Ch 2.

Project Planning &

Controlling

Capital Investment Process

Search for Investment Opportunities:

Recognition of opportunities which are

compatible with the firms objectives
Screening the alternatives: Preliminary
screening process to assess whether it is
technically feasible, resources are available
& the expected returns are adequate to
compensate the risks involved
Analysis of feasible alternatives: If the
proposal satisfies the screening process, it
is then analyzed in more detail by
gathering technical, economical and other
data

Capital Investment Process

Evaluation of alternatives: Investment

appraisal techniques are applied which

range from a simple payback method to the
more sophisticated discounted cash flow
methods
Authorization: Once the evaluation is
completed then proposal is forwarded to a
higher level of management for
authorization to take up the project
Implementation & Control: If approved the
project will be implemented and its
progress is monitored with the aid of
feedback reports.

Kinds of Projects
Balancing Projects
Modernization Projects
Replacement Projects
Expansion Projects
Diversification Projects

Classification of Projects:
National & International Projects
Industrial & non-industrial projects
Projects based on level of technology: High

level, Conventional Level & Low Level

Projects based on size: Large, medium &
small scale projects
Projects based on ownership: Public sector,
private sector & joint sector projects
Projects according to purpose: Balancing,
modernization, expansion, diversification,
replacement, etc.

Forward & Backward

Integration

Backward integration: Setting up of facilities

for the production of raw materials and

components required for the current operations
of the organization.
Forward integration: The creation of facilities
for manufacturing products for which the
current products of the organization serve as
inputs
Reliance's backward integration into polyester
fibres from textiles and further into
petrochemicals was started by Dhirubhai
Ambani.
Reliance has entered the oil and natural gas

Rationale for Diversification

To achieve consistent growth and

profitability
When companies objectives are no longer
compatible with the scope of current
portfolio
To enhance the shareholders value
The grass is greener on the other side or
sheep mentality

Project Organization
Structure

Matrix Organization Structure: It is a formal way

of hierarchy and sharing authority between

project manager and his team of functional
managers, who are answerable to the Project
manager as well as the functional heads

Project Organization
Structure

Task Force Organization Structure: A task force

is created by getting the personnel from

various functional departments & putting
them under the Project manager. The staff
attached with the Project manager continues
to get administrative support from their
respective parent departments, but they will
be under the control & guidance of the Project
manager as long as they are in Project
management team

Benefits of Project
Management:

Provides techniques for making trade-offs

between conflicting goals & enterprise

priorities, besides enabling control &
coordination
Helps in reducing time, lowering costs and
producing higher results
Minimizing conflicts
Enables fixation of responsibilities &
assignments
Reduces the need for continuous reporting
Provides suitable organization structure to
provide support & service internally &
externally

Project Management
Information Systems
Project Management Information Systems

(PIMS) is structured based on the needs of

managerial planning and control activities
and/or organizational functions.
Managerial Planning and controlling
activities can be:
a)Strategic Planning
b)Tactical Planning
c)Operational Planning
PIMS aims to provide information appropriate
to various levels of management

Communication Channels
Both written & oral, formal & informal

communication are vital for the success of

a project
The communication process should not be
one merely conveying a message.
It must convey information, motivate, as
well as assist the project management to
control

Techniques used to improve

communication are:
Obtaining feedback, possibly in more than

form
Establishing multiple communication
channels
Using face-to-face communication
whenever possible
Being aware of non-verbal communication
Communication at appropriate time
Avoiding interruptions in communications
Removing the usual communication
barriers
Arranging regular site-coordination

Use of Computers in Project

Management
Use of computers becomes inevitable in

projects that involve hundreds & thousands

of activities
Keeping track of such large no. of activities
and scheduling them using network
techniques are undoubtedly beyond
manual manipulation
Computer support is required for
a)Reporting
b)Resources management
c)Cost analysis

Stages in Setting up of a
Project
Initial Selection of Project Ideas:

Must match the promoters profile of

qualifications, experience, interest, etc.

