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Project Management: Paper - 3.2
Project Management: Paper - 3.2
Paper – 3.2
PROJECT MANAGEMENT
PROJECT MANAGEMENT
Unit – 1
Unit – 2
Unit – 3
Unit – 4
Unit – 5
Unit – 6
OBJECTIVES
INTRODUCTION
Projects are the building blocks to meet the enterprise objectives. Project
management is essentially involved in executing the projects. It is recognized as a
management philosophy in the recent past in addition to that of discipline. Project
management has always been central to the existence of industries like
construction, aerospace and defense, where schedule and cost goals are contract
fundamentals.
The new design of maruti zen, concord supersonic jet aircraft, ship
vasundhara, Godrej puff refrigerator, compaque computer, L&T crane steel
rolling mill of the Tatas, New oil base for the ESSAR refinery, new production
line of J.K cement, highway roads of the country’s capital city, new fly over in
metropolitan cites etc have one thing common; indeed they are all purposefully
unique and they are project. The basis logic behind on the these projects are; a.
Investment of resources for a specific objective and b. a cause of irreversible
change.
What is a project?
-United Nations.
FEATURES OF A PROJECT
Types of projects
Much of what the project will comprise and consequently its management
will depend on the category it belongs to. The location, type, technology, size,
scope and speed are normally the factors which determine the effort needed in
executing a project. Though the characteristics of all projects are the same, they
cannot be treated alike. Recognition of this distinction is important for
management. Classification of project helps in graphically expressing and
highlighting the essential features of the project.
NORMAL PROJECTS
CRASH PROJECTS
Requires additional costs to gain time.
Maximum overlapping of phases is encouraged.
DISASTER PROJECTS
Besides that, projects in general are classified on several basis as give in the
following illustrative list.
- United Nations Asian and Pacific Development Institute.
Categories of Projects
PROJECT
National International
CLASSIFICATION OF PROJECT
The project can be classified on several basis. Major classification of the
projects are given below:
1. Industrial project
2. Agricultural project
3. Educational project
4. Health project
5. Social project
1. Quantifiable project
2. Non-quantifiable project
1. Independent project
2. Dependent project
1. Pilot project
2. Demonstration project
1. Normal project
2. Crash project
3. Disaster project
Rondinelli, Dennis & Apsy Palia 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.
All the steps given in different studies can be grouped into three main phases viz.,
- Pre-investment phase
- Implementation phase and
- Operational phase
PRE-INVESTMENT PHASE
This phase is involved with preparation for the project to take out smoothly.
IMPLEMENTATION PHASE
Plant commissioning
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 fo rhte product and securing the
market acceptance of the product. It aims to realize the projection made in the
project regarding sales, production, cost and profits. Project monitoring and
project evaluation are two vital activities under this phase.
Evaluation Definition
Application Planning &
Designing
1. Prototype development
2. First units to test
marked
3. Begin campaign
4. Progress report
TIME
It can be seen from that curve that effort built up in a project is very slow
but effort withdrawals is very sharp. It can also be seen that time taken in the
formative and clean up stages together is more than the implementation stage.
This parabolic patterns of growth, maturity and decline itself in all phases of the
project life. This curve enable a project manager to ascertain the state of health of
any project at any point of time.
Project management
TIME
COST
RESOUCES
PERFORMANCE
Project planning
Definition of work requirements
Definition of quantity of work
Definition of resources needed
Project monitoring
Tracking progress, comparing actual to predicated
Analysis impact and making adjustments.
The behaviouralists see the task force as organized around problems (not
products, programmes, projects or tasks) arranged in an organic rather than a
mechanical model in which the executive becomes the link pin or coordinator but
human speaking the diverse languages or research and who has skills to realay
information and mediate between groups. People will be differentiated not
vertically according to rank and status but flexibly and functionally according to
skill and professional training and replacing bureaucracy as we know it.
It can be inferred that the basic theories and philosophies, governing the
age-old corps and projects had a stormy attack by the systems approach to
management. Owing to the fact that project management is a subset of total
management cult, it would be comforting oneself to describe the principles of
general systems theory. The general systems approach can be squared with a
management approach which attempts to integrate and unify scientific
information across many fields of knowledge. Systems theory attempts to strike at
problems with a holistic view rather than through and analysis of the individual
components.
The most important problem is lack of mutual trust and respect amongst
the participating agencies: owner, financial institutions, consultants, vendors and
contractors. The owner believes that the agencies/contractors would take his for a
ride and, therefore, he should, as far as possible, do things himself. When
consultants are not appointed, projects are likely to have congenial weakness
such as wrong selection of technology, wrong site, high risk element, etc.
Sometimes the owner may appoint a consultant for a nominal fee and ask him to
prepare a report which he can sell to the bank. These reports often do not reflect
reality as they are made without any in-depths study, and if cleared, would give
birth to defective projects. This, doubt, reflects on a consultant’s lack of
professional ethics and can be avoided if the financial institutions use a proper
accreditation, system for consultants.
Most vendors and contractors, do not trust the owner regarding payment.
At the very first sign of delay in payment, they start slackening. They cannot also
be expected to be too enthusiastic about a project where fund problems are
foreseen. A vendor, in such circumstance, may not start the work at all. This not
only delays the project but sours the relationship between the owner and the
vendor.
The problems discussed above can broadly be grouped into four classes of
environmental problems: social, economic, technical and managerial. As
discussed before, if these problems are not tackled, time and cost overruns cannot
be stopped. Yet management of environment is beyond the scope of project
management. There is no point, therefore, in discussing these problems in any
further detail as they are beyond the scope of this book.
While one cannot change the environment for the duration of a project,
one can definitely project oneself from its adverse influences adverse influences.
This can be done by creating a strong shield which will not only resist the adverse
effect of the environment but also influence the environment marginally, at least,
along the boundary. This is referred to as boundary management.
A project can shield itself effectively against the environment only if it engages
good agencies, used good system and has adequate funds to meet the
requirements of the project. Good system and good agencies will require good
funds. However, the funds must be used properly otherwise a project cannot be
completed at least cost which is the ultimate criteria for measuring the efficiency
of project management. Unfortunately, at the moment, we are unable to provide
such a shield to all our projects that must be the only reason for our poor
performance in the execution of the project.
♦ Project complexities
♦ Execution of customer’s special requirements
♦ Organisation restructuring is a typical task
♦ Project risks
♦ Changes in technology
♦ Forward planning and pricing.
Project management has been evolved as a distinct ever since the Second
World War. It has got elevation the recent times.
Only managers with sufficient spirit and dynamism can withstand the over
whelmin dizziness in these incessant operations.
This is to signify a person who has the overall control of the project and
shoulders responsibilities for its execution and performance. Therefore, he is
thoroughly involved in planning the work and monitoring, directing and leading
the participants and seeks to reach the project goal in time-cost-quality
conundrum. The project manager is either a specialist or having predominantly
technical background with sufficient experience, exposure, expertise on
multifaceted, multidimensional and multi disciplinary project. It is well evident
from the monumental constructions and project that have been around us since
heydays, that the role of a project manager is quite distinct and demands an all
round performance.
Project Consultant
For any developing country, project management hols the key for
development. Without efficient project management neither cost control nor time
control is possible. The basis ingredient of successful project management is a
happy integration of three factor, appropriate estimate, competent contractor and
effective project management. The other important ingredient of successful
project management is an effective management team.
When a project is taken up for execution, the first task would be to assess
the requirements of the service of an outside consultant or the in-house expertise
available would be sufficient for the project.
Need of consultants
Need of consultant arises:
i) When a project of new technology is undertaken.
ii) When the in-house consultant is incapable of meeting the requirements
of the project.
iii) When there is no in-house facility available in the organization.
iv) When the project is executed on the basis of imported technology and
know how.
v) To avail the advantages of expertise available with the outside
consultants.
a) In-house consultants
b) Outside consultants
• Indigenous
• Foreign consultants.
Job of consultants
With the passage of time, there has been progress in Indianisation in the spheres f
technology, know how etc. Many firms in public sector as well s in private sector
have come up in have consultancy services. A few well known consultancy firms
are:
CONCLUSION
Thus, this chapter has explained the various aspects of projects and project
management. This conceptual knowledge will certainly helps you to know about
the features of project and project managements, which is an emerging unique
discipline. And this chapter has also explained the various stages of project life
cycle, which helps the project manager to ascertain the strength and weakness of
any project at any point of time.
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LESSON – 2
PROJECT IDENTIFICATION
OBJECTIVES
To ascertain the different sources from which a project idea can be generated
PROJECT IDENTIFICATION
PROJECT IDEAS
The various sources from which the project idea can be generated are explained
below:
The governments plays a very important role in out economy. Its proposed
outlay in different sector provides useful pointers toward investment
opportunities. They indicate the potential demand for goods and service required
by different sectors.
A search for project ideas may begin with an investigation into local
resources and skills, various ways of adding value to locally available materials
may be examined. Similarly, the skills of local artisans may suggest products thay
may be profitably produced and marketed.
Industrial sickness is rampant in the country. There are over 20,000 units
which have been characterized as sick. These units are either closed or face the
prospect of closure. A significant proportion of sick units, however, can be nursed
back to health by sound management, infusion of further capital and provision of
complementary inputs. Hence there is a fairly food scope for investment in this
area. Such investments typically have a shorter gestation period because one does
not have to begin from scratch. Indeed, in many cases marginal efforts would
suffice to revive such units.
For well established, multi brand product groups like bathing soaps,
detergents, cosmetics and tooth pastes, the question to be asked is not whether
there is an opportunity to manufacture something to satisfy an actual physical
need but whether there are certain psychological needs of consumers which are
presently unfulfilled. To find whether such an opportunity exists, the technique of
spectrum analysis may be followed. This analysis is done somewhat as follows.
(i) Important factors influencing brand choice are identified (ii) respect of the
factors identified in step (iii) gaps which exist in relation to consumer
psychological needs are identified.
It should take into account the depriving factors which might have adverse
impact.
Thus, the above said conditions will differ due to resources availability,
use pattern and other relevant conditions of the area. Besides that, project should
also consider certain national priorities.
Project ideas are like other ideas which don’t take concrete shape
immediately. There are several stages of making propositions their considerations
and scrutiny for their soundness.
Conceptual stage
The third & fourth stages may be called as investment opportunity study.
This study is necessarily preliminary and the broad one and has a limited
objective of providing planners with a choice of projects from which they can
make a selection. Pre feasibility study and these can be differentiated opportunity
study and a detailed feasibility study and these can be differentiated mainly on the
basis of information required for respective stages.
After gathering the project ides from the various sources as aforesaid, it is
essential to eliminate ideas which prima facie are not promising. This process f
eliminating the irrelevant and unviable ideas is called screening of project ideas. It
can be done with the help of testing the following conditions of the propositions.
The project idea must be compatible wit interest personality and resources
of the entrepreneur. It should be accessible to him and also it offers him the
prospects of rapid growth and high return on invested capital.
The project idea must satisfy or go along with the governmental priorities,
National goals and governmental regulatory framework.
Identifying the adequacy of market is the key factor to select, the viable
project idea. To judge the adequacy of market the following factors have to be
examined.
A brief summary of the points required for SWOT analysis is given below:
Availability of internal financial reasons for new projects after taking into
account the need for replacement expenditure, increase in working capital,
repayments of borrowings and dividend payments.
Impact of corporate laws on the growth of the company especially (MRTP ACT)
etc.,
Possibility of evolving new technology and its impact on the cost structure of the
company
CONCLUSION
Thus this lesson has explained to you the significance and mode of conceiving
good project idea. It also explains to you the various sources from which the
project ideas can be generated and how one should select the project ides.
1. What factors would you take into account for identifying promising
investment opportunities?
2. What is SWOT analysis and how it can be done?
3. Explain the process of project identification
LESSON – 3
PROJECT FORMULATION
OBJECTIVES
INTRODUCTION
The different stages in the project formulation process are briefly describes as
follows;
A. Feasibility analysis
B. Techno-economic analysis
C. Project design and network analysis
D. Input analysis
E. Financial analysis
F. Social cost-benefit analysis
G. Project appraisal
FEASIBILITY ANALYSIS
TECHNO-ECONOMIC ANALYSIS
Project design is the heart of the project entity. It defines the individual
activities which go into the corpus of the project and their inter-relationship with
each other. It identifies the flow of events, which must take place before a project
can start yielding the results for which it has been set up. The inter-relationship
between various constituent activities of a project in most conveniently expressed
in the form of a network diagram. Project design and network analysis are
concerned primarily with the development of the detailed work plans of the
project and its time profile, and the presentation of this plan is form of a detailed
network drawing. Project design and network analysis make available to the
project formulation team a clear picture of the work elements of the project and
also their sequential relationship. This presentation the way for detailed
identification and quantification of the project inputs, an essential step in the
development of the financial and cost-benefit profile of the project.
INPUT ANALYSIS
The objective is to identify and quantify the project inputs and to assess
the feasibility of a sustained supply of these inputs all through the effective life
span of the project. Resources are consumed in project constituent activities. The
best method of identifying the project constituent activities. The best method of
identifying the project inputs is therefore to identify these activities determine the
resources which each activity will consume individual requirements. Input
analysis uses the network plans for developing the input characteristics of the
project. If thereafter proceeds to evaluated the availability of the inputs both in
quantitative as well as qualitative terms. Resources require for a successful
implementation of a project include not only the material inputs but also human
resources which are necessary both for the setting up of the project as also its
successful normalization run. Resources requirements estimates form the basis of
costs estimates of the project and are, therefore, essential for developing the
financial profile and cost-benefit profile of the project.
FINANCIAL ANALYSIS
In judging the overall worthiness of the project, the effect of the project on
society as a whole is very essential. While financial analysis evaluates a project
from the profitability point of view, social cost benefit analysis views it from the
point of view of national viability. The cost-benefit analysis however takes into
account not only the direct costs and benefits which will accrue to the project
implementing body but also total costs which all entities connected with the
project will have to bear and the benefits which well be enjoyed by all such
entities. The idea here is to evaluate the project in terms of absolute costs and
benefits rather than in terms apparent costs and benefits.
PRE-INVESTMENT APPRAISAL
CRITERIA TO BE FOLLOWED
Setting up priorities and choosing the goals that are more urgent
Searching for alternations and carrying out feasibility studies to pick up projects
that appear most beneficial and desirable.
Estimation the needed resources (human and physical) and finding the yearly cost
and benefit of project
Preparing of time schedule for all hobs so that the physical and financial targets of
the projects are passed appropriately
Evaluating the performance of each project to ensure the worth of good or service
for each rupee to be spent.
CONCLUSION
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LESSON – 4
OBJECTIVES
INTRODUCTION
The performance requirement for the various technical system and the key
equipment have been specified.
This feasibility study helps the promoter to make the investment decisions
correctly and to obtain funds without much difficulties.
Present demand of the goods produced through the project. i.e. market
facility (or) getting a feel of the market.
Future demand: a projection may be made about the future demand. The
period normally depend upon the scale of investment.
TECHNICAL FEASIBILITY
FINANCIAL FEASIBILITY
For projects that involve new companies, statement of total projects cost,
initial capital requirements, and flow relative to the projective time table.
MANAGERIAL FEASIBILITY
The success or failure of a project largely depends upon the ability of the
project holder to manager the project. Project is a bundle of activities and each
activity has its own role. For the success of a project, a project holder has to co-
ordinate all the activities in such a way that the additive impact of different inputs
can produce the desired result. The ability to manage and organize all such inter
related activities come within the concept of management. If the person in-charge
of the project, has the ability, has the ability to manage all such activities, the
desired result can be anticipated.
There are three ways to measure the managerial efficiency:
a. Hereby skill
b. Skill acquired through training
c. Skill acquired course of work
SOCIAL FEASIBILITY
A project may cross all the above barriers mentioned above an found very
suitable but is will lose its entire creditability, if it has no social acceptance.
Though the social customs, conventions such as caste community, regional
influence etc. are creating hindrance for development of a project should avoid all
such social conflicts which will stand on the successful implementation of the
project,
(e.g.) Considering the interests of the general public; projects which offer
large employment potential, which channelise the income from less developed
areas will stimulate small industries.
In a nut shell, the feasibility report should highlight on these five testing
stones before it can be declared as complete and only after judging through these
indicators a project can be declared as viable and can be submitted for finance or
any other assistance from any institutions.
1. Introduction
2. Summary and Recommendations
3. Project Capacity, Chemistry of the product, specifications, properties,
application and uses.
4. Market potential
5. Process and know-how
6. Plant and machinery
7. Location of the unit
8. Plot plan and building
9. Raw materials availability
10. Utilities, requirements
11. Effluents treatment
12. Personel requirement
13. Capital cost
14. Working capital
15. Mode of finance
16. Manufacturing cost
17. Financial analysis
18. Implementation schedule
Thus, this chapter narrates the very purpose of a feasibility report in a lucid
manner, covering components of feasibility reports, principal feature of project
feasibility study and also checklist for feasibility study. It helps in defining and
analyzing the alternative approaches to production processes and outcomes. It
focuses attention on the material inputs and various other techno-economic
variables. It describes the optimization process, justifies the assumptions and
hypothesis set thereby selection the better alternative solutions and defines tre
clear boundaries of a project viability.
