assignments
and flexibility.

h) Orchestrating the Decision-Making Process

Most decisions on a project do not require a formal meeting to

discuss alternatives and determine solutions. Instead decisions are made in
real time as part of the daily interaction patterns between project managers,
stakeholders, and team members. Group decision making should be used
when it will improve the quality of important decisions. This is often the case
with complex problems that require the input of a variety of different
specialists. Group decision making should also be used when strong
commitment to the decision is needed and there is low probability of
acceptance if only one person makes the decision. Participation is used to
reduce resistance and secure support for the decision.

i) Managing conflict within the Project

Disagreements and conflicts naturally emerge within a project team

during the life of the project. Participants will disagree over priorities,
allocation of resources, the quality of specific work, solutions to discovered
problems, and so forth. Some conflicts support the goals of the group and
improve project performance. For example, two members may be locked in
a debate over a design trade-off decision involving different features of a
product. They argue that their preferred feature is what the primary
customer truly wants.

This disagreement may force them to talk to or get more information

from the customer, with the result that they realize neither feature is highly
valued, but instead the customer wants something else. On the other hand,
conflicts can also hinder group performance. Functional conflicts can be
encouraged and there should be a clear demarcation between functional and
dysfunctional conflict. Members may be upset and dissatisfied with the
interchange, but as long as the disagreement furthers the objectives of the
project, then the conflict is function. Managing dysfunctional conflict is a
much more challenging task than encouraging functional conflict because
dysfunction conflict is hard to identify.

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Notes
j) Rejuvenating the Project Team

Over the course of a long project, a team sometimes drifts off

course and loses momentum. The project manager needs to swing into ac-
tion to realign the team with the project objectives and step on the pedal.
There are both formal and informal ways of doing this. Informally, the
project manager can institute new rituals to reenergize a team. Another
option is to have the project sponsor give a pep talk to the team members.
Sometimes, more formal actions need to be taken. The project manager
may recognize the need for a teambuilding session devoted to improving
the work processes of the team.

Project Team Pitfalls

High performance project teams can produce dramatic results

however like any other good thing there is a dark side to project teams that
managers need to be aware of. In this section we examine more detail some
of the pathologies that the high performing project teams can suc- cumb to
and high light what project managers can do to reduce the likeli- hood of
these problems occurring.

a) Groupthink

Janis first identified groupthink as a factor that influenced the mis-

guided 1961 Bay of Pigs invasion of Cuba, his term refers to the tendency of
members in highly cohesive groups to lose their critical evaluative capa-
bilities. This malady appears when pressures for conformity are combined
with an illusion of invincibility to suspend critical discussion of decisions. As
a result decisions are made quickly with little consideration of alterna- tives;
often the practice leads to fiascos that, after the fact, appeared totally
improbable. Some of the symptoms of group think include the following:

➢ Illusion of Invulnerability: The team feels invincible. It is marked

by a high degree of esprit de corps, and implicit faith in its own
wisdom and an inordinate optimism that allows group members to
feel-complacent about the quality of the decisions.

➢ Whitewash of Critical Thinking: The group members discuss only

a few solutions, ignoring alternatives; they fail to examine the

248
 Notes
adverse consequences that could follow their preferred course of
action; and they too quickly dismiss any alternatives that on the surface
appear to be unsatisfactory.

➢ Negative Stereotypes of Outsiders: Good guy, bad guy stereotypes

emerge in which the group considers any outsiders who oppose their
decisions as the bad guys, who are perceived as incompetent and
malicious and whose points are unworthy of serious consideration.

➢ Direct Pressure: When a team member does speak out or question

the direction in which the team is headed, direct pressure is applied
to the dissenter. He or she is reminded that speed is important and
that the aim is agreement not argument.

b) Bureaucratic Bypass Syndrome

Project teams are often licensed to get things done without having
to go through normal protocols of the parent organization. Bypassing
bureaucratic channels is appealing and invigorating. However, if
bypassing becomes a way of life, it results in the rejection of
bureaucratic policies and procedures, which provide the glue for the
overall organization. A team that operates outside the organization may
alienate other workers who are constrained by the norms and procedures
of the organization; eventually, these outside bureaucrats will find ways
to put up road blocks and thwart the project team.

c) Entrepreneurs Disease

Project teams can be intoxicating in the same way that start up

ventures are. Such intoxication is exciting and contributes greatly to the
success of the team. But abuse can occur as the team makes decision based
on what is best for the project instead of on what’s best for parent
organization. The team becomes myopic in its focus and often views
the constraints imposed by the parent organization or something to
overcome. When this attitude occurs on developmental project the team
members, enthralled with their accomplishments sometimes quit the parent
organization and start their own business. While starting a new venture may
be good for the project team, it does little for the parent organization that
sponsored and financed the development work.