Rough estimate of project cost &
promoters ability to mobilize the resources
Clear idea about the market size and
growth potential
The availability of inputs & proximity of
market
Cost involved in production, administration
and marketing
Availability of technology & plant and

Stages in Setting up of a
Project
Selection of Project Location:
Proximity of inputs
Proximity of market
Availability of power
Availability of water
Communication facilities
Government policies, subsidies, grants &

concessions
Manpower availability
Weather & climatic conditions
Environmental factors & other regulations

Stages in Setting up of a
Project

Selection of Project Site:

Availability of land
Cost of site

Cost of site preparation & development

Choice of Technology: Factors that influence the

choice of technology:
Plant capacity
Investment outlay & project costs
Technology used by other units
Latest developments
Ease of absorption of new technology

Stages in Setting up of a
Project

SWOT Analysis: Some of the aspects considered

in SWOT are:
Internal financial resources
Availability of funds in the capital market
Extent of support from banks & financial
institutions
The business & financial risks associated
Brand loyalty of existing products
Source of raw materials & other infrastructural
facilities
Market share, distribution network
Severity of competition
Cost of production & managerial competence,

Stages in Setting up of a
Project

Time & cost trade-off: The project should be

completed within its schedule of implementation

and within the estimated cost.
Sometimes it may be possible to complete the
project before due date, but with an additional
cost
Following are the three time-cost options
available:
a)Most efficient plan: Technical requirements of
the project are met through the most efficient
views of available resources
b)Scheduled plan: Technical requirements are met
by the scheduled dates

Stages in Setting up of a
Project

Monitoring of Capital Expenditure: The

accumulation, monitoring & control of

capital expenditure consists of the following
steps:
a)Budget
b)Allocation of Job Order no./ Capex no.
c)Collection of cost against each Capex no.
d)Control of Costs
e)Proper Reporting

Stages in Setting up of a
Project
Variance of Performance Analysis:

Variance Analysis: The traditional analysis

involves comparison of actual costs with

budgeted costs to determine the variance.
This approach is inadequate for project
control as it tells only what happened in
the past & does not answer what will
happen in future
Performance Analysis: This modern approach
analyzes the project as a whole & individual
parts. It indicates whether they are as per
schedule & as per budgeted costs. The trend
of the performance and the likely final
cost & completion date of project as a

Important Terms in Project

Management

Zero Date: Means a date is fixed up from which

the implementation of the projects begins. The

progress is monitored by taking zero date as a
base.
Financial Closure: Once the financial
institutions decide to finance the project, loan
agreements are entered into. After this, the
project in all aspects is ready for implementation
and this state of readiness for monetary support
of project is called financial closure
Project Visibility: The project activities start
from the zero date. A project cannot seen by the
public most of its life. It can be seen by the
people only at the end of its implementation

Important Terms in Project

Management

Work Breakdown Structure: The total project

work is broken down according to various

components and establish the connection
between various components is termed as work
breakdown structure. It helps in construction of
network diagrams under PERT & CPM.

Important Terms in Project

Management

Brown field project: A project implemented in

the area of a working plant/working facility is

known as brown field project. Revamping,
replacements, rehabilitation, renovation,
modernization projects of a running plant are all
BFP
Resource levelling: It is usage of resources
during the project duration with minimum
variation in source requirements without
extending the project completion time. The
objective is to level, as much as possible, the
demand for each specific resource during the life
of the project without allowing any increase in the
project duration

Important Terms in Project

Management

Value Engineering Review: A systematic

analysis and evaluation of the techniques and

functions in the various spheres of an
organization with a view to exploring channels
of performance improvement so that the value
can be bettered
Risk Aware Culture: Estimation of sales,
profitability, costs, investments, etc are based
on various assumptions which involve risk &
uncertainty. The awareness of risk is important
and a risk awareness culture is to be developed
at all levels of project management
Line of Balance: It is a device for planning
and monitoring the progress of an order,

Line of Balance

Important Terms in Project

Management

Project Procedure manual: The manual is

prepared in such a way that the interacting

agencies are able to see their roles and mutual
relationships in pursuance of the common goal. It
analysis the aspects the systems or the
subsystems seek to achieve and a complete
picture of the system is available
CAT & RAT Schedule: CAT schedule stands for
committed activity target schedule is used for
progressing of the agencies whereas RAT stands
for reserved activity target schedule are those
that are to be achieved.

Important Terms in Project

Management

Network Analysis (PERT & CPM): Is a technique

for planning and controlling large projects, It helps

to plan when to start various tasks, to allocate
resources so that tasks can be carried out within
schedule, to monitor actual progress & to find
when control is needed.
Feasibility Study Report: Before the project is
finalized, the promoter will conduct a feasibility
study to confirm about the techno-commercial
strength of a project and prepares a report called
feasibility report. This report becomes the base
for preparation of detailed project report

Important Terms in Project

Management

Market Survey: Before undertaking any new

project it is customary to undertake a market

survey which helps in determining the level of
demand, testing buyers reaction to different
product configurations & packaging and
identifying the links between purchasing
behaviour and other variables. The effectiveness
of this technique depends upon a number of
variables:
a) Number of potential buyers
b)Clarity of buyers intentions
c) Buyers willingness to disclose their intentions
d)Cost of identifying & contacting buyers

Important Terms in Project

Management

Invisible Walls in Project Estimating: There

are certain invisible walls which stops from

making 100% accurate estimates. They are:
a) Delay in governmental clearances
b)Delays in obtaining sanction of loans
c) Reliability of contractors
d)Hurdles from local people near the project site
e) Political disturbances
f) Foreign exchange rate variations
g)Uncertainty of market & consumer preferences
h)Unforeseen competition

Reasons for Project Failure

Substantial overrun of the projects which

makes the project not feasible to

implement further
Changes in technology during the
implementation
Incorrect estimation of the cost of project &
its profitability
Lack of experienced management team
Lack of delegation of authority &
responsibility
Lack of project monitoring systems
Failure to obtain government clearances &

Techniques for Project Control

Watch & measure the achievements at

short intervals
Ascertain current variances & predict future
variances
Ascertain root causes of variances
Take actions to offset the ill-effects of past
variances
Prevent future potential variances
Track & measure the quantitative output &
cost inputs
Evaluate targets, output & input in financial
terms

New Concepts in Financing &

Execution of Projects:
Build, Own & Operate (B.O.O.): The

entrepreneur will build the project from his

own resources, he will own the project and
is also entitled to operate the project
subsequent to its commercial launching
Build, Operate & Transfer (B.O.T.): Private
sector is invited by the govt. to undertake
projects in core sector. Under this, the
private sector will put the investment in
building the project, and the govt. allows it
to operate for a certain period & then
transfer to the Govt.

New Concepts in Financing &

Execution of Projects:
Lease, Rehabilitate, Operate & Transfer

(L.R.O.T.): Govt. will give a running plant for

rehabilitation to put the plant on profitability
track. The govt. adopts this concept when it has
funds constraint
Engineering, Procurement & Construct (E.P.C.):
The contractor takes the complete responsibility
to construct, erect & supply the plant & keeps it
ready to operate by the owner.
Turnkey Contract: When a single contractor
undertakes the responsibility for the entire work
and complete it so that the owner merely turns
the key and operates the plant, it is called

Incentives in Project Planning

Incentives for Export Oriented Units
a) Liberal import facilities are allowed depending on

actual import content of product and FOB value of

the product
b)Customs and central excise duties paid on raw
material used for manufacture of export products
are reimbursable
c) Raw material are supplied at controlled prices for
specified export products
d)Priority is accorded by railways for transport of
goods meant for exports
e) Export Credit Guarantee Corporation (ECGC) offers
special assistance by way of protecting from credit
risk

Incentives in Project Planning

Incentives for Export Oriented Units

f) ECGC also guarantees to banks & financial

institutions to enable exporters to obtain better
facilities from them
g) Financial facilities at special concessional rates of
interest are given by commercial banks
h) 100% foreign equity participation is allowed but
the company should be an Indian company
i) Imports of capital goods /components and raw
material are exempted from import duty
j) Relaxations are allowed in respect of sales tax,
property tax, octroi, etc.
k) Tax holiday is available for 100% export oriented

Incentives in Project Planning

Incentives for Units in Industrially Backward Area:
a) Central grant or subsidy scheme
b)Concessional finance scheme
c) Transport subsidy scheme
d)Various state govt. schemes
Incentives for Small Scale Industries
a) Small scale units need not obtain industrial licenses

for certain category of items manufactured

b)Number of products & services have been
exclusively reserved for small scale units
c) Govt. provides comprehensive assistance to small
entrepreneurs through various organizations like
SIDBI

Tax Considerations in Project

Planning
Some projects are located primarily because of

tax incentives and benefits associated with

them
Tax incentives, tax benefits & implications play
a major role in project investment decisions
Normally capital expenditure is not allowed as
a tax deductible expenditure
But in certain cases, tax incentives are given
for capital expenditure incurred
Eg. 100% deduction is allowed on capital
expenditure if incurred on scientific research
related to business carried on by the enterprise

Cost & Time Overruns

Reasons for cost & time overruns are

summarized as under:
a)Pre-feasibility stage
b)Evaluation stage
c)Choice of technology
d)Contracting & Procurement
e)Construction stage
f) Start-up stage

Methods to avoid cost & time

overruns

Master schedule/milestone network/master

budget
Time and resources schedule
Procurement time schedule

Cost Benefit Analysis

It is an analytical tool in decision making

which enables a systematic comparison to

be made between the estimated cost of the
project and the estimated value & benefits
which may arise from the operation of such
a project

Cost Benefit Analysis&

Investment Decisions
For public/non profit making organizations

seeking to make an investment decision,

the concept of NPV may not be regarded as
entirely appropriate
CBA involves the assessment of the costs
and benefits of the firm as well as the
social costs & benefits
Eg. A firm building a bridge does not have
to pay society for the additional pollution
created nor does it receive payments for
the additional jobs created.
Hence there is a difference between private
costs & benefits and social costs & benefits

Techniques of Cost Benefit

Analysis

1. Discounted Cash Flow Techniques:

Net Present Value (NPV)
NPV = (B-C)/(1+r)n
Where, B = Sum of the benefits of the project, n
= expected life
C = Sum of the costs of the project, r = social
rate of discount
Internal rate of Return (IRR)
IRR is that rate of return which equates the
sum of the costs & sum of the benefits.
If IRR > cost of capital, project should be
accepted.

Techniques of Cost Benefit

Analysis

2. Benefit Cost Comparison: The estimated costs

are compared with the estimated benefits and
the project is undertaken if the benefits are
greater than the costs
The method is unsatisfactory because it does not
take into account time value of money.
Another problem is the figures are not relative,
hence comparison with other projects cannot be
done.
3. Benefit/Cost Ratio: This is a ratio which
assesses estimated costs with the benefits.
It suffers from the same fault that it does not
take into account time value of money

Social Cost Benefit Analysis

Social Cost is a sacrifice or detriment to

society
Social benefit is a compensation made to
the society in the form of per capita
income, employment opportunities, etc
Social Cost Benefit Analysis is a systematic
evaluation of an organizations social
performance as distinguished from its
economic performance.
It is concerned with the possible influences
on the social quality of life instead of
economic quality of life.

Indicators of Social
Desirability
Employment Potential

Foreign exchange earnings

Social cost benefit analysis
Capital-output ratio
Value added per unit of capital

Economic Appraisal
Techniques of Project
Economic Rate of Return: Is a discount rate at

which the cash inflows and outflow are

equated. ERR is determined on the basis of
shadow prices which reflect the real cost of
inputs to the nation and the real benefit of
output to the nation
Domestic Resource Cost: Represents the
resource cost of a product manufactured
domestically without importing such product.
DRC is the costs incurred in production to the
net foreign exchanges saved or earned.
DRC = Value added at domestic prices x
Exchange Rate
Value added at world prices

Economic Appraisal
Techniques of Project
Effective Rate of Protection: Indicates the degree pf

protection a project receives from international

competition.
In calculation of ERP the basic parameter is the
'value added' which is difference between the selling
price of a product and cost of material input
ERP = Value added at domestic prices Value added
at world prices
The difference in the value added is because of the
protection given to the domestic product
ERP(%) = Value added at domestic prices Value added
at world prices x 100
Value added at world prices

Thank You