PROJECT REPORT
OBJECTIVES
INTRODUCTION
A project at the outset must bear a logical appearance, which it can get
only after the feasibility test. Project report is a document, which clearly narrates
the various aspects f project in a prescribed form. Project report preparation is a
post investment decision exercise. It involves the preparation of detailed
specifications and designs for the project premises, detailed design of the process
or other equipment and time schedules for the implementation of the project.
Hence, the detailed project report is the work plan for the implementation of the a
project once an investment decision is arrived at.
Many of the institutions like SISI, State Financial Institutions also help in
preparation of project report and later on recommend they to the banks. Besides
these institutions, several commercial banks help the entrepreneurs to get a good
project report.
The following are the important headings under which the complete
information on relevant aspects should be included for a small scale industry’s
project report.
General information
Rationale
Project description
Market potential
Capital expenditure and sources of finance
Assessment of working capital requirements
Other financial factors
Government and other statutory approvals
Economic and social variables
1. GENERAL INFORMATION
The following aspects should be given in the stage, which are of general
nature:
3. PROJECT DESCRIPTION
4. INPUT FACTORS
Raw materials: What are the sources of raw materials? Are they locally
available? Whether imported raw material is also required? If so, whether license
has been obtained? Is it suitable to get quality raw materials continuously at
reasonable prices?
As a simple example, one can easily surmise that a raw material with a
high volume to weight ratio will indicate the plant is located near the source of
raw material. e.g. Cement, power (coal based). On the other hand, if the values
added in such a case is very high, then it may be possible or even necessary to
locate the plant away from the source or raw materials. Textiles, power (gas based
of oil based), processed foods like snack foods, ice creams are some the pertinent
examples.
The characteristics of the raw materials are multivariate and not just on the
volume weight ratio. It is imperative therefore that this elements gets a careful
consideration while assessing a project. The market, the management, and the
utility needs of the projects also influence the locational decisions.
Labour: What is the type of labour required? Whether skilled or unskilled? Are
they available in that area? If not, what arrangement have been made to recruit
and train the labour in various skills?
Power: Inadequate supply and high cost of electricity is a major problem now-a-
days. So, the project report should contain the information regarding the power
requirements, the load sanctioned, stability of supply of power and the price at
different consumption level.
Fuel & water: Whether the fuel systems like coal, coke, oil or gas are
required and if yes, then state their availability position. Similarly water is an
important factor. The source and the quality of water should be clearly stated.
Waste discharge: Most of the plants product waste material or emissions that
may result in many health problems to the public. The emissions and discharges
may be various types like (a) gaseous )smoke, fumes, dust etc.) by physical
(noise, hear, vibration etc.) or (c) liquid or solid discharged through pumps and
sewers. Hence, it should be clearly stated that the arrangements made from these
things.
The source of plant and machinery as also the specification for the same
can often make or break a project. It is, therefore, equally important to evaluate
the plant and machinery which is to be installed at the project. The reputation of
the supplier and references to place where such/similar plant and machinery are
installed is a good starting point while assessing this element.
Capacity & Technology: The installed and licensed should be stated and
the number of shifts likely to follow should be stated. Similarly, is the technology
upto date and appropriate? Which other units are using the same technology and
with what results? How the required know-how is proposed to be arranged.?
It is pertinent to note that there are no hard and fast rules but
“appropriateness” and “relevance” are the two key operative words while
assessing a technology proposed for the project. It is ridiculous to propose a
highly sophisticated, push button control technology in a place where electricity
supply follows its own rules or where a simpler technology is better understood
and more manageable. Equally, it would be disastrous to recommend an obsolete
technology on account of its durability or time tested proof of performance when
everyone else is fast discarding it.
For example, a capacity of 100 tps. But if raw material proposed is “agricltral
waste” a whole lot of new considerations starting from collection and storage or
raw materials come into play necessitation appropriate changes in the plant size
and even perhaps the technology. Similar situations can arise in linkages of
technology to management, availability of utilities, and cost of the project.
Quality control:
What is the system arranged for to check the quality of products on
continuous basis? The quality marks like ISI, Agmark will enhance the values of
the product as well as confidence among the consumers. If it is desired to get
quality markings, the fact should be included in the project report.
5. Market Potential
Facts regarding the anticipated demand for product and the level of supply, should
be clearly stated. An estimate of manufacturing and administrative expenses
together with the price expected along with the margin of profit should be stated.
Marketing strategy:
What is the strategy adopted for marketing the product should be stated.
Whether the products are to be supplied to the reputed sellers directly or
distributors? Is there any possibility of getting a contract from the reputed
concerns should also be stated in this project report. Similarly whether after sales
service has been arranged and how to fill the gap of demand if there is
fluctuations in the sales seasonal demand arrangements made for warehousing the
products.
Cost of the project : Since each project is profit motivate it is important that cost
of the project is carefully assessed and evaluated. One of the most important
factors in this assessment is the level of accuracy in the cost estimates, which in
addition to proper data collections also depends upon the approach and the
attitude of the evaluator himself. Some evaluators tend to see all cost estimates as
“too high” leading to unnecessary under estimation of the project cost and
consequent problems in project implementation and even project viability. On the
other hand some evaluators tend to provide “cushions” at all levels of cost
estimates which may erode the viability of the project on paper leading to wrong
decision on the issue of project selection and implementation.
As estimate regarding this various capital inputs required by the industry should
be given. Those capital items include the following:
The project is not put up in a vacuum but in the real world which is subject
not only to procedural requirements but also to policy guidelines and stipulations.
These requirements, guidelines and stipulation could begin with the very
permission to establish a project and go across various economic statutes of a
country governing several aspects, not merely as an element of feasibility or
otherwise of setting up the project but as part of the plan extending over the
economic life of the project.
Among other things, what will be the abatement costs to control pollution
and treating for the effluents and emissions, should be stated. Added to this,
whether the project derives home some social benefits like the following:
Two models of project report are given at the end of this lesson.
The detailed project report differs from feasibility report in the following
manner:
Time span: These studies are subjected to an exploratory type of research and
hence consume a span of 6 to 15 months. A lot of care and diligence is inevitable
on the part of the estimator while preparing the official document and hence may
consume time within the range of 1 year to 2 years after the decision is take by the
top management.
Costs involved: The cost of feasibility studies varies on the type of project. As an
average for any project the costs may range approximaterly between 1.5-3% of
the project costs. The cost of preparing a detailed projet report is little higher than
that of feasibility studies. The total costs may range between 5-7.5% of the
expected investment.
Reliability: These studies are reliable for a short period of time (till the decisions
are made about a project). In the long run they serve only as a data bank as the
information stinks. The detailed reports help in guiding the entire project and even
if any variation is there in the project data it can be compared and observe.
However, this acts as a major signpost for all practical purposes in the project
development and for future reference.
Depth of analysis: The depths and magnitude of the feasibility studies are
obviously reflected through costs and time consumed in conducting studies. The
level of information furnished in these reports is clear, yet some secondary issues
are perfunctorily managed. The depth and magnitude is perfectly maintained by
furnishing intricate details of the project. The report is prepared with diligence
taking all precautions to avoid ambiguity and mystery concerning issues of the
project.
CONCLUSION
2. Production target
The different type of size of tables costing to Rs. 7.80.000/- is out annual target.
The calculation is based on single shift of 8 hours per day and 300 working days
in a year. The rates of machines and raw materials have been taken as prevailing
in the market at the time of preparation of project.
The sheets, tubular steel etc., are cut to required size and pressed to shape, bent in
a press brake for table top, sides and drawers. Holes are made by drilling
wherever necessary for cutting screws.
Fixing of doors, hinges assembly, cleaning, pickling and drying are to be done
before painting. The spray painted articles are to be store-enamelled for better
quality and bright and lasting finish.
Total 7,400/-
Say 7,400/-
Total 7,80,000
10. PROFITABILITY
FIXED COST
i) M/s. Ashok Brothers, 37, Panchkuion Road, New Delhi – 110 001
ii) M/s. Machine Tools Traders, P.B.No. 1260, 57A, Ligichetti St.,
Chennai – 600 001
iii) M/s. Perfect Machine Tools Co., (P) Ltd., Bell Building, Sir Phirozshah
Mehta Road, Mumbai – 400 001
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LESSON – 6
PROJECT APPRAISAL
OBJECTIVES
INTRODUCTION
APPRAISAL PROCESS
Size and prospective growth of the market which the unit is required to cater like
nature of population, their purchasing power, their educational background,
fashion etc.
Demand and supply position of the product in the national and international
market.
Nature of competition
Pricing policy including prospective prices vis-à-vis the quality of the product.
Marketing strategy and selling arrangements made by the unit adequacy of sales
fore:
Export Potential
B) TECHNICAL APPRAISAL
To seek a better available alternative technology which is both cost effective and
efficiently manageable;
To seek such a technology that can go with existing skill levels of team members
or requires little orientation and training programmers;
The technology that is used in projects can be classifies on the basis of:
Nature of skills applied while using the technology. On the basis of purpose, the
technology can be:
Conversion technology which is used in process industries like cement sugar, etc.
Core technology, which is a base for any industrial activity like basic plant and
machinery that is erected. For example, Lakshmi Machine works textile machine
installed in the textile firm.
While performing a technological appraisal some of the vital ingredients that need
attention are:
The critical inputs mean all the basic location and operational requirements which
make the project viable. These include:
Raw materials. For instance, sugar factories are situated near sugarcane producing
areas.
Availability of land.
Nearness to market for finished product. The units producing heavy bulk finished
goods are always situated near the regional market.
These call for carefull consideration regarding choosing right size of the plant,
proper layout and correct technical design. The capacity of the plant should be
neither too low rendering it uneconomic nor too high to keep it idle. This has
assumed tremendous importance especially in view of the fact that Indian industry
has a tendency to have cost and high capital output ratio.
Provision for performance guarantee the after sale service y the suppliers.
Planning should be pragmatic and proper so that the construction and gestation
period are estimated properly and there are not time and cost over-run. Of late,
many f the projects have failed because of faulty planning at the initial stage and
subsequent delay in sanction/release of more funds by banks/financial institutions.
Generally, the CPM techniques are used for net-work scheduling.
The various points one has to take into consideration while estimating time are:
Industrial License
Permission for collaboration arrangement and the present position
regarding signing of the same
Consent of the appropriate authority for disposal of effluents
SEBI’s consent for issue of capital, if applicable
Import licensed for plant and machinery and raw materials
Typing up of credit facilities from financial institutions/banks
Possible timing of issue of capital including underwriting arrangement for
the same
Acquisition of land
Soil testing
Construction ( Civil and architectural)
Supply of plant and machinery including installation thereof
Recruitment of manpower
Supply of raw materials
Start up and trial run
Normal production
This is most difficult job to evaluate the “MAN or MEN” behind the project. It
has been the practical experience of the bank/financial institutions the even the
most technically feasible and financially/commercially viable project has been a
total failure because of lack of management experience. The problem may
become all the more serios if the managemnte is dishonest/delinquent rather than
inefficient and ineffective. Unfortunately, there is no scientific yardstick by which
managerial competence can be judged objectively. For an established group of
industrialists floating a new company unit, the banker can have at least, an idea of
the background of the promoters. Much also depends whether the existing
promoters belong to the ‘Blue Chip’ group or not. But, in case of a new promoters
floating a new project, the problem of judging managerial competence induces
some kind of subjectivity in the decision of the banks/financial institutions. In
appraisal parlance, such evaluation is known as ‘Principle of three Cs’ i.e.
Character, Capacity and Credit worthiness. The following table will show some
principles of credit evaluation in terms of Cs of credit.
Some of the other points that observe careful consideration in this regard can be
enumerated as under:
D) FINANCIAL APPRAISAL
The basic purpose of financial appraisal is to assess whether the unit will generate
sufficient surplus so as to meet the outside obligations. Financial appraisal usually
examines two aspects of finance:
The cost of the project: i.e., the amount required to complete the project and bring
it to normal operation
The means of financing the cost i.e. the sources from which the required funds are
to be raised.
After computing the cost of the project and means of finance, the various factors
required for assessment of financial viability which a banker should carefully
examine, are as under:
Free reserves
Subsidy
The shares subscribed by both of them are taken as equity. Long term debt
consists of:
2) Debentures
However, for heavy capital intensive industries like cement plant fertilizer plant
of ship breaking unit, this can be further relaxed.
Sensitivity Study: This carried out to see that the unit would be able to serve its
debts & give reasonable return under less optimistic conditions. For determining,
profitability of the project generally projections are obtained over the entire
repayment period (say 7 to 10 years) in the following areas:
- Cost of Production
- Profitability
- Cash flow
- Debt service coverage ratio
- Break even point
The appraiser should satisfy himself about the reasonableness of the bsic
assumption on which the above projections are made. The important assumptions
generally looked into are:
- Capacity build up
- Cost of raw materials
- Estimates of salaries & wages
- Estimates of administrative expenses
- Expected selling price
- Provisions made for depreciation
- Provisions for various taxation liabilities
The assumptions should be reasonable and realistic. In case, the assumption are
not pragmatic, the same can be got changed by the bank and fresh figures can be
compiled. But the basic consideration the banker should have it that the cash
generation position of the unit should be quite comfortable throughout the
repayment period. An ideal debt service coverage aimed at is 2:1.
A model problem for ascertaining cash flow projection and the financial viability
of the project are given below:
Illustration:
The estimated project cost Rs. 160 crores. It consists of Rs. 96 crores of fixed
assets and Rs.64 crores of working capital margin.
The estimated sales and operating costs (excluding depreciation) are Rs. 192
crores and RS. 144 crores per annum respectively. The description on fixed asset
would be @ 20% p.a. based on the written down method.
The salvage of fixed assets and current assets will be equal to their book values.
The principal of the term loan will be repaid in four equal annual instalments of
Rs. 16 crores each. The first installment wil fall due t the end of the second year
and the last instalment at the end of the 5th year. The outstanding term loan would
carry interest @ 12% p.a. The levels of short term bank finance and trade credit
will remain at Rs. 32 crore level each, on account of the roll-over phenomenon,
till they are paid back at the end of the 5 th year. The short term bank finance will
carry interest rate of 20% p.a.
Answer
(a) The financial viability of the above project can be checked by preparing
the cash flow projections for a period of five years from equity, long-term
and total funds perspectives.
Years
Total funds
Equity
Fixed assets
Working capital margin
Revenue
Operating costs
Depreciation
Interest on long term funds
Interest on short term
borrowings
Profit before tax
Tax
Profit after tax and interest
Net salvage value of fixed
assets
Net recovery of working
capital margin
Repayment of term-loans
Retirement of trade
creditors
Repayment of short- term
borrowings
(i) Initial investment
- equity point of view
- long term funds
- total funds
(ii) Operating cash inflows
- equity vies
- long terms funds
- total funds
(iii) Terminal cash flows
- equity view
- long term funds
- total funds
Net cash flows from
-equity view
- the long term funds
- the total funds view
Years
Cost of project
Expected revenue
Operating expenses
Depreciation
Interest on long term funds
Interest on short term
borrowings
Profit before tax
Tax
Profit after tax and interest
Net cash accrual
Illustration 2
You as a project analyst are required to work out the incremental cash flows
associated with the replacement of old machine and prepare a statement ot be
presented to the management for consideration.
Answer
The above case refer to replacement project. In such cases, one must take the
following pints into consideration:
• Comparison of new machine with the old machine from the overall cash
flows points of view;
• Comparison of new impact of the ‘replacement’ or ‘relating the old
machine’ over the cash flows;
• Financing mix used for the replacement and its impact on the interest rates
to observe the effect on the profit after interest and tax.
At least two of the above factors should be applied here to analyse the position
and present the analysis for managerial consideration. The following cash flow
statement will help present the situation better.
(Rs in crores)
1. Net Investment in the
machine
2. Savings in manufacturing
costs
3. Depreciation on the old
machine
4. Depreciation on the new
machine
5. Incremental Depreciation
6. Incremental taxable
profit
7. Incremental tax
8. Incremental profit after
tax
9. Net incremental salvage
value
(a) Initial investment (1)
(b) Operating cash flows
(5+8)
(c) Terminal cash flows
(a+b+c)
Working notes:
Net investment (Rs. 4 lakhs less Rs. 90,000) = Rs. 3.1 lakhs
Savings of the new machine are given in the problem, i.e. 1 lakh.
Incremental depreciation is derived by considering depreciation of the new
machine less depreciation of the old machine.
E) PROFITABILITY ANALYSIS
RATIO ANALYSIS
Many important parameters such as sales, operating profit, net profit, equity, debt,
current assets. Current liabilities, etc. do not give much information if figure is
studied in isolation. If a ratio is calculated between related items, the ratio
indicates the relationship between two or more than two variable, thus giving
meaningful information for taking decision. Some of the ratio useful for banks are
discussed below.
This indicated the relationship between term liabilities and owned funds and helps
in assessing the capital gearing. The debt shall include long term loans,
debentures, deferred payment preference shares due for redemption between 1 to
3 years. The equity includes ordinary share capital, preference share capital due
for redemption after 3 years, investment subsidy, unsecured loans subordinated to
the term loan, internal accruals, non refundable deposits in the case of
cooperatives.
B. CURRENT RATIO
The ratio indicates the liquidity posing of the company. Current assets should be
more than current liabilities. The acceptable ratio should be between 1.5 to 2.1.
The ratio beyond 2.1 will indicate that either the inventories are stocked
unnecessarily or the products produced are not sold. The current ratio will
indicate the necessity for proper inventory control.
C. DEBT SERVICE COVERAGE RATIO (DSCR)
The ratio indicates the capacity of the unit to repay the term loan liabilities and
interest thereon. It is important ratio for lending institution as the repayment
period has to be suitably fixed based on this ratio. This ratio indicates the cash
generation the term liabilities to be paid out of this and balance left for the
company’s use. Repayment of term loan without generating sufficient cash will
lead to reduction in working in the working capital, tight liquidity positon and
further deterioration in the working of the unit. The acceptable ratio should not be
less than 1.5: 1 which indicates that 1.5 times cash is generated to pay the terms,
loan liabilities of one time. The formula calculation of the DSCR is given below:
The DSCR should be calculated for each year of operation and also for the entire
repayment period as an advance.
D. MARGIN OF SECURITY
The term loans are generally sanctioned against the security of fused assets. The
excess of fixed assets over the term loans provides margin for the term loans.
A list showing the method of calculation of above ratios and their usefulness is
given separately.
The manufacturing cost consists of two costs viz. fixed costs and variable costs.
Certain type costs viz. depreciation, interest on term loan, repair and maintenance,
rent and insurance, wages and salaries, administrative expenses etc. has to be
incurred by the unit irrespective of the level of operative of the level of operation.
This cost will not change with the level of operation and they are called fixed
costs. All the other costs viz. cost of raw material consumables, power, water,
stores, packing charges, selling expenses etc. which vary with eth level of
operation is called variable cost. The BEP is the level at which the unit should
operate to meet the fixed costs. It is level of operation, where there is no profit or
loss for the unit. The BEP is calculated using the following formula.
The appraising officer should follow uniform policy to divide the total cost into
fixed cost and variable cost as certain cost neither remain fixed nor changed in the
same proportion in which the level of production changes.
A project should earn sufficient return which should be at les equal to the cost of
capital invested in it. The following evaluation techniques helps to identify the
best investment proposal amongst the available.
The period required for recovering the entire investment made the project is
calculated. The shorter is the period better return. The cash flow (operating profit
+ depreciation + other non cash write off-tax) is accumulated year by year until it
equals the original investment. However, this method ignores the cash inflow
received after crossing the pay back period. This method is best suited where the
emphasis is on avoidance of long term risk.
Unlike the pay back period method, the entire life of the project is taken into
account. The average annual net operating profit (after depreciation) for the entire
life of the project is calculated and the rate of return of original investment in an
year is calculated by taking the average of opening and closing boo values of the
investment in the year. The grand average of such average investment of all years
is obtained to know the average investment of the project gives the average rate
of return. This method does not give any importance to the time value of the
money and also the life differential of the projects.
Pay back method and average rate of return method does not give importance to
the time value of money. The money invested today will not be equal to the
money received in the future. Therefore, the time value of the money also should
be taken into account while determining the return for the present investment.
Under this method, the future cashflow of all the years during the expected life of
the project are discounted at a predetermined cut-off rate and the net present value
id obtained. The cut-off rate should be either equal to or more than the cost of the
funds. The present investment is an outflow of funds and hence treated as having
minus value. If the difference between the present investment and the new present
value of cash inflow is positive than it indicates that the profit is greater than the
cost of the capital.
NPV method indicates, the net present value of the future cash flows at a
predetermined discount rate and the project is accepted for investment if the
return of a project, the net cashflow in each year are discounted at various
discounting rates till the sum of net presten values of cashflow equal the cash
outflow. Such a rate of discount which would equate the present value of
investments to the present value of future benefits over the life of the projects.
Problem 1
Answer
Problem 2
Year 0 1 2
Purchase of Plant
Running Costs
Savings
The cost of capital is 8%. Measure the sensitivity of the project to changes in the
levels of plant value, running costs and savings (considering each factor at a time)
so that the NPV becomes zero. Which factor is most sensitive to affect the
acceptability of the project.
0 1.000
1 0.926
2 0.857
Answer
Sensitivity Analysis
i.e 60.5
7,000 x 5 = 8.007% or by 8%
i.e 60.5
3,994.5 x 100 = 14.03% or by 14%
i.e. 560.5
11,555 x 100 = 4.85%
According to this analysis, it is clear that savings having a lowest sensitivity ratio
gets affected most while accepting the project.
Problem 3
Ganesh Industries Ltd. is considering to acquire a new plant for its existing
industry in order to expend the output the output whose investment will be Rs.
2,00,000. The expected life of this new plant is 8 years having no salvage value at
the end of 8th year. The future cash flows and their probabilities for couple of year
are as under.
Required
Plot the project proposal in a decision tree indication clearly the variations at each
level of cash flows and suggest the company whether to proceed with the plant or
not if the cost of capital is 10% [P/V Factor at 10% 1st = 0.909; 2nd – 0.826]
Answer
The project is exhibiting a positive expected net present value indicating its
success. The project can therefore be accepted.
It is also difficult to estimate the real cost of direct inputs and the real value of the
output. Another important problems is the determination of the social rate of
discounting.
Opportunity cost
In the social cost-benefit analysis the relevant cost is the opportunity cost. The
opportunity cost is the (i.e. the benefit) of the cost alternative foregone due to a
particular course of action.
It is implied from the above definition of opportunity cost that there is no
opportunity cost when there is no alternative. For example, the opportunity cost of
self-employment is the salary for the best job he could have obtained. But if he
does not have any job opportunity other than the self-employment, there is no
opportunity cost for the self-employment.
Resources have opportunity costs when they have alternative uses. When there
scarcity of resources, decisions about resources allocation should be base on a
careful assessment of the opportunity costs of the alternatives. To illustrate,
assume that financial resources are scarce and the total resources available with
the financial institution for lending is Rs. 10 lakhs and there are three applications
for finance viz., project A requiring assistance of Rs. 10 lakhs and project B
requiring Rs. Lakhs. And project C requiring Rs. 4 lakhs. The opportunity cost of
project A is project B and C. Even if all the projects are profitable and feasible, if
the net benefits from A s higher than the aggregate net benefits from B and C,
project A should be preferred according to the opportunity cost principle.
Assume, further, that the commercial profitability of the textile shop is relatively
high and that of the agricultural project is low but it will increase the output of
some important agriculturl commodity. In this situation the lending institution
should prefer the agricultural project because though it is commercially less
viable than the textile shop, it will make a higher contribution to the national
output. Even if the proposed textile shop is not opened, the total textile output or
sale will not be affected but if the agricultural project is not assisted, it will
adversely affect the total output. It clearly shows that in the national profitability
analysis, application of the opportunity cost principle is very essential.
Shadow prices
We have stated earlier that in the social cost benefit analysis or in the national
profitability analysis, the prices of inputs and outputs of the project should be
suitability corrected to reflect the real cost if the market prices are characterized
by distortions of any type. Shadow price, also known as accounting price, refers
to such adjusted price of the input/output so as to reflect its real cost of value.
For example, if the price charged for electricity supplied to an industrial unit in 50
paise per unit when the cost of production of electricity is one rupee, the price of
electricity is to considered in the commercial profitability analysis is 50 paise per
unit but in the national profitability analysis the relevant cost of electricity is one
rupee per unit which is the real cost of production. Thus, the market price of
electricity is 50 paise but its shadow price (accounting price) used for the national
profitability analysis is one rupee.
To take another example, suppose that the cost of imported patrol is Rs. 3 per liter
but the selling price in the domestic market is Rs. 7 per litre because of a tax or
Rs. 4 per litre. The shadow price of imported petrol would, therefore, be Rs. 3 per
litre because the remaining Rs. 4 of the market price or Rs. 7 represents a mere
transfer of income from one sector to another sector within the economic and it
does not represent a resource cost or sacrifice to the nation.
Eg. SCBA Balance Sheet of Nuclear Power Project (Pearce & Nash 81)
Benefits Costs
Gain in Gross domestic xx Social cost of extra GDP to xx
provident be generated by the project
Routine Radiation (loss of xx
human life) in value
Waste management xx
Proliferation xx
Civil Liberties xx
xx xx
Socio-Economic Appraisal
Social cost benefit analysis (SCBA) is a perfect necropsy where the identification
and determination of the best among project alternatives is made with reference to
a country’s economic and social prerogatives. It is a systematic procedure for
comprehensive review of all the costs, benefits, and effects of a project. Such
appraisal is preformed for development and infrastructure projects usually by
emphasizing the economic, technical, operational, institutional, and financial
factors to ensure that the selected project meets all necessary requirement and is
implementable.
NB = α( βγδX − βM − γδd )
UNIDO-FOCUS
Fundamental focus of these guidelines is net increase in the aggregate
consumption of an economy due to the project output. Other subsidiary objectives
are noted as:
Therefore, to survey the above objectives, the guidelines advocate the followi
steps for the appraiser.
• Identification of direct and indirect costs and benefits that affect the
aggregate consumption of an economy;
• The consumption of the shadow prices of labour, foreign exchange, and
investment;
• The estimation of the social rate of discount, and also of relative weights
to be attached to the net benefits accruing to various groups in the
economy if redistribution of income is considered as a separate objectives.
The net effect of costs and benefits on the economic situation of a country;
The concept of shadow prices that are associated with various types of goods and
services dealt in the project.
Little and Mirrlees, through their pioneering efforts, interpret the problem of
LDCs as follows:
• In an LDC, the foreign trade sector is considered as the public sector
program. The public sector projects are to be efficient by setting their
prices equal to marginal costs.
• (P = MC – leaving to room for loss)
• Under such a threshold pricing level only world prices should be used as
‘shadow prices’.
• Distribution and efficiency be the twin important objectives of a
government policy that affects project performance.
Therefore, shadow prices give risk to effect on social welfare of a small change in
quantity of an input or output. Its value depends on the welfare function being
used and the constraints imposed.
• Traded goods for which the elasticities of demand and supply in the
market are infinite;
• Traded goods which are having definite elasticities of demand and supply
in the global markets;
• Non-traded goods that are not being traded and will never be traded
provided optimal trade policies are employed by the economy;
• Potentially traded goods that are not presently traded but can be traded if
the trade policies are optimal.
In all the above cases, world prices are recommended to be used as shadow prices
since domestic pricing policies keep changing.
The crux of the Diamond and Mirrlees approach is that, application of world
prices as shadow prices helps offset the fluctuations in domestic prices and
justifies the project from the economy’s point of view. They emphasis productive
efficiency, trade efficiency, and optimal operations. This depends on the existence
of optimal commodity taxes without which the exceptions to the rule of using
world prices would disappear.
The capital intensive industrial projects are appraised and evaluated on the basis
of ‘efficiency’ criteria. The efficiency criteria bases its arguments on Economic
Rate of Return (ERR) of a project. This approach is generally followed by all
leading development financial institutions of the country such as ICICI, IFCI,
IDBI and other SFIs.
The infrastructural investments are appraised based on the net benefits accured to
a country through the project. The appraisal division will visualize the economic
situation in the presence or absence of the project and judge the balance of
payments of the country. Therefore, here the shadow prices will be of great
concern.
Let us briefly bivouac on these three important measures which are widely
applicable to projects of national importance.
In order to compute the ERR, the world prices are considered instead of domestic
market prices will be considered with C.I.F. prices for inputs and F.O.B. prices
for output and for tradable goods where the international prices are not available
and for non-tradable goods, social conversion factor (SCF) is essential to convert
actual rupee value into the social cost or benefit derived.
X+M
SCF = ---------------------------------
X ( 1-tx ) + ( 1 + tm )
Where
This can be defined as the ratio which translates the domestic price for any non-
tradable into its price value so that the good can be expressed in terms of its real
domestic price equivalent.
SER defined
The shadow exchange rate can be defined as “that rate of exchange which
accurately reflects the consumption worth of an extra unit of foreign exchange in
terms of the domestic currency”. Say an extra US$ is earned by the public project,
what domestic consumption value would it buy? If it is useful to divide SER by
official exchange rate (OER), therefore, if one dollar is convertible into Rs. 35
then;
SER 35
------ = ----- = 1
OER 35
Therefore, ERP helps in project appraisal in similar lines with DRC provided a
slight change is followed in the form of reducing SER.
Fundamental of DRC
The DRC (Domestic Resource Cost) version of Lal (1974) presents the criterion
as:
D
SER> ----------
(X – M)
Where
Where, value added is the difference between the value of what a project produces
and the value of nay inputs purchased from elsewhere.
Value added at domestic price is simply the value of payments made to domestic
capital and labour.
For example, we assume that there are two goods Q1 and Q2 which are traded
along with a good Q3 which is domestically produced to export through the public
project. Two domestic inputs K and L are used for this purpose. The world prices
of these goods can be assumed as P1, P2, P3 respectively. The traded by applying
the equation we can compute DRC as,
( w × l3 ) + ( r × k 3 )
DRC =
p 3 − ( p1 × f1 )
Where
w = wage rate,
l3 = labour used in manufacture of product Q3 i.e. L/Q3
r = rate of interest
f1 = share of Q1 and Q2
A DRC focuses on the size of domestic resources given up per unit of foreign
exchange earned. It is only in these terms that the ratio makes sense.
(Rs. Crores)
Value of tradeable inputs at domestic prices 700
Value of non-tradeable inputs at domestic prices 180
Value of tradeable inputs at world prices 560
Sales realization at domestic prices 1,000
Sales realization at world prices 800
Calculate
(a) Effective Rate of Protection (ERP) of the project. Comment on the ERP
(b) If the exchange rate of rupee per US dollar is 35, what is the Domestic
recourses cost of the project?
Solution:
Inputs costs:
Traded 700 560
Non-Traded 180 180
Net-value added 120 60
Value added at domestic prices - Value added at world prices
ERP = ×100
Value added at world prices
120 − 60
= ×100 = 100%
60
If value added at domestic prices is same as the value added at world prices, ERP
= 0 which means project does not enjoy any protection. Here the project enjoys
100% protection against international competition.
LIMITATIONS OF SCBA
CONCLUSION
Thus the project has to be appraised that the project will generate sufficient return
on the resources invested in it. The viability of the project depend on technical
feasibility, marketability of the products at a profitable price, availability of
financial resources in time and proper management of the unit. It should be also
within the framework of national priorities bases on social cost benefits analysis.
In brief a project should satisfy the tests of technical, commercial, financial and
managerial feasibilities as given above.
SELF ASSESSMENT QUESTION
1. What are the required information for the proper project appraisal?
2. Describe the different stages in the project appraisal process.
3. Write “Significance of appraising the managerial competence from an
industrial project and how it can be made?
4. Explain the different methods of profitability appraisal of a project.
5. What do you mean by SCBA? How it can be made.
6. What are Economic Rate of Return and Effective Rate of Protection and
how it could be computed?
7. Explain the UNIDO guidelines for SCB Analysis.
LESSON – 7
PROJECT PLANNING
OBJECTIVES
INTRODUCTION
Project Planning is foreseeing with blue print towards some predicated goals or
ends. Project plan is a skeleton which consists of bundle of activities with its
future prospects; it is a guided activity. It is a plan for which resour4ces are
allocated and efforts are being made to commence the project with great amount
of preplanning, project is a way of defining what we are hoping to do about
certain issue. The project alone is not responsible for what happens during the
course of a planning. Project is a final form of written documents that guides us as
to what steps need to be taken next.
• It should provide a basis for organizing the work on the project and
allocating responsibilities to individuals.
• It is a means of communication and co-ordination between all those
involved in the project.
• It induces the people to look ahead.
• It instills a sense of urgency and time consciousness
• It establishes the basis for monitoring and control.
It planning a project, the project manner must structure the work into small
elements that are:
The various activities involved in Project planning is given in the following chart
as Project Planning Structure.
The different way of allocating the activities of a project are important means of
delineating various degrees of decentralization. These are three main ways in
which project planning can be decentralized into manageable divisions viz.,
Project planning by subject
Planning in phases
Comprehensive project planning covers the following; planning the project work:
the activities relating to the project must be spelt out in detail. They should be
properly scheduled and sequenced.
Planning the manpower and organizations: The manpower required for the project
must be estimated and the responsibility for carrying out the project work must be
allocated.
Planning the manpower and organizations: The manpower required for the project
must be estimated and the responsibility for carrying out the project work must be
allocated
Planning the information system: The information required for monitoring the
project must be defined
Single use plans: It includes programmes schedule and special ways of operating
under particular circumstances. Single plans are meant as objectives which centre
on focused and desired results. In can also be known as short term plans to deal
with the specific problem for specific place with prescribed time limit.
Standing plans: Standing plans are those plans which include policies, standard
methods and standard operation, procedures. They are designed to deal with
recurring problems. It may be treated as standard document to be used in different
plans to deal with a set of problems. The design procedure and steps are already
described. It may require adjustment considering the unit of operation.
Project planning begins with the end result, the goal and works backward. Often
the focus of project planning is on questions like who does what and when before
such operational planning is done, the objectives and policies guiding the project
planning exercising must be articulated.
If the project team lacks a clear goal, even excellent skills and the best equipment
will not enable the team to do a good job. Well defined objectives and policies
serve as the framework for the decisions to be made by the project manager.
Throughout the life of the project, he has to seek a compromise between the
conflicting goals of technical performance, cost standard and time target. A clean
articulation of the priorities of management will enable the project manager to
take expeditious actions.
Performance objectives
Policies are the general guide for decision making on individual actions. Some of
the policies of a project are:
There are different tools available for drawing the project plan in a formal way.
They may be grouped into two categories. Traditional tools and network analysis.
Gantt Chart: It is the oldest formal planning tool designed by Henry Gantt in
1903. Under this, the activities of project are broken down into a series of well-
defined jobs of short duration whose cost and time can be estimated. It is a
pictorial device in which the activities jobs are represented by horizontal bars on
the time axis. The length of the bar indicates the estimated time for the job. The
left hand end of the bar shows the beginning time, the right hand and the ending
time. The manpower required for the activity is shown by a number on the bar.
An illustrative bar chart is shown as follows.
2 2
3 8
4 5
5 4
The project review dates are indicated by a vertical dotted line and at this time a
horizontal line is drawn beneath each bar to indicate the progress actually made
upto that date. The length of the progress line is then drawn to represent the
percentage of the job that has been completed at the review date. The merits and
demerits of Gantt are below:
Network techniques
These are more sophisticated than the traditional bar chart. In these
techniques, the activities, events and their inter relationships are represented by
net work diagram which is also called an arrow diagram. The following diagram
shows an illustrative network diagram.
3 D 5
E
B
C 4
A G H I
Thus, a comprehensive project planning must have SMART goals, sound policies
and designed scientifically.
PROJECT DESIGN
So, project design is the heart of the project entity. It defines the individual
activities which go into the corpus of the project and their inter relationship with
each other. It identifies the flow of events which must take place before a project
can start yielding the results for which it has been set up. Project designing is
primarily convened with the development of the detailed work plan of the project
with time schedule. The design can most conveniently express the inter-
relationship between various constituent activities of a project in the form of a net
work diagram. This design gives a clear picture of the work elements of the
project and paves the way for detailed identification and quantification of the
project inputs.
TIME ESTIMATE
While designing a project it is essential to fix/set time target for each and every
activities of the project. It helps to complete the projects as per time schedule
through which it can enjoy optimum benefits. Time estimate can be made by
making a work break down of the project, estimating the time schedules for each
work, putting them in proper sequence as per technical or any other logical
manner and finally matching their build-up on a time scale with the available
resources.
The time estimation for completing a project depends not only the work
content/sequence but also be influences by resources and constraints. So, the basic
factors involving in the time estimation are work, constraints, resources and also
the data available. Besides that, three time values can be obtained for each activity
of a project viz.,
The optimistic time is the time required if no hurdles or complications arise. The
most likely time, tm, is the time in which the activity is most likely to be
completed. This estimates takes into consideration normal circumstances, making
allowances for some unforeseen delays. The pessimistic time, tp, is the time
required if unusual complications and / or unforeseen difficulties arise.
Average time
Once the three time estimates for each activity are obtained, the expected value of
activity duration is calculated. The expected value, te, is usually obtained by the
formula:
to + 4 tm + tp
te =
6
where :
te = optimistic time
tm = most likely time
tp = pessimistic time
The time estimates for various activities of a project is given in the following
The network diagram with average time estimates is shown in the following
figure:
a2
13
15
13
a1 A5
8
0
2
12 2
A3 8
A4
12 20
Difference approaches of time estimation
In this approach data from recently competed projects are used without
consideration of a , p and n. Often these data are used for estimating broad work
package duration. Their values are also used for estimating the overall project
duration.
3. Estimating approach:
to + 4 tm + tp
te =
6
This approach has been used for calculating the average time as given above.
4. Range Estimates:
These estimate may also be a estimate or even past data. No two do time data
from past projects for any work will be the same; they can be better expressed by
a range.
e.g. vendors quite often guest deliveries like 6-8 months or 10-12 months.
CONCLUSION
Thus, Project plan is a skeleton which consists of bundle of activities with its
future prospects. It helps to allocate the resources, efforts and time in a project
way which increases the efficiency of project performance. Moreover, it helps
exercise control and monitor the project work thereby facilitate the time
completion of project.
OBJECTIVES
PROJECT SCHEDULING
It is one of the key components in the project control system. It refers to when it is
to be done and how much is to be done. The purpose of scheduling is to obtain
commitment, communicate the commitments to concerned and ensure
coordination through self regulating first efforts. The scheduling is helpful to link
the summarial activities appearing in the network.
PURPOSE: The ongoing scheduling and monitoring process enables one to:
Monitoring is an action inducing efforts meaning thereby that it would ensure that
commitments made by various agencies are followed by action.
For monitoring the time aspect of the projects, the efforts should be taken.
So schedule control is to ensure adherence to the agreed time schedule for the
project. Monitoring and control of project and time, therefore becomes essential
to ensure adherence to project schedule.
BOUNDING SCHEDULES
Early start schedule refers to the schedule in which al activities start as early as
possible. In this schedule
a) are events rear at their earliest because all activities start at their earliest
starting time and finish at their earliest finishing time.
b) there may be time legs between the completion of certain activities and the
occurrence of events which these activities lead to, and
The early start schedule: It suggests a cautious attitude towards the project and a
desire to minimize the possibility of delay. It provides a greater measure of
protection against uncertainties and adverse circumstances. Such a schedule
however, calls for an earlier application of resources. A model for early start
schedule is given below:
2 5
3 4
0 5 10 15 20 25 30 35 40
2 5
i.) 5 occur10
0all events 15latest 20
at their because 25 30
all activities 35 at their
start 40latest
starting time and finish at their latest finishing time.
ii) some activities may start after a time lag subsequent to the occurrence of
the proceeding events.
The late start schedule reflects a desire to commit resources late as late as
possible. However, such a schedule provides no elbow room in the wake of
adverse developments. Any unanticipated delay results in increased project
duration. A model for late start schedule is given below:
2 5
3 4
0 5 10 15 20 25 30 35 40
Example 1:
Let us consider a small project for which the network diagram is shown in fig.
2
2days
1 day
2days 3 1day
1 5
6 3days
4
2days
In fig. activity duration is shown above the activity arrow and manpower
requirements are shown below the activity arrow. Only 12 men are available for
the project (a manpower resources constraint).
The early start schedule of this project is shown as a graph on the horizontal time
scale in fig.
Looking at the manpower requirements for the early start schedule we find that it
is as follows: 20 for the first day, 14 for the second day, and 5 for the fifth day.
Obviously this schedule is unacceptable in view of the manpower constraint. So,
we explore the possibility of shifting activities. Our efforts at shifting activities,
keeping the project duration at five days soon reveals that nmo schedule is
feasible with only 212 men. So we extend the duration of the project by one day
try various schedule to see whether we can find a feasible schedule. A little
juggling of activities shows that a schedule like the one shown in fig. is feasible –
this is the best we can do.
SCHEDULING TO MATCH REALIZE OF FUNDS
The cost estimates for various activities of our illustrative project is given in the
table. For out discussion here weeks have been changed to months.
Cost estimates
Total 1,56,00,000
The government has decided to release Rs. 1,56,00,000 required for the project in
the following manner.
Rs. 69,00,000 in the first year Rs. 68,00,000 in the second year, and Rs. 19,00,000
in the third year. It has also stipulated that the unspent amount would lapse and
hence cannot be carried forward.
2. A rate of spending greater than that of the early start schedule is not
possible (This is because in the early start schedule all activities start as
early as possible). Any release of funds above the early start schedule
requirement curve is beyond the capacity of the project to spend.
3. The rate of spending corresponding to the late start schedule is the
absolute minimum necessary to complete the project on time. If the rate of
spending is less, than that corresponding to the late start schedule the
project duration will have to be necessary extended.
4. A pattern of funds release lying between the two bounds, early states
schedule requirement and late start schedule requirements, prima facie
suggests that a schedule can be worked out without extending project
duration.
Let us not look at the cumulative funds release pattern for our illustrative project.
This lies between the early start schedule requirements as late start schedule
requirement. So prima facie it suggests that a feasible schedule without extending
the project duration can be developed. Let proceed further and consider
scheduling year by year. The activities thus begin in year 1 according to the early
start schedule are (1-2) and (1-3). If both these activities are commenced as early
as possible, the fund requirement for year 1 would be Rs. 84 lakhs. Since this
amount exceeds Rs. 69 lakhs, the amount to be released in year 1, the expenditure
in year 1 has to be reduced by Rs. 15 lakhs. For this we consider the possibility of
shifting activities to subsequent periods. Looking at activities (1-2) and (1-3) we
find that (1-2) is on the critical path, so there is no flexibility available with
respect to it. Activity (1-3), however, can be shifted as it is not on the critical path.
Since activity (1-3) requires Rs. 5 Lakhs per month it has to be shifted by three
months so that the amount spent in year 1 in equal to the amount released in year
1. Since there is free float of six months for activity (1-3), we shift it by three
months.
We not go to years 2. The effects of shifting activity (1-3) by three months are as
follows: (i) the funds requirement for year 2 on account of activity (1-3) increases
by Rs. 15 Lakh over and above what it is for the early start schedule, (ii) The
earliest finishing time moves to 23 months from 20 months. Since this shift occurs
within year 2, there is no change in funds requirement on account of activity (3-
4), (iii) The earliest starting time for activity (4-5) moves to 23 months from 20
months and the earliest finishing time for activity (4-5) moves to 25 months from
23 months. This decreases the funds requirement for year 2 by Rs. 7.5 lakhs = Rs.
75.5 lakhs. However, the funds budgeted for year 2 are only Rs. 68 lakhs. So we
consider the possibility of shifting some activities to year 3. We find that by
shifting activity (4-5) to year 3 the expenditure in year 2 can be reduced to Rs. 68
lakhs, the budget of the year. As a result of this shifting the expenditure for year 3
(first four months of it) equals the budgeted funds release for year 3. The schedule
arrived at finally is shown in Fig.
In view of the practical difficulties in using linear programmer for solving large-
scale scheduling problems, heuristic programs have been developed. A detailed
discussion about these aspects are given in paper 4.
COST CONTROL
Cost control is not only “monitoring” of cost and regarding perhaps massie
quantities of data, but also analyzing the data and to take corrective action before
it is too late. Cost control should be performed by all personnel whoever may be
the cost centre projects office. Cost control is actually a such system of the
management cost and control system. The purpose of any management cost and
control system is to establish policies, procedures and techniques that can be used
in the day-to-day management and control of projects and programs. The planning
and control system must, therefore, provide information.
The appropriate system must consider a cost/benefit analysis, and include such
items which are:
PROJECT COST
A well disciplined Management Cost Control System (MCCS) will produce the
following results:
1. Policies and procedures that will minimize the ability to distort reporting
3. Weekly term meetings with a formalized agenda, action items and minutes
Management must compare the time, cost and performance of the progress to the
budgeted time, cost and performance, into independently but in an integrated
manner. The first purpose of control therefore becomes a verification process
accomplished by the comparison of actual performance to date with the
predetermined plans and standards set forth in the planning phase. The
comparison serves to verify that:
In another words, the comparison verifies that he correct standards were selected
and that they are properly used.
The second purpose of control is that of decision making. Three useful reports
are required by management in order to make effective and timely decision:
The project plan schedules & budget prepared during the planning phase
These reports are then supplied to both the managers and the doers. Three useful
results arise through the use of these reports, generated during a thorough decision
– making stage of control.
Identification of any major deviation from the current program, plan, schedule
and budget
The management cost and control (MCCS) takes on paramount importance during
the operating cycle of the project. The operating cycle is composed of four
phases:
These four phase, when combined with the planning cycle phase I constitute and
closed system, network that forms the basis for the management cost and control
system.
1. At zero date:
The control estimate prepared before the zero date will be very soon overrun
unless design and engineering procedures are constantly reviewed. For which
value engineering review should be carried out during the following stages of
engineering development.
Building design
After engineering the next important phase for cost reduction is procurement.
Normally, competitive acceptable item at the lowest cost. But competitive bidding
alone will not ensure procurement at lowest cost unless the following steps are
taken in addition to competitive bidding.
Purchase procedure
4. During construction:
There is not much scope for cost reduction during construction. However, there
are certain as listed below on which close control must be exercised for keeping
cost down.
Extra items,
Cash flow projection/forecast showing the sources and uses of cash (money) for a
given period is an important as balance-sheet in that period. The inflows would
typically be revenues from sales of products, sale of fixed assets, issue of shares
and loans, out flows would be costs incurred requiring payments to creditors,
purchase of fined assets or investments etc. Budgeted, cash flow must be made
along with the control flow.
The difference between budget and actual for each period is known as variance.
Analysis of the period and cumulative variance provide a control mechanism
helping to ensure that each expenditure and commitments are not allowed to rise
above the projects ability to provide the funds from its operations.
A value engineering review uses costs as the basis of review and ensures that
value is included in the design. Value of an item, in this context, would mean the
minimum cost at which the function provided by the item under review from an
other item. In this process, the cost of the item can be brought down without
compromising the essential performance the value goes up.
The various stages at which value-engineering review could be carried out have
been show in the following fig.
BASIC PACKAGE
REVIEW
TENDER WORK
PACKAGE REVIEW
POST CONTRACT
ENGINEERING
REVIEW
In can be seen from the figure that much benefit can be obtained with vary little
effort when value engineering is applied at the early stage of the project. Through
systematic value engineering, it is claimed that 10-20% of the project cost can be
easily reduced. The major part of this saving can come from value engineering
review of the basic engineering review. Whatever may be the stage, value
engineering has to deal with function and cost. For this cost function visibility is
essential. The cost of each function will be worked out by estimation the cost of
each work package. When the cost of each function is expressed as percentage of
the total project cost and also compared wherever possible with the industry
average the cost worth gap in each package and therefore, opportunity of value
improvements gets established. This helps me to find out design alternatives by
suing various study and other creative techniques.
Thus the essence of value engineering is to identify unnecessary cost and then
eliminates it. The methodology of value engineering requires a cost function
visibility. The range and depth of visibility will vary depending on the state of
project development. But what ultimately will ensure an improved value are the
ideas unfortunately be produced mechanically like the function cost work
analysis.
A heuristic is a rule of thumb like schedule critical activities first or schedule the
activity which has the largest independent float in the end. A heuristic program
consists of a collection of such heuristics. In recent years may heuristic programs
have been developed. They are formulated usually as computer programs. These
programs may be broadly divided into two types resources leveling programs and
resources allocation programs. A resources leveling program seeks to level
resource requirements given a constraint on project duration. A resources
allocation program tries to find the shortest project schedule, given fixed
resources availability.
OBJECTIVES
For a company executing projects either regularly or for the first time it would be
necessary for the chief executive to issue what may be called project charter. It
must define the project scope, the project goals, name and authority delegated
project manager, project reviewing authority and request co-operation of all
concerned in the execution of the project. An elaborate effort in this direction may
produce what is known as a project manual.
There are two system for the management of project and they are:
Similarly for effective project control system it is essential to design the tools
such as project planning, project scheduling and project monitoring.
The term factory design refers to the plan for a particular type of building,
arrangement of machinery and equipment, and provision of service facilities,
lighting, heating, ventilation, etc. in the building.
Factory design and layout of the factory are significant aspects of the factory
organizations. They have direct relationship with the process of manufacturing,
productively and value of the product. It also influences the operational costs of
the enterprise. It also boosts the morale of workers and ensure maximum
supervision.
1. Location
3. Plan Layout
4. Functional Smoothness
6. Cost of Building
7. Lighting, Ventilation and Service Facilities
8. Nature of Product
The factory design and layout should be flexible so that it may be adapted easily
to technological change, modernization, diversification and expansion with
minimum cost and time.
While working on factory layout plan, a very important aspect to be kept in mind
is the fact that the movement of materials from one stage of manufacture to the
next should be minimal. For this, this movement has to be streamlined. If this is
not initiated, it will result in the wastage of human effort and time, both of which
have a telling effect on the efficiency of an organization and the cost of
production. In industrial life, the economic and efficient usage of all the factors of
production is the key to profitability and the ability to compete in the market.
PLAN LAYOUT
A plant layout is “a floor plan for determining and arranging the desired
machinery and equipment of a plant, whether established or contemplated, in the
one best place to permit the quickest flow of material at the lowest cost and with
the least amount of handling in processing the product from the receipt of the raw
materials to the shipment of the finished products”.
♦ Proper layout of utilities and services and provisions for effluent disposal,
where necessary
The success of an enterprise to a greater extent depends upon the factory design
and layout. The location, layout, amenities will influence productivity and
facilitate better management. More importantly, the efficiency of the production
flow depends largely on how well the various machines, production facilities and
employee amenities are located in a plant.
PROJECT DESIGN
Project design in the first stage in the execution of the project. Project design is
concerned with developing project scheduling techniques and also drawing the
schedule for implementation fo the project. This is more or less a time frame for
each phase in the project development. It includes major items of project
implementation such as finding of location, construction of building, procuring
plant and machinery and finally executing the production prgroamme.
Project design along with network analysis helps to develop work plan of the
project and present it in the form of diagrams representing duration of time for
each work and adjustment of the time schedule framed with reference to the
problems that usually arise in the project execution. Project design is useful to the
entrepreneurs in the following ways:
4. It defines the individual activities which go into the corpus of the project
and their interrelationship with each other.
5. It enables to identify the know of events which must take place for the
successful completion.
With the advent of the computer and large-scale introduction of computer based
planning and control in Indian public castor units, network analysis cn
considerably enhance managerial effectiveness in the context of any time bound
action programmes. Petty defaults have caused big diseconomies in the public
sector enterprises in this country. Computer-based network analysis can handle
these problems economically and efficiently. The binding condition is, however,
that management is serious in effecting economies in different areas of activities;
and activities and events are closely watched for initiating corrective action in
proper time.
The main task of a project manager is to design systems and manage through
them. A business system refers to the total picture of men, machine, materials and
paperwork involved in the implementation of any phase of a project. System has a
planned sequence of operations for carrying out a recurring work involved in a
system with family and consistently which is called a procedure.
The first step in system design for project management is to conceive the total
physical system and its natural modules. In the next step, the connection between
these modules has to be identified. Finally, a control system using information as
the media has to be developed for self control as well as forced control of the total
project. Project management system is mainly constituted by project work system
and project control system.
Effective planning by dividing the work into manageable elements which can be
planned, budgeted, and controlled.
The project organization represents formally how the project personnel and
outside agencies are going to work. The work breakdown structure defines what
work is to be done in a detailed manner. To assign responsibility for the tasks to
be done, the work breakdown structure has to be integrated with the project
organization structure.
Work breakdown through the hardware approach is, therefore, the only natural
and permanent way of breaking work. Added to this, using a rational codification
number it is possible to establish the linkage of the hardware element with
software and agencies. Performance target, schedule, budget and accountability
can similarly be fixed for any hardware element. Thus, hardware-oriented work
breakdown structure provides the basic framework for project work system
design.
Project Execution Plan (PEP
Project execution plan (PEP) refers to that exercise of matching the project
hardware and software with the executing agencies to that a viable work system
emerges.
1. Contracting plan
3. Organization plan
Project execution plan is a strategic plan – it does not deal with the operational
details of building a project. The operational details are covered in a network plan
which is developed later after the project execution plan is approved by the
owner’s plan for project execution and, therefore, it must from the basis for
development of all operational plans including network plans.
Contracting plan
This is the first step in the preparation of a project execution plan. Owners
invariably need some agencies with whom they can share responsibilities. In the
interest of developing self-regulation systems it would be necessary to contract
out those areas where the owner’s company does not have inherent competence.
Work packing plan will be the next important step in the preparation of the project
execution plan. A work package in a project is the smallest division of work
where it stil retains the characteristics of a project. This when a project is
progressively divided into systems and the system into subsystems, a stage is
ultimately reached where further division into components will strip it of its
multi-disciplinary character – the work at that stage can be consideration these
packages, grouping them or keeping them as they are, in order to from viable
contracts.
Work packaging can also ensure that all agencies in a project think and channelise
their effort in one direction, i.e. towards the completion of the packages only.
Thus, design engineers, procurement engineers and construction engineers will
then give priority to their work in relation to a work package and not according to
functional convenience. Fulfillment of the requirements of a work package will
alone be considered and achievement and not the mere volume of work
completed. This will lead to a well-coordinated completion of the project.
Thus, the contracting plan and work packaging plan together produce a list of
contracts with the scope of work defined in terms of self-contained work
packages.
Organization plan
Having decided the number of contracts and their scope, the owner is now in a
position to set his own house in order. The owner can deliberate on the form of
organization to be adopted so that the interest of the project is best served.
The last section of the project execution plan deals with system and procedure. A
heavy emphasis has to be placed on routine system and procedure so that no
intervention is required in the day –to-day operation of a system. There are at
least eight routine sub-system of project management for which appropriate
procedures can be conceived right at the start of the project implementation.
1. Contract management
2. Configuration management
3. Time management
4. Cost management
5. Fund management
6. Materials management
7. Communications management
While the routine system and procedure for each company will be
different, in most of the cases the difference may not be very significant. it is
quite possible to examine the system and procedure of one project and adapt it
after making minor modifications.
PROJECT DIARY
Maintaining diary help the person to get relief from, the burden of carrying
everything in their head. It could boost up one’s memory theryby helps to avoid
the problems of unattended work due to lack of memory.
Once these systems and procedures have been developed for the project, it is the
duty of the project administrator to set for smooth take off. It requires proper
project execution systems which should be more concerned about external
intervention for survival than on its internal self regulating capability.
♦ Project direction
♦ Project co-ordination
♦ Project communication
♦ Project organization
♦ Project control
These terms are often construed as actions for getting results. Too often the terms
are used interchangeably to mean management. Therefore, for the successful
execution and administration of project requires direction, organization, co-
ordination, communication and control all at the same time but in varying
proportion. We shall discuss the nature of significance of project direction,
communication, co-ordination in this lesson.
PROJECT DIRECTION
Project direction refers to the use of authority to channelise the activities of the
project on desired lines. During the initiation of start-up period of the project this
direction shall be provides by the project manager. But once the project inters the
production period direction will be exercised by other members of the project
organization of else the project will stall.
Project initiation/start-up
The need for project direction as mentioned before, is maximum at the time of
start-up of implementation. The project manager during this period needs to
provide directions relating to:
1. Scope of work
3. Basis of work
5. Schedule of work
6. Budget of work
8. Co-ordination of work
The success of a project is heavily dependent on team work. All the items from 1
to 10 are finalized with the involvement of project participants or else the
directives will appear authoritarian, and will unnecessarily invite opposition. If
the directions can be formulated through a participative approach, the some can
be issued formally in the name of a project manual with instructions for strict
adherence to the same. Direction, during the project initiation period, means not
simply giving a push to the project; the direction issued at this stage will, in fact,
shape the destiny of the project.
Project start-up, design review, purchase order and work orders are on-time
directions. But a project will require only when unforeseen events occur, directors
otherwise will require to be provided when problems occur during project
execution. In either case, a decision has to be made as to what should be done and
the same should be authorizing for implementation. Thus, decision making and
direction are part of every-day function of any manager.
Communication in a project
Hence, in any action plan, organization of work and people is a basic project
management requirement. It is suggested that this must receive a communication
orientation.
PROJECT CO-ORDINATION
Co-ordination can be defined as the effort to bring parts into super relation for
harmonious functioning. A well co-ordinated project is as pleasing as a price of
music.
The word breakdown structures provide the basic frame work for both physical
ant time co-ordination preparation of work breakdown structure, structuring the
organization, establishing a project procedure manual, housing people under one
roof wherever possible. – sets the stage for effective physical co-ordination.
Once the stages are so set, the day to day co-ordination in a project is ensured
through.
a) squad check
c) communication
A project is a group effort and in group there will always be differences of option.
But coordination is not merely smoothing out differences; it is re-integration of
the parts into a whole facing into account the subdivided functions and their
interest.
Time and cost over-runs of projects are very common in India, particularly in the
public sector. Due to such time and cost over-runs, projects tend to become
uneconomical, resources are not available to support other projects, and economic
development is adversely affected. To minimize time and cost over-runs and
thereby improve the prospects of successful completion of projects. A lot of
things can be done to achieve this goal, the more important ones appear to be as
follows:
Adequate formulation
Advance action
Adequate formulation
Care must be taken to avoid the above deficiencies so that the appraisal and
formulation of the project is through, adequate and meaningful.
A sound organization for implementing the project is critical to its success. The
characteristics of such an organization are:
The authority of the project leader and his team is commensurate with their
responsibility.
Advance action
When the project appears prima facie to be viable and desirable, advance action
on the following activities may be initiated: (i) acquisition of land, (ii) securing
essential clearances, (iii) identifying technical collaborators / consultants, (iv)
arranging for infrastructure facilities, (v) preliminary design and engineering, and
(vi) calling of tenders
Once a project is approved, adequate funds must be made available to meet its
requirements as per the plan of implementation – it would be highly desirable if
funds are provided even before the final approval to initiate advance action.
Piecemeal, ad-hoc, and niggardly allocation, with undue rigidities, can impair the
maneuverability of the project team. It is a common observation that firms which
have a comfortable liquidity position are, in general, able to implement projects
expeditiously and economically. Such firms can initiate advance actins
vigorously, negotiate with suppliers and contractors aggressively, organize input
supplies quickly, take advantages of opportunities to effect economies, support
suppliers in resolving their problems so that they can in turn redound to the
successful completion of projects, and sustain the morale of project-related
personnel at a high level.
To minimize time over-runs, it may appear that a turnkey contract has obvious
advantages. Since these contracts are likely to be gagged be foreign suppliers,
when global tenders are floated, a very important question arises. How much
should we rely on foreign suppliers and how much should we depend on
indigenous suppliers? Over-dependence on foreign suppliers, even though
seemingly advantageous from the point of view of time and cost, may mean
considerable outflow of foreign exchange and inadequate incentive for the
development of indigenous technology and capability. Over-reliance on
indigenous suppliers may mean delays and higher uncertainty about the technical
performance of the project. A judicious balance must be sought which moderates
the outflow of foreign exchange and provides reasonable fillip to the development
of indigenous technology.
Effective monitoring
In order to keep a tab on the progress of the project, a system of monitoring must
by established. This help in:
FACTOR DETERMINANTS
Project Managers:
The project manager is the crux of the coordinating authority with various
functional heads. He is the seminal coordinating authority forging a lasting
rapport with the financial institutions, government and statutory bodies, etc. He is
the main plank and fulcrum of the project and he is a person who has been
associated with the project right from the scratch to the completion of the project.
He play role like a lynch-pin. He encompasses into his fold the whole gaumt of
the project team and also entire spectrum of clientele contractors and turnkey
consultants. The foremost ami and motto of the project manager is to accomplish
the project cost within the stipulated amount. Hence, it can be observed that the
project manager plays a vital role in the firmament of industrial project.
Project Team:
Use of Computers:
EXTERNAL FACTORS
Construction Management:
Project Consultants:
PROJECT ORGANIZATION
OBJECTIVE
INTRODUCTION
Once a project has been established and the goals are set, the project
manager/sponsor has to act to achieve these goals, since a manager/sponsor gets
things done through others and also since most of the projects are multi
disciplinary, a project manager has necessarily to look around for help. This help
can be experted both from internal and external and sources; internally, from
within the institution which employs the project manager and externally from
various institutions and individual so having competence and skill relevant to the
establish systematic arrangement of works, activities (or) talks between
individuals and group with the necessary allocation of duties and responsibilities
among them to achieve project objectives. This process in nothing but a project
organization.
DEFINITION
The relationships in the project setting are dynamic, temporary and flexible.
Hence, there is a need for entrusting an individual or group with the responsibility
for integrating the activities and functions or various departments and outside
organization involved in the project work. Depending on the authority that is
given to the person responsible for the project, the projects organization may take
one of the following forms:
B. Divisional organization
C. Matrix organization
He serves only as the focal point for activity control, that is, a center for
information. The project manager does not have authority and direct
responsibility of line management. He may gently coax line executive to strive for
the fulfillment of project goals.
The project manager in this position, does not make any decision for the project,
nor does he provide any staff service top the functional departments who make all
the decisions relating to the project. The project manager merely collects
information. Collects and communicates the same to the chief executive.
This arrangement may be chosen by a chief executive who wants to directly
control the project but cannot devote much time to keep track of details. The chief
executive may expect the project manager to co-ordinate and expedite the project
which the latter will find a very trying proposition in view of his not having any
authority.
Chief Executive
Project Manager
Demerits
1. The project manager may find it difficult to exert leadership and feel
unsure of his role due to deprival of formal organization authority. He has
to influence others only through his professional competence closeness to
top management and persuasive abilities.
2. This arrangement may work for every small projects. It cannot works for
large projects even if the project manager is provided with supporting staff
since the real person, who in this arrangement wields authority and can
therefore co-ordinate and expedite the project, is the chief executive who,
as stated earlier, may not have much time for the project.
B. DIVISIONAL ORGANIZATIONS
Under this form of project organization, a separate division is set up to implement
the project. Headed by the project manager, this division has its complement
personnel over whom the project manager has full like authority. In effect, this
form of organization implies the creation of a separate goal oriented division of
the company with its own functional departments.
This form of organization facilitates the process of planning and control, brings
about better integration of efforts and strengthens the commitment of project-
related personnel to the objectives of the project, the project manager in this role
provide departments who will executive the project.
The project manager, in this case, will be a specialist in project management toosl
and techniques, and in view of his superior knowledge relating to scheduling,
budgeting and information systems, he is in the best position to advise other
functions. A project manager in this role can also carry out service activities like
collection and transmission of data, follow-up one functional group to service
another group to service another group, maintain records, measure progress,
analyze progress and prepare progress reports. He may also act as a single focal
point regarding communication between various participating functions and
between his company and other interacting companies.
Chief Executive
Demerits
The direct approach, though devoid of any authority, may not get automatically
accepted unless this has the backing of the chief executive and in course of time
becomes an organizational practice. Yet if lines of communication are not made
direct, there would be inordinate delay and much of the advantage that could be
expected from the arrangement would not be there.
C. MATRIX ORGANIZATION
Project Manager A1 B1 C1
X
Project Manager A2 B2 C2
Y
Project Manager A3 B3 C3
MATRIX ORGANIZATION
Chief Executive
Civil Mechanical
Project Manager
X-Project
Staff X-Project
Project Manager
The main feature in the matrix operation is that, the parties involved in the matrix
will have a common concern as well as a specialist concern. As long as the parties
respect the specialty of the others and look to one another for help and support for
the common cause, a matrix will work extremely well. But is one assumes that
what should have even a common cause is not common, and also believes that
help would not be forthcoming unless the other party is forced, matrix is unlikely
to succeed.
Ideally one would like to see both the parties are understanding mutually
supportive and not trying to overtake each other. If the matrix ever operated at
that level, the arrangement can be called a balanced matrix. Much as one would
like to see a matrix remain balanced, it may not remain so not early because of the
personally factors of the partners but because the company may not want it to
remain balanced.
Thus, a matrix may be filled either to the project side or to the functional side
depending on circumstances. If the project influence is more in decision-making
for the project, then the arrangement is considered a strong matrix. On the other
hand, if the functional departments are seen to be influencing the decision-making
more, the arrangement is considered a weak matrix. While a company may
operate on matrix, one may see it operating with different strengths in different
projects.
But such problems are very real in the operation of a matrix. It may be weaker
than the weakest acceptable or stronger than the strongest desired. A balanced
matrix where there is a balance of power between the project manager and
functional manager is an ideal but non-exist out situation. Therefore, many people
consider a matrix a complex organizational arrangement and would like to avoid
it if possible.
Trouble normally starts when the functional departments would not take-up the
work that is needed first or would not deploy resources to do it within the time
and budget. The work may happen when resources to do it within the time and
budget. The work may happen when resources are withdrawn without the project
manager’s prior knowledge. When things, occur as above, the arrangement not
doubt is weak matrix. On the other hand, if the project manager starts deciding
who should work for them? On the other hand, if the project manager starts
deciding who should work for them, encourages violation of functional standards
and norms gives technical decisions without consulting functional departments,
does not allow withdrawal of staff for training or optimum utilization of the
potential of the concerned staff, then the arrangement is stronger than a strong
matrix. In either case the company executing the project is not going to get the
best from its people. Form the project manager; they will be required to follow the
home organization’s policies and procedures. If there are direction from the
project manager asking violation of functional policies and procedures, the task
force will notify both the functional head and the project manager. The functional
manager may either accord approval or take it up in case, the functional manger
and the project manager cannot settle it between there selves. On the other hand,
there may not be any reference at all to the functional manger or corporate
management, if the project manager sorts it out at his level by taking the
functional staff into confidence whenever decisions are made.
Unlike the matrix the loyalty of the functional staff in this arrangement is clearly
with the project. The functional department’s influence is virtually non-existent.
Therefore unless the functional representative have strong functional
commitment, functional excellence is likely to e compromised for expediency.
The functions will require strong corporate management support to ensure
adherence or policies and procedures laid down by them.
This arrangement, as can be seen in just the opposite of the arrangement shown in
the Figure, Functions in this arrangement have been relegated to the staff position
and the position and the project has assumed the dominant like role. Naturally, the
time and cost objective of the project will receive the best attention in this
arrangement, but one cannot be too sure about the quality objective. The project
with this arrangement moves very fast, and that is the single dominant reason why
many people would prefer a task force arrangement.
There may not be any real risk in going for a task force arrangement if the
technology for the project is simple, and the project is also small. The functional
staff in this case need not be top specialists; one specialist may cater for multiple
disciplines. This ensures maximum utilization of specialist time which is normally
not expected to happen in a task force arrangement.
Such an arrangement is obviously possible when the project is too large and
complex or geographically so located that there is no way of managing it without
granting autonomy to the term handling the project. The project manager for such
a project will obviously be a very senior person to justify delegation of so much
authority by the company. The project manager, in such an arrangement, will be
required to carry out lot of administrative functions besides his core project
business. It would not be surprising to find the project manager spending more
time in the administrative matters than on the business of the project in this types
of arrangement.
Totally Projectized organization
Chief Executive
The traditional form of organization is not suitable for project work because it has
not means of integrating different departments at levels below the top
management and it doesn’t facilitate effective communication, coordination and
control. Hence, project organization may take one of the following forms – line
and staff organization, Divisional organization, Matrix organization, Task force
organization and Totally projected organization.
CONCLUSION
Thus this chapter discusses different forms of organization of human resources for
the effective execution and management of project.
SELF ASSESSMENT QUESTIONS
***********************
LESSON – 11
PROJECT CONTRACTING
OBJECTIVES
CONTRACTS
The project charter and the organizational arrangement accords the project
manager appropriate authority over the in-house resources But not all projects can
be executed with in-house resources for the execution of the project. When a
project manager has to get things done with resources over which he has no direct
authority, it becomes necessary to acquire the required authority in lieu of some
considerations. Such an arrangement can be termed as a contract and the authority
so acquired as contractual authority. If this authority is acquired in house through
a contract, then the process can be termed as internal contracting. All other
contracts for the acquisition of authority can be termed as internal contracting. All
other contracts for the acquisition of authority can be termed as business
contracts.
BUSINESS CONTRACTS
In order in enter into a contract, there must first be an offer or proposal signifying
the willingness of one arty ot do ro abstain from doing something at the desire of
the other party. The desire of the other party is expressed in the enquiry often
known as Notice Inviting Tender (NIT) and the offer to carry out the services t
certain terms is known as Tender.
The sequence of events resulting in a business contract are as shown below:
R’S OF CONTRACTING
If one choose not to over-play the legal aspects, contracting itself can be found to
constitute the 3 ‘R’s in the case of contracting are: Responsibility, Reimbursement
and Risk.
1. Responsibility
2. How to define the work parcels so that the contractors now their scope
precisely and there is not overlapping, undefined, unallocated or
ambiguous work areas.
Collectively, the above are often referred to as scope of work. Schedule of work,
technical specifications, scope drawings, special conditions of contract,
responsibility of matrix and special write-ups in appropriate combinations are
used to ensure clarity.
Contact planning
The factors listed below may be considered while taking a decision on the number
of contracts.
4. Availability of contractors
10. Current work load of the contractor and capability of the contractors
II. REIMBURSEMENT
METHODS OF CONTRACTING
Engineers & Contractors take a single commitment for the design, engineering,
procurement, delivery, construction, erection and commissioning of the project
and training of operating and maintenance of personnel.
1. Lumpsum
2. Fee plus reimbursement
Turnkeys contracts are used for complete plants. Usual turnkeys contracts have
some sort of advanced technical know-how, which limits the number of
competitors that can bid-know-how for construction and operation of the plant. In
turnkey projects, the owner is not involved until the project/plant is ready for
operation/commission. But, companies require some involvement during the
execution. As a result, the turnkey contract now carefully detail the company’s
rights and responsibility.
Turnkey Contracting
A turnkey contract may be defined as: “a single contractor acquires and sets al
necessary remises, equipment, and supplies operating personal to bring project ot
state of operational readiness. All that the customer needs to do is to turn the key
to begin full effective usage of the new facility. Some time the contractor
continues to assume operational control. Turnkey facilities are appropriate for
customers who are unable to perform or wish to avoid their own subcontracting
for ordering and testing components acquired from several vendors. Recruiting,
screening and training is a highly specialized task. A turnkey contractors is
compensated either through surcharges on each item or thorough services
procured for the facility of by a commitment in advance to a fixed price”.
Therefore, turnkey contract may help in cutting down the number of responsibility
centres to the extent of one. In a turnkey project a single contractor has complete
responsibility to supply the owner a plant which is complete and ready for he
owner to operate by simply turning the key. Turnkey thus is an expression for the
extent of responsibility that a contractor undertakes; it is not to be mixed up with
he commercial and payments terms. Turn-key would not necessarily mean a fixed
price contract; it is quite possible for engineering consultancy organizations to
undertake turnkey responsibilities for projects ever without having capabilities of
supplying and financing. On the other hand, in a lumpsum turnkey contract a
contractor offers the owner a complete plant for a single price. Even when a
turnkey contract is entered into the process of dividing the work does not totally
stop with the decision to go turnkey. It only reduces the number of agencies the
owner is required to coordinate. The turnkey contractor in turn will be required to
subdivide the work further as it is not possible to have all the capabilities required
for a complex project under one single roof.
In the turnkey contract a major advantages to the promoter stems from the fact
that the responsibility for the contract lies with a single source and the promoter is
relived from responsibilities for the equipment or plant and performance.
In the turnkey contract a major advantage to the promoter stems from the fact that
the responsibility for the contract lies with a single source, and the promoter is
relieved from responsibilities for the equipment or plant and performance.
The turnkey contract generally ensures that the projects is put into operation more
rapidly than other contracts since both design and construction are the
responsibility of one entity.
When a turnkey contract extends beyond the commissioning stage the teething
problems of a multidisciplinary project can be resolved by the contractor’s in-
house trained personnel.
Disadvantages of Turnkey Contract
The turnkey contract do not permit the normal checking procedure by the sponsor,
as is sought to be developed by the promoter as it leads to internal conflicts.
In order to make a lupus offer a contractor would like to have all the details. If the
details are not known he would like to build contingencies in his price to take care
of the unknowns. It is this aspect of pricing that can make a lumpsum contract
more expensive than a cost-plus contract.
On the other hand, if the work can be framed out by the owner at a fixed price, the
owner would know at a very early stage of the project his total liability and also if
he is going to be within the approved budget or not. His anxieties to that extent
will be less. With cost-plus contract, the owner would not have the advantage of
knowing what the total cost is going to be till a very late stage. The owner will
therefore, be anxious all he time due to this uncertainty. Naturally, whenever
possible the owner would like to go for a lumpsum contract.
The specially of the cost-plus contract is the opportunity it provides to start work
immediately, thus eliminating the need for detailed scope definition and
preliminary engineering by the contractor in submission of his proposal. It allows
flexibility to the owner to change his mind at any stage without being forced to
pay exorbitantly. The owner can also upgrade his design, specification and quality
of construction without any objection from the contractor.
1. Single project responsibility helps manage the total project without any
impediments
2. As the company is authorized to execute the project at agreed terms
without project sponsor’s intervention may smoothen the implementation
process and remain and less susceptible to time overrun.
3. Decision making to procurement, engineering, and construction aspects
can be processed quickly.
4. Little or no competition from small contractors since only by contractors
undertake this type of total project execution.
Disadvantages
Advantage over turnkey is that it allows the owner, a better chance of defining
exactly what he wants, rather than what the contractor thinks he needs.
Owner hires independent consulting engineer to design the pit fully and puts it for
tender. Then the consulting engineer is retained to be the owner’s representative
during the construction phase.
In complex pits, a fast-track approach is adopted whereby the pit is divided into
separate overlapping design/bid/build packages.
BOOT
BOOT is an outgrowth of the latest hue the cry over the boosting private sector
involvement in the development of major projects. There has been a growing
trend in the recent past both in the developing and developed countries, of
encouraging private sector to participate in various projects through concessions
labeled as BOOT project strategies. The term BOOT was introduced in the early
80s by the Turkish Prime Minister Turgat Ozal to designate a ‘build, own and
transfer’ or ‘build, operate and transfer’ project; this term is often referred to as
the Ozal formula.
Smith and Merna defines BOOT as: “a project based on the granting of a
concession by the principal, usually a government, to a promoter, sometimes
known as the concessionaire, who is responsible for the construction, financing,
operating and maintaining he facility over the period of concession before finally
transferring the facility, at no cost to the principal, as a fully operational facility.
During the concession period the promoter owns and operates the facilities and
tries to recover the costs of investment, maintenance while operating the facility
to result a margin of profit”
The related acronyms used to describe concession contracts include:
BOOT projects may be classified on the basis of the method of procurement type
of facility, the location of the facility and the method of revenue generation. They
range from:
♦ Speculative to invited
♦ Infrastructure to industrial/process
♦ Domestic to international
♦ Market-led to contract-led
Country highways, bridges and tunnels, water, gas or oil pipelines and
hydroelectric facilities are considered suitable projects, as a private economic
equilibrium is obtainable. However, subsides are often necessary for high-speed
train networks and light rail trains, as prices paid by users are often low and
governments generally prefer to control prices. The characteristics of BOOT
projects are particularly mass transit railways and power generation, and as such
they have a political dimension of public welfare that is not the features of other
privately financed projects.
BOOT Packages
Construction Packages
Operational Packages
Comprises all the components associated with debt finance, equity finance,
standby loan agreements, shareholders agreements, currency contracts and debt
service arrangement for financing the building.
Resume Package
Comprises all the components associated with revenue generation and includes:
demand analysis, duty and tariff levels, and assignment of revenues, tariff
structures and revenues from associated development.
The BOOT project offers both direct and indirect advantages exclusively for
developing countries like India as follows:
Disadvantages
BOT
BOT, which stands for Built-Operate-Transfer, encapsulates the process
whereby a government turns over to the private sector what would normally be an
public sector project (example, transportation or infrastructure projects) for
building an initial operatin and after a limited period (say a 25 years concession)
transfer back to the government. The expression ‘built-operate-own’ transfer
(BOOT) is also used. The structure of BOT financing normally takes the form of
limited recourse lending to specially incorporated project vehicle which holds the
concession from the host government to carry out the construction and operation
of the project. A concession agreement will usually form the basis of BOT project
financing. It is essentially a license or permission to implement a project, and is
rather a hybrid document. Not only must it be satisfactory to the parties to the
concession agreement, but it must ultimately meet the requirements of project
investors and lenders. Thus it contains commercial terms (for example,
concession period, project infrastructure specification, construction timetable and
concession fee, etc.) and financial terms (for example, ability of lenders to create
security over the concession agreement and project assets, recourse of lenders to
the host government and the effect of premature termination on project
indebtedness). The other variations to the BOT structure are DBFO (design-build-
finance and operate), DCMF (designed-constructed-managed-financed) and BOO
(build-own-operate) schemes.
A contract presumes that the parties entering into a contract are competent and
normal. But if, for instance, the contractor selected for a specific work is not
competent technically, financially or managerially, then the risks will multiply
several times. This uncertainty must, therefore, be resolved at the first instance. A
well laid out procedure for prequalification of contactors and tendering can
resolve this uncertainty. Such a procedure is known as tendering procedure.
A tender may be defined as an offer to carry out certain work or supply certain
material or services in accordance with clearly detailed description and
conditions. The tendering procedure deals with prequalification of contractors,
preparation of tender documents, mode of floatation of enquiry, receipt of tender
guidelines for evaluation of tenders and selection of contractor. We will discuss
this in some details in the context of reducing risk and uncertainty in the
execution of a project.
The need for contractors originally arose because plant sizes grew to such an
extent that it became almost impossible for the traditional equipment suppliers to
perform their own function efficiently as well as to deal with the organization,
administration and overall design problems connected with complete plant
projects. Bearing in mind that a contracting firm will usually tender only for
plants worth several million dollars, it will be appreciated that the preparation of a
tender is a major operation in itself and may cost (in the case of a substantial
project) up to US $ 250,000. The cost of preparing turnkey tenders may be re-
estimated between 1 and 2 per cent of the value of the project, unless it is a repeat
project (such as a complete plant of a similar size).
In the case of large projects, there are likely to be only two or three competitors
tendering, and they are often pre-selected once they have an established reputation
in the same or similar fields with projects of the same order of magnitude. In fact,
some firm now prefer to by-pass the procedure of competitive tendering
altogether on some projects because of the cost involved and instead to negotiate
direct with a single favoured contractor. Nevertheless, a contractor must have the
facilities available to tender for complete plants on a lump sum turnkey basis, if
necessary.
Prequalification of contractors
After evaluation, the short-listed contractors are informed about their selection
and their confirmation obtained as to whether they will submit the tender.
1. Prices
2. Programme
3. Terms of payment
4. Conditions of contract
5. Contract prices adjustment
6. Validity
The document is then issued to the short-listed contractors for submission of their
theder.
Receipt of tenders
The tenderers may make a request to visit the site. Normally, the
purchaser/engineer accompanies the tenderes to the site and provides further
information. There may be a pre-bid conference to clarify the various issues to the
tenderers. Supplementary queries can be clarified through correspondence till the
due date for the bidding. On the due date bids may be opened in front of the
tenderers present. The purchaser/engineer will announce and record the names of
tenderers and prices including prices of alternative tenders. They would also
announce and record the names to tenderers, if any, who are disqualified due to
late submission.
Evaluation of tenders
The tenders are evaluated from technical, commercial, contractual and managerial
angles. Contractor’s confirmation or classifications are sought on various matters
which either do not conform the tender requirements or those that have nto been
offered by the contractor. The correspondence may reduce the points of
disagreement but a post-bid meeting often cannot be avoided. Normally, separate
meetings are held with each contractor to obtain clarification and also to bring all
the offers in line with the tender requirement.
The actual evaluation process includes checking the acceptability of the offer
against technical specifications, management specification and various
commercial and contractual terms and conditions. An adjusted contract price will
be arrived at in each case. Normally, the lowest bidder who is also technically and
managerially acceptable is awarded the contract.
Agreement
Form of guarantee
By an agreement dated and made between the purchaser and the contractor the
parties enter4 into a contract as stated below:
Now we hereby jointly and individually guarantee to the purchaser punctual, true
and faithful performance and observance by the contractor of the covenant on is
part contained in the said agreement and undertake to be responsible to the
purchaser, his legal personal representatives, successors or assigns as sureties for
the contractor for the payment by him of all sums of money losses, damages, cost
charges and expenses that may become due or payable to the purchaser from the
contractor in consequence of default in the performance. Nevertheless, the total
amount to be demanded shall not exceed 15 per cent of the contract price.
This guarantee shall not be revocable by notice and our liabilities as sureties
hereunder shall not be impaired by any alterations made or agreed to in the
general conditions of contract.
TYPES OF TENDERING PROCESS
Unfortunately for the contractor, a high proportion of inquiries are, for one reason
or another, not vary serious. This tends to occur mainly in countries where the
infrastructure may not yet be ready for a particular type of plant. It is upto the
contractor to assess the seriousness of each inquiry. The tendering policy of most
contractors can be categorized into one of the following three types.
Evaluation of tenders
The tenders are evaluated from technical, commercial, contractual and managerial
angles. Contractor’s confirmation or classifications are sought on various matters
which either do not conform the tender requirements or those that have not been
offered by the contractor. The correspondence may reduce the points of
disagreement but a post-bid meeting often cannot be avoided. Normally, separate
meetings are held with each contractor to obtain clarification and also to bring al
the offers in line with the tender requirement.
The actual evaluation process includes checking the acceptability of the offer
against technical specifications, management specification and various
commercial and contractual terms and conditions. An adjusted contract price will
be arrived at in each case. Normally, the lowest bidder who is also technically and
managerially acceptable is awarded the contract.
Agreement
Form of guarantee
By an agreement dated and made between the purchaser and the contractor the
parties enter into a contract as stated below:
Now we hereby jointly and individually guarantee to the purchaser punctual, true
and faitful performance and observance gy the contracgor of the convenant on his
part contained in the said agreement and undertake to be responsible to the
purchaser, his legal personal representatives, successors or assigns as sureties for
the contractor for the payment by him of all sums of money losses, damages, cost
charges and expenses that may become due to payable to the purchaser from the
contractor in consequence of default in the performance. Nevertheless, the total
amount to be demanded shall not exceed 15 per cent of the contract price.
This guarantee shall not be revocable by notice and our liabilities as sureties
hereunder shall not be impaired by any alterations made or agreed to in the
general conditions of contract.
Unfortunately for the contractor, a high proportion of inquiries are, for one reason
or another, not very serious. This tends to occur mainly in countries where the
infrastructure may not yet be ready for a particular type of plant. It is upto the
contractor to assess the seriousness of each inquiry. The tendering policy of most
contractors can be categorized into one of the following three types.
Indiscriminate tendering
This is tendering for all projects without regard to the type and/or value. While a
broad front is offered, a large number of small contracts must often be undertaken
with a disproportionate amount of supervision and design cot, giving rise to high
tendering costs. The acceptance rate is generally lower than for more selective
tendering.
The tendering period also varies considerably. If this is too short, an inaccurate
tender with a large number of qualifications and exclusion clauses can result. On
the other hand, a tendering period is rarely considered by the contractor to be too
long. A point worth noting is that many contractors are reluctant to request an
extension of tendering time for fear that this gives the potential client an
impression of inefficiency. Yet it is usually better to seek such an extension rather
than to submit an inaccurate tender.
Prior to a client asking for bids for a plant, a feasibility study is necessary. This
may be conducted by the client itself, by an independent consultancy organization
or in some cases b y the contractor. Such a feasibility study may be preceded by
an advisability study that initially defines the project and assesses its possible
attractiveness; this is usually carried bout by the client. The feasibility study itself
examines the markets for the products to be manufactured (with due regard for
supplies, technological restraints, plant location, financial constraints and time
schedule) in order to determine the overall economic feasibility. Based on the
results of the feasibility study, a summary initial schedule is devised, usually
comprising three parts namely; advantages and disadvantages of various solutions
and reasons for choice of the recommended solution; full information on the
recommended proposition; a summary estimate of costs.
This schedule can be enlarges and refined to form the basis for decisions
concerning the technical, financial and managerial aspects of the project.
Additional inputs might include; descriptive and memoranda indicating
construction and operating methods, breakdown of supplies and equipment
leading to particular specifications, time schedules, the margins of risk; technical
files comprising overall plants and drawings of the main components of the plant;
an evaluation (to within + 10 percent) of the costs and expenses entailed.
From this detailed initial schedule, the final schedule will be drawn up. This will
contain detailed technical specifications and work plans, definitions of the work to
be carried out by different specialists, the timing and an estimate of expenses
broken down as accurately as possible. The calls for tenders are then based on the
description given in this final schedule. They contain the specifications fo the
plant and its components, including civil and other works, as well as appropriate
administrative and commercial clauses.
If the client does not already have a list of approved contractors, interested
contractors may be invited to submit prequalification documents. The purpose of
these is to ensure that firms making bids are technically and financially sound.
Many contractors will classify the type of bid in order to define the amount of
work to be performed by their staff into three different categories. An
approximate estimate bid contains no original detail but is based on previous
projects of similar scope and capacity. An order of magnitude bid is usually
required for a plant feasibility evaluation by the client. No original engineering
details are given and the bid us constructed from cost-capital cures and an
approximation based on past estimates and scaling factors. The definitive estimate
is based on defined engineering data with complete plot plans and elevations,
piping and instrumentation diagrams, equipment data sheets and quotations,
structural sketches, soil data and complete specification. For the compilation of
such an estimate, the contractor may, in turn obtain bids on 50 to 90 per cent of all
the process equipment required. The contents of a typical tender of this type are
shown in the figure 5, the proposal being divided in three sections; technical data,
commercial data and cost data.
Contend of a Tender
1. Technical proposal
Commercial proposal
For large-scale tenders, the contractor usually appoints a proposal manager to co-
ordinate the whole proposal preparation and to liaise with the client. This applies
especially to the larger contracting companies.
Tenders are all opened at the same time, and examined and compared with the aid
of a table showing the main data. In some developing countries, a preferential
coefficient (X) may be given to local firms, and foreign contractors are selected
only if their prices are at least X per cent below the lowest local bid. This co-
efficie may vary widely but it can be as high as per 30 per cent.
The chief merit of global tendering is that it gives equal opportunity to every
supplier/contractor to make an offer within the terms and conditions of tender and
thus it promotes competition. Global tendering is particularly recommended to
ensure safeguard against public procurement.
The bidder must also furnish the lists of technical personnel with then experience,
names of sub contractors and the nature of job handled by them. The details of
similar works executed in last ten years indication name, address of clients, nature
of job, contract value, completion times, etc., need to be furnished by the bidder.
Information on current orders in hand, expected time of completion have also to
be furnished by the bidder.
The bid application, completed in all respect in seven copies must be submitted to
the project authorities so as to reach them within a specified date. One set of
sealed copy of application must be sent under registered post to the Directorate
General of Technical Development, Coordination Section, New Delhi. The
following should be subscribed on the envelop; Package number Description …
Application for pre-bid qualification for plant modernization phase. The project
authorities have the right to verify the credentials of the applicants and their
facilities, etc., and call for additional information, if required, to ascertain the
bidders’ capabilities. The project authorities also reserve the absolute right to
reject, at their discretion, the application of any or all bidders without assigning
any reason.
Initial evaluation
Once the bids are received, the project authorities evaluate them on a preliminary
basis, with a checklist, as to whether all key points, including commercial terms,
costs, delivery schedules and other contractual aspects, have been fully covered.
In order to shortlist the vendors, the acceptable bidders are arranged in ascending
price order, after eliminating bidders with unacceptable quotations, or with
incomplete bids. The preliminary evaluation enable to focus greater attention on a
few vendors with competitive bidding, the need (if any) solicit additional
information.
Technical evaluation
Commercial evaluation
The detailed commercial scrutiny is usually conducted after evaluating the bid
technically. The commercial scrutiny consists of checking whether everything I
the specification is covered in the price. These aspects include the following :
drawings, documents, maintenance, operating manuals, test facilities, test
certificates, painting and insulation, shop assembly, packing, creating, field
service, freight to deliver payment, warranties, guarantees delivery crating, field
services, freight to delivery payment, warranties, guarantees delivery date, unit
rates, bases of escalation, discounted value of money, currency exchanges,
imports costs and costs of values applies to down payment, progress payment,
final payment, operating costs, variable annual costs, escalation costs, field
service costs and other cost components.
Pre-award meetings
It helps the project authorities to meet the short listed vendors in apreaward
conference prior to selection for reviewing any questions which have arisen
during the technical and commercial evaluations and to confirm all aspects of the
bid. It is desirable that a team of senior officers connected with the project meets,
the shortlisted vendors so that negotiations, if necessary, can take smoothly and
also to have discussions on ethical consideration.
Bid conditioning
The conditioning process helps the project authorities, to consider intangible and
other factors which might influence vendor selection. A low bid may not
necessarily be the cheapest bid when the following aspects are considered:
additional expenditing, follow-up, additional engineering review, delayed receipt
of drawings, interchangeability of spares with existing equipments, local vendors,
local pressures/support, future service availability, initial maintenance,
compatibility with existing infrastructure, additional support facilities application
of learning-curve for cost-reduction, transporting over dimensional consignments,
etc.
Vendor selection
Pre-commitment meeting
The pre-commitment meeting with the vendor enables the suppliers to know that
he is likely to get the contract. A formal agenda is made to cover a comprehensive
review of specification, contracts, and commercial terms in order to reduce
misunderstanding between the two parties. A broad identity of views on all aspect
is reached between the two parties. If the vendor has some lingering doubts, these
are recorded in written statements.
Formal award
The last step in the whole exercise is to formally award the contract to the vendor.
A telex or telephone order is initially placed. A formal written purchased order,
together with necessary documents, data sheets, specifications, contractual terms,
etc., is handed over to the vendor. After choosing the vendor, the next stage of
follow up of the contract’s implementation on manufacture, transport, installation
is planned, so that efforts are made to commission the project in time.
There are five main types of contracts that are currently used by process plant
contractors. In order of decreasing degrees of the fixed price element, these are as
follows:
The less experienced clients tend to prefer the sum type of contract as this results
in the greatest competition between contractors and the evaluation of bids is easy.
Contractors’ bidding costs for this type of contract are at their highest and there
are disadvantages. Not only is the bid time quite ling, but such bids are highly
inflexible, with any changes being difficult and expensive. Costs may be high to
cover any contingencies and risks, and the client-contractor relationship tends to
be more divergent than with other types of contract. Finally, the emphasis on the
low bid may give an unsatisfactory end product.
Fixed price contracts are used mainly where the client is in a position to specify
exactly what is to be built and where much of the engineering work must be
carried out prior to signing of the contract. Other types of contracts may be
converted to a fixed price contract when the work is sufficiently advanced to
permit an accurate, maximum cost estimate to be made.
Typical payment terms for engineering work are an initial down payment made on
contract signature, several instalments paid at intervals during plant construction,
and a final payment due after satisfactory completion and the expiry of any
performance guarantee period. In some cases, periodic installment payments may
continue over several years after plant completion. Installments may fall due upon
contract signature, during deliveries of equipment and plant construction, after
completion of acceptance costs, or at set time intervals.
Great care must be taken over the wording of payment terms since loosely worded
provisions can result in substantial financial losses to the contractor, particularly if
installment payments are determined by the dates of tests and the commissioning
of units. Whenever possible, fixed dates should be written into the agreement of
individual installment payments to avoid excuses for postponement being made
by the client, some of which may be trifling in nature. To minimize such risks, the
contract should also clearly specify the exact documents and certificates required
before a payment can be authorized.
NEGOTIATION
Investments in projects involve huge capital outlay. Hence the project manager, in
collaboration with the finance and purchase departments, deliberates with the
equipment suppliers on quality, delivery schedule, price, payment schedule,
service and other relevant legal contractual aspects. This process of deliberation is
known as negotiations.
The term negotiation, is derived from Latin civil laws and refers to trading and
deliberations, leading to the purchase of equipments and services. Negotiation is
essentially a communication process between the parties incidental to the making
of a contract, or a business transaction.
Parameters of Negotiation
There are a large number of aspects that my crop up in the negotiation process.
Some of the important areas in which the buyer and the seller may concentrate are
mentioned below. These are price, cost, terms and conditions of the original
contract; variations in quantity; specifications and deviation from specified
tolerances; basis for price revision or escalation; facilities to be provided by the
project authorities; quality of subcontracted items; unforeseen amount of
construction maintenance repairs; continued supply of spares; buyback
arrangements of initially dumped unwanted spares; supply of critical buyback
arrangement of initially dumped unwanted spares; supply of critical drawings;
performance guarantee after initial warrantee is over; after sales service;
technology upgradation after initial supply of equipments on a continuous basis;
interrelation of legal terms; basis for penalty/bonus; payment schedule;
moral/ethical aspects; dispatch terms; instructions on insurance; removal of
rejected items; and risk purchase clause in the event of changes in delivery
schedule.
Tools of Negotiation
It is essential that the negotiating team must be familiar with the market situation,
and possess thorough knowledge about the suppliers’ expertise on technical,
financial and manpower capabilities. It is not necessary to negotiate on each and
every item/supplier. It is desirable to negotiate only with the lowest two or three
tenders. The process of negotiation must be confined to high cost critical items.
Techniques like ABC/VED/MUSIC-3D analysis may be helpful.
Quantity discount analysis is used for simple comparisons while detailed analysis
of cost breakdown into labour, material, overhead etc., are used for complex
comparisons. The break-even analysis is also used for estimating the internal price
structure and to obtain greater insight into the suppliers proposals.
The concept of learning curve of the labour cost going down with repetitive jobs
may be used for repetitive labor intensive projects. Other techniques include
persuasion, questioning, discussions, vertical thinking, and prolonged silence,
walk out etc., depending on the situation.
The important personal abilities and qualification for negotiation are: (1)
knowledge, (2) attitude, (3) skill in identifying the issues under negotiation and
(4) planning strategies and techniques to revolve these issues effectively by
argument, persuasion and skills in communication,
Contractor’s obligations
Client’s obligations
The list of the client’s obligations tends to be far shorter. Contractors should try to
add an umbrella provision to the effect that anything not specifically included in
the lump sum shall be deemed to be excluded (and thereby becomes
reimbursable). When the client wants to review or approve certain drawings and
information, an approval time of say 10 working days should be added, following
which the drawings, etc., shall be deemed to be approves. Any client changes
after those 10 days shall constitute a change in the order with price and time
repercussions.
Clients are usually responsible for obtaining permits and other official
authorizations, the supply of utilities (including construction utilities) and
feedstock, telephone and other communications’ facilities, canteen, toilets,
fencing, guards, roads, lighting, storage facilities, warehouse, etc.
CONCLUSION
OBJECTIVES
PROJECT FINANCING
Over the past two decades there have been considerable changes in the techniques
used to meet the financing needs of projects particularly in view of the increasing
scarcity of funds, high interest rates and the high level of debt in the beneficiary
countries. The most common sources of project finance in developing countries or
countries in transition are:
Project financing from export credit agencies is generally available in two froms
and often in a combination of both: either from the national export-import bank
and / or as foreign aid. When tied together they are called mixed credits, and if the
country is a member of the Group on Export Credits and Credit Guarantees
(ECCG) of the OECD Trade Committee, these credits are regulated by OECD
arrangements. Most foreign aid of this type is used to purchase goods and services
from the private sector in the country that provides the financing. These agencies
provide a number of project finance services.
Supplier’s credit
This is credit guaranteed by the export credit agency, which is made available,
often at a concessional rate of interest, for a fixed period. Repayment is over a
period of 5-10 years from the compoletion date of the project, and the repayments
of the capital plus interest is secured by negotiable paper such as promissory notes
or bills of exchange. Bank charges, bonds, insurance costs, etc., are usually
included in the project offer if this type of financing is foreseen. The main
disadvantage for the contractor is that no progress payments are made ant that
project finance is not available until the project is completed. The supplier is
usually required to assume some of the risk of financing.
Buyer’s credit
The advantages of financing through export credit agencies are that a fixed rate of
interest is often available and the concessional rates of interest are lower than
those4 charged by strictly commercial sources. Furthermore, the loans extended
are often for longer terms than commercial sources. Furthermore the loans
extended are often for longer terms than commercial loans and the official nature
of the loan may offer some protection against government expropriation.
However, there are also advantages, first in that the process of approval of loans is
often very bureaucratic and lengthy. Where loans are tied, the goods and services
available from the countries providing the credits may not be the best suited to the
project and may by far more expensive than those available from other sources.
Furthermore, additional equipment and spares, which may be found to be needed
later are not covered by the credits. Finally, serious problems arise if the project is
unable to generate sufficient foreign exchange to repay the loan.
The World Bank and some of the regional development banks, such a IDB
and ADB have made special provisions to provide project finance through
national export credit agencies in their respective regions of operation.
One major problem facing export credit agencies is the very conservative
attitude of development finance corporations in general, as many of them have
had negative experience in assessing credit risks in the construction industry.
Many governments will often fund small and medium sized projects out of
their own funds, either directly or indirectly by means of equity investments,
investment gratis, subsidized loans, tax concessions or subsidies on utilities,
manpower, energy or raw materials.
Commercial banks
Commercial banks are a major source of project finance, offering loans for
five to ten years with floating rates of interest based on the LIBOR or the United
States prime rate. Commercial bank loans for large projects are typical arranged
as syndicated bank loans. There are two basic options open to project developers:
either the project developer assumes full responsibility for obtaining project
finance or it used the services of a bank specializing in project finance.
Alternatively, the client may use a local or regional bank to arrange or engineer a
financial package. The bank been determines the maximum foreign exchange
requirements and the possibilities of obtaining export credits and aid funds and
prepares a project finance package.
Industrial lenders
Leasing companies
Contractors
Contractors often initiate project finance but they are rarely able to
participate in the long-term financing of projects. They may participate in the
form of fixed-price contracts, with guarantees, and sometimes may take part of
their fees in the form of equity in the project. Contractors can also provide
assistance to their clients in developing the financial planning, as they are often
experienced in dealing with multilateral and bilateral lending agencies, export
credit agencies, banks, etc.
Some countries have taken equity positions in companies that own “build-
own-operate” projects. A typical project finance request form used by engineers
and contractors to define the financing requirements of a particular project to be
developed may be found at the end of this chapter.
Counter trade
There are different forms of counter trade, the most simple of which is
barter. This consists of a simple contract to swap one set of goods for another set,
with the contract being valid for a limited time period. The value of the goods
traded is agreed on at the time of negotiation of the contract. Barter is used to
repay debts or to pay for goods and services over a short period of time.
PROJECT OVERRUN
There are project having reasonably successful operations yet they fact
constraints of adequate funds in view of policies like credit squeeze and the
prevailing inflationary conditions. In such cases, the development finance
institutions in their follow-up operations have to offer desired assistance to the
units to enable them to overcome these difficulties. An area of serious concern to
the institutions is when the project suffers on account of insufficient availability
of finance at the project implementation stage. The difficulties are accentuated
especially when there is time and cost overrun.
Meaning of overrun
The best example for the time overrun is Srisailam Dam whose stone way
layed by the First Prime minister Pt. Jawaharlal Nehru and was scheduled to the
completed by the mid 1970s was simply overrun by a decade only when Mrs.
Indira Gandhi during 1983, the then Prime Minister of India, inaugurated the
tunnel of Dam which was partially complete. Some of the International projects
that were susceptible to cost and time overrun were : BART project of San
Fransisco, Opera House of Sydney, Channel Tunnel, Oosterscheld Aircraft project
etc.
The tie and cost overrun has been depicted in the diagram
Ca
c Cs
t
Time Ts
o Time Ts Ta o
The reasons for overrun require a close scrutiny and in many cases the
institutions may have to take certain decisions depending upon the merits of the
case which may be considered unpleasant by the management.
As indicated above the reasons for time and cost overrun may be broadly
classified into:
1) internal
2) external
INTERNAL REASONS
Firstly, the cost overrun is the natural outcome of the cost underestimation
at the project preparation and evaluation stages. The principal motivation for this
willful cost underestimation is to keep the promoters’ contribution, about which
the institutions have somewhat inflexible norms, to the minimum possible. Once
the project financing is tied up, the promoters find themselves in a more
favourable position to express there inability to contribute substantially to the
overrun. The overrun undertaking is an instrument in the hands of institutions
which is of little practical significance.
Secondly, there may be change in the project concept as such during the
implementation stage, viz., unsuitability of the location, changes in the designs of
civil structure, additions/changes in the various items of plant and equipment
following certain alternations in process technology, size of operation, product
mix etc. Most of these points would be further elaborated when we discuss the
technical problems at the project implementation and operation stages.
EXTERNAL REASONS
As far as uncontrollable external factors are concerned, they generally fall in the
following broad categories:
These reasons may be classified through stages of life cycle of the project.
After the time and or the cost overrun has occurred the following consequences
are inevitable:
The financial institution has to normally depend upon the information monitoring
system to find out the quantum of overrun and its reasons. It is also a common
practice with the institutions to carry out some kind of re-evaluation of the project
through visits and personal discussions to assess the impact of the overrun on the
long term project viability and to determine the quantum of additional assistance
needed to implement the project. Efforts are also made to motivate the promoters
to bring additional funds to meet a part of the overrun.
In view of the generally complex nature of the project overrun which may be due
to a combination of controllable and uncontrollable factors, it is not possible to
prescribe effective remedies to avoid its occurrence in absolute terms. However,
certain institutional safeguards may prove useful in limiting its magnitude. There
are:
CONCLUSION
Thus, cost can be reduce in all reduced in all areas, but one cannot and must not
be stingy while managing projects involving crores of rupees cost must be
controlled but it must be done with grace. Hence this chapter suggest that cost is
the final measure of project management effectiveness and discusses various
measures for keeping the same under control.
SELF ASSESSMENT QUESTIONS
2. Describe the nature and causes of cost and time over runs.
4. Explain the causes for overrun at the different stages of project life cycle.
LESSON – 13
PROJECT CONTROL
OBJECTIVES:
INTRODUCTION:
Once the project has been launched, it is essential to control the projects to
achieve the desired results. In this process the control becomes closely inter-
wined in an integrated managerial process. Project control involves a regular
comparison of performance against targets, a search for the causes of deviation
and a commitment to check adverse variances.
1. Establishment of controls.
It is nothing but controlling a project when it enters the production perio-using the
controls established during the initiation period.
Control during the production period involves four steps, There are
4. Taking corrective actions to make things happen, as they should these four
steps should fellow each other till the work is completed.
3. On project Schedule
4. On Projects Cost
The subsequent chapters discuss about significance and mode of schedule control
and cost control of project.
2. People Problems
Managers do not have required experience & training Lack of competence and
inclination to control projects.
GANIT CHARTS
Heat-treatment of A 2 Weeks
The bar chart for this project is shown in Fig. The various activities are shown
along the ordinate or the vertical axis and the time elapsed along the horizontal
axis.
The example in Section 1.2 was deliberately chosen to shown that the bar chart
may appear to be a excellent pictorial representation of a project. However, in
practice, bar charts have serious limitations. A few of these are:
Interdependent of activities:
In a programme where there are a large number of activities that can be started
with a certain degree of concurrency, the bar chart cannot show clearly the
interdependent among the various efforts or activities. This is a serious
deficiency. The mere fact to or more activities are scheduled for simultaneous or
overlapping times does not necessarily make them related or interdependent, or
completely independent. Consider, for example, the project represented in Fig.
Such activities as preparing a pattern, preparing a mould, costing and cleaning,
and heat-treating have to run sequentially, i.e., one activity must be completed
before the other can begin. The bars representing these activities are not allowed
to overlap. On the other hand, installing machine M and preparing the test rig can
proceed simultaneously because they are completely independent activities and
hence the bars representing them can run parallel to each other. However, this is
exactly the weakness of the bar chart, because two parallel bars need not
necessarily stand for independent activities, as the following example will show.
If the activities are not allowed to run in parallel but in strict sequence, the total
time taken for the completion of the project is 50 weeks. As we can easily see,
erection of the sideboards can start after the completion of, say, one-half of
foundation digging. Similarly, poring of concrete can start, say, 5 Weeks after the
erection of side boards. The bar charts for these activities will as shown in Fig.
According to this plan, the side board erectors still have 4 weeks of work after the
excavation job is over. However, if due to certain unexpected difficulties the
excavation is delayed by 1 or 2 weeks, how will reflect on the sideboard erection
or the concrete pouring job? This is not revealed by the bar chart.
Project progress:
A bar chart cannot be used as a control device since it does not show the progress
of work. A knowledge of the amount of work in progress or jobs completed is
absolutely necessary in a dynamic programme. Changes in plans are a necessary
part of a large project and a bar does not offer much assistance under such
circumstances.
Uncertainties
One of the most important deficiencies of the bar chart is its inability to reflect the
uncertainty or tolerances in the duration times estimated for various activities. The
modern day space system programmes or other complex projects are largely
characterized by extensive research, development and technological progress. The
traditional knowledge or practices play a very insignificant role. In such
situations, the completion of various stages or jobs cannot be forecast with
exactness. Uncertainty about a test becoming successful or a sudden break though
in technology to know-how will always provide situations which will make
rescheduling of various events a necessary part of the project and give it a
dynamic character which is not reflected in a bar chart.
MILESTONE CHARTS
This modification is called the milestone system. Milestones are key events or
point time, which can be identified when, completed as the project progresses. In
the Gantt chart a bar which represents a long-term job is broken down to several
pieces, each of which stands for an identifiable major event. Each event is
numbered and an explanatory table given identifying the number with the event.
These are specific event (points in time) which management has identifies as
important reference points during the completion of the project. This work
breakdown increases the awareness of the interdependent between tasks.
Figure A show a Gantt chart and Fig. B the corresponding milestone charts. Two
important points to be notices are that: (a) the long time jobs are identified in
terms of specific events or milestone; and (b) these milestones or key events are
plotted against the time scale indicating their achievements by specified dates.
While the milestone chart was definitely an improvement on the bar chart, it still
had one great deficiency, i.e., it did not clearly show the interdependent between
events. In a milestone chart the events are in chronological, but not logical,
sequence. A natural extension of the milestone chart was the network where the
events are connected by arrows in a logical sequence.
CPM is used for scheduling special projects where the relationship between the
different parts of project is more complicated than of a simple chain of task to be
completed on after the other. This method (CPM) can be used at one extreme for
the very simple job and at other extreme for the most complicated tasks.
Under COM, the project is analyzed into different operation or activities and their
relationship are determined and shown on the network diagram. So, first of all a
network diagram is drawn. After this the required time or some other measure of
then combined to develop a schedule which minimizes or maximizes the measure
of performance for each operation. Thus CPM marks critical activities in a project
and concentrates on them. It is based on the assumption that the expected time is
actually the time taken to complete the object.
MAIN OBJECTS OF CPM
(iv) To find the critical path and the minimum duration time for the project as
a whole.
ADVANTAGES OF CPM
(ii) It identifies most critical elements and pays more attention to these
activities.
There are so many modern techniques that have developed recently for the
planning and control of large projects in various industries especially in defence,
Chemical and construction industries. Perhaps, the PERT is the best known of
such techniques.
PERT is a time-event network analysis technique designed to watch how the parts
of a programme fit together during passage of time and events. The special project
office of the U.S. Navy developed the technique in 1958. It involves the expected
of any operation can never by determined expected time of any operation can
never by determined exactly.
(i) All individual tasks should be shown in a network. Events are shown by
circles. Each circle representation event a subsidiary plans whose
completion can be measured at a given time.
(ii) Each arrow represents and activity the time consuming element of a
programme, the effort that must be made between events.
(iii) Activity time is the elapsed time required to accomplish element an event.
In the original PERT, three-time values are used as follows: Is
The experiences have shown that the best estimate of time out of several estimates
made by the projects engineer is:
t1 + 4t2 + t3
t =
6
and the variance of t is given by-
t3 t1
V (t) =
6
Here it is assumed that the time estimate follows the Beta distribution.
(iv) The next step is the compute the critical path and the slack time. A critical
path or critical sequence of activities is one, which takes the longest time
to accomplish the work and the least slack time
ADVANTAGE OF PERT
(i) Pert forces nabagers and subordinate manger’s to make a plan for
production because time event analysis is quite impossible without
planning and seeing how the pieces fit together.
(ii) PERT encourage management control by exception. It concentrates
attentions on critical element that may need correction.
(iii) It enables forwards-working control, as a delay will affect the succeeding
events and possibly the whole project. The production manager can
somehow make up the time by shortening that of some other time.
(iv) The network system with its sub-systems creates a pressure for action at
the right spot and level and at the right event.
(v) PERT can be effectively used for re-scheduling the activities.
Although these techniques (PERT and CPM) use the same principles and are
based on network analysis yet they in the following respects from each other:
(i) PERT is appropriate where time estimate arte uncertain in the duration of
activities as measured by optimistic time, most likely time, and pessimistic
time, where as CPM (Critical Path Method) is good when time estimates
are found with certainty. CPM assumes that he duration of every is
constant and therefore every activity is critical or not.
(ii) PERT is concerned with events, which are the beginning or ending points
of operation while CPM is concerned with activities.
(iii) PERT is suitable for non-repetitive projects while CPM is designed for
repetitive projects.
(iv) PERT can be analyzed statistically whereas CPM not.
(v) PERT is not concerned with the relationship between time and cost,
whereas CPM established a relationship between time and cost is
proportionate to time.
CONSTRUCTION OF A NETWORK
B Design A 8 3
C Build frame B 2 5
D Build doors B 1 2
J Paint body G 2 4
K Interior J 1 3
N Finishing touch M 1 2
Otherwise, the circles are known as ‘nodes’. ‘Activity’ refers to progress to work
leading from ‘one event to other event’. This is indicated by the ‘arrows’ in the
network. When drawing a network physical neatness, avoiding criss-cross, ‘loops’
must be avoided. A ‘loop’ results when two activities have the same ‘start’ and
‘end’ nodes or events.
In such a case, a ‘dummy’ activity, with time zero as well as resource needs zero,
is introduced to avoid a loop. Now, the network for the car project is attempted.
NETWORK DIAGRAM – CAR PROJECT
F
J K
A B
H
I
L M N
E
C
A brief description is presented on the network in Fig. 1. Node or event A is the
starting point. Node B indicates the completion of ‘design’ work, A – B, therefore
indicates the progress of design activity, which needs 8 days for completion.
The numbers above the arrows thus indicate the time required for completion of
respective activities. Until design, B, is completed activities C, D, F and H cannot
be taken up. Hence, all these activities have common start node, viz B. Activity
‘G’ cannot be taken up, until activities D and F are over. So activities D & F
coverage at ‘G’, and so on. No dummy activity is needed for the project.
In the network, only one time estimate is given for each activity. As against this,
pessimistic (longer), optimistic (shorter) and most likely (via media) time
estimates may be given for each activity. These time estimates are notated as tp,
to tm. From these estimates, expected time (te) is worked out as follows:
(tp + 4 tm to) / 6 = te
The ‘te’ is taken as the activity duration and written above the activity arrow in
the network. The ‘te’ computation given above is based on ‘beta’ distribution
which underline very low probability for tp and to and very large probability for
tm.
Now, the different routes of the network can be deduced. A route simply means
the course of project from the starting point to the ending point of the project
accordingly, the routes of the project are:
Route I :A–B–D–G-J–K–L–M–N
Route II :A–B–F–G–J–K–L–M–N
Route IV :A–B–C–E–I–L–M–N
The time duration of the different routes can be worked out by adding together the
time duration of individual activities falling in the respective routes, Accordingly.
The time required for completion of the project is given by the time duration of
the critical path. If everything goes well, by end of 20 th day the new model car
would by ready, for this to happen, each activity in the critical path has to be
taken up and completed as per schedule.
That is ‘B’ must be over by the 8th day, H must be commenced on beginning of 9th
day and completed on 14th day. I to begin on 15th day and completed by 17th day,
L to begin on 18th day and completed on the same day, M to begin on 19 th day and
completed on the same day and N to begin on 20 th day and completed on the same
day.
Now the concepts of earliest start time (EST), earliest finish time (EFT), latest
short time (LST), latest finish time (LFT), slack, total slack and free slack may be
presented.
EST refers to when a particular activity can be taken up at the earliest. Activity
A–B has to begin at day 0 day and will go till the end of day 8. Actually B-D, B-
F, B-H and B-C can be taken up immediately after A-B is over, i.e. from end of
day 8. (i.e. the beginning of day 9).
So, the EST for B-D, B-F, B-H and B-C is end of day 8. B-D will be over by end
of day 9 day and that the EST for D-G is end of day 9 (i.e. the beginning of day
10). The EST for G-J is not however end of day 10, by which time D-G will be
over.
Because G-J cannot be commenced until F-G is also completed. F-G will be over
by end of day 12. So, for G-J the EST is end of day 12 or beginning of day 13 and
so on.
EFT refers to when a particular activity can be completed, assuming it has been
commence as per its EST. for A-B it is end of day 8, for B-D it is end of day 9, for
B-F it is end of day 11 and so on. For G-J the EFT is end of day 14.
LST and LFT are computed backwards from last activity, viz, M-N in this project.
M-N must be over by end of day 20. So, its LFT is end of day 20. Its LST is end
of day 19, so that by end of day 20. If you go backward, for activity L-M the LST
is end of day 18 and LFT is end of day 19.
Table-2 gives the EST, EFT, LST and LFT for the various activities.
Because, none of the activities can be delayed, lest projects duration will increase.
There are two concept of slack: total slack and free slack. Total slack is simple
LST – EST or LFT – EFT. Free slack refers to slack or spare time available for an
activity when all succeeding activities in the network can be started at their
respective EST. Only three activities D-G, K-L and E-I have free slack.
PERT and CPM techniques have become useful to management in many ways.
These are:
ERT and CPM techniques are not simple static involving the computation of
times, EST, LST, EFT, LFT and drawing the diagram. It is a dynamic tool. It
helps in resource allocation and resources leveling.
In table : the number of workers required for each activity is given. With that
information we can compute what is the human resource requirement day after
day.
The resource requirement depends on when the activities are scheduled to begin,
i.e., as per their EST or LST or any intermediary time. Suppose as per EST the
activities are scheduled.
Days B C D E F G H I J K L M N Total
Labour
Needs
1 3 3
2 3 3
3 3 3
4 3 3
5 3 3
6 3 3
7 3 3
8 3 3
9 5 2 7 5 19
10 5 7 5 17
11 3 7 5 15
12 2 5 7
13 5 4 9
14 5 4 9
15 3 3 6
16 3 3
17 3 3
18 3 3
19 2 2
20 2 2
Total 24 10 2 3 21 2 30 9 8 3 3 2 2 119
Labour
days
per
activity
From table-3, you know how much labour is required on day to day basis, (see
last column) and how much is required activity – wise (see lat row). You can now
make allocations of human resources to the project.
In the same way, you can find what would be the day-to-day labour needs when
the works are scheduled as per their LSt, table-4 gives the same.
Between 9th and 17th days, there are differences in the daily needs under the two
pattern of job scheduling. During the period 1st – 8th day only one critical activity
is in operation and during 18th – 20th days too only critical activities are operated.
So, under both scheduling patterns the labour needs are same.
Days B C D E F G H I J K L M N Total
Labour
Needs
1 3 3
2 3 3
3 3 3
4 3 3
5 3 3
6 3 3
7 3 3
8 3 3
9 5 5
10 5 5
11 7 5 12
12 5 7 5 17
13 5 2 7 5 19
14 3 2 5 10
15 3 4 7
16 3 4 7
17 3 3 6
18 3 3
19 2 2
20 2 2
Total 24 10 2 3 21 2 30 9 8 3 3 2 2 119
Labour
days
per
activity
Resource leveling means evening out the daily resources needs to the extent
possible. You find that under the EST scheduling the labour needs on 9th thorough
17th days are respectively 19, 17, 15, 7,9,9,6 and 3 persons and under the LST
scheduling, labour needs are 5,5,12,17,19,10,7,7 and 6 persons per day
respectively for the different days.
The daily needs are highly varying. Certain leveling or smoothening or reducing
the variations in