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Notes
d) Team Spirit Becomes Team Infatuation

High-performing project teams can be tremendous source of

personal satisfaction. The excitement, chaos, and joy generated by working
on a challenging project can be an invigorating experience. Leavitt and
Lipman-Blumen even go so far as to say that the team members behave like
people in love. They become infatuated with the challenge of the project
and the talent around them. This total preoccupation with the project and
the project team, while contributing greatly to the remarkable success of the
project, can leave in its wake a string of broken professional and personal
relationships that contribute to burnout and disorientation upon completion
of the project.

e) Going Native

Going native is a phrase first used by the British Foreign Service

during colonial times to describe agents who assumed the customs, values
and prerogatives of their foreign country assignment, they did so to the
point that they were no longing representing the best interest of the British
empire but rather those of the natives. This same phenomenon can occur
within the project teams working abroad or in those who become closely
identified with their customers. In essence, the customer’s interest takes
precedent organizations interests. This change in view point can lead to
excessive scope creep and open defiance of corporate policy and interests.

Conclusion

Dealing with these maladies is problematic because, in most cases,

they are a distortion of a good thing, rather than a simple evil. Awareness
is the first step for prevention. The next step is to take pre-emptive action
to reduce the likelihood of these pitfalls occurring. For example, managers
can reduce the isolation of the project team by creating work-related
connections outside the project team. These include interactions naturally
occur in a matrix environment where members work on multiple projects
and maintain ties to their home department. Likewise, the isolation of
dedicated project teams can be reduced by the timely involvement of
external specialists. In either case, the active involvement of relevant
members of the parent organization at project status meetings can help
maintain the link between the project and the rest of the organization.

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 Notes
If the team appears to be suffering from group think, then the project manager
can encourage functional conflict by playing the devil’s advocate to
encourage dissent. Finally, formal team-building sessions may reveal
dysfunctional norms and refocus the attention of the team on project
objectives.

Self Assessment Questions

1) Differentiate between managing versus leading a project.

2) Who are the various project stakeholders? How to manage them?
3) Explain the steps in successfully managing the stakeholders?
4) What is social network building?
5) What is management by wandering around?
6) Discuss the ways to build social network to succeed in projects.
7) Discuss the qualities of an effective project manager.
8) What are the ground rules for project teams?
9) What is blended learning?
10) Explain the steps in managing project teams.
11) Explain the steps in Five Stage Team Development Model.
12) Discuss the factors in leadership in relation to four development
levels of followers.
13) Discuss the situational factors affecting team development.
14) How to build high performance project teams? Explain.
15) Discuss the areas of project team pitfalls.

CASE STUDY

The role of the finance team in climate change projects

Asda is Britain’s second largest supermarket with 368 stores. It has

successfully embedded sustainability in its strategy and has implemented
many initiatives to save energy, reduce packaging and remove unnecessary
waste from its stores. Asda’s finance team plays an intrinsic role in the
decision making process including planning, testing and roll out of all of
their sustainability programmes. These include: zero waste to landfill;
reducing harmful emissions from stores; depots and transport; responsible

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store development (e.g. Asda’s low carbon flagship store in Bootle,
Liverpool); minimising packaging on own-label products; continually
improving waste management practices at store level; encouraging
customer and associate recycling through ‘bring back’ facilities and
‘green’ transport. Below are examples of the finance team’s specific
contribution to some recent projects at ASDA.

Projects Finance team’s contribution

Bio/bakery recycling projects Cost benefit analysis

ASDA project management process Stewardship, progress,

responsibility and performance

Reporting

Evaluation of the potential impact Financial evaluation,

of carbon reduction commitment interpretation and presentation to
regulations on Asda

senior executive team

New initiative store testing Investment appraisal

Analyse the role of finance team in managing climate change

projects.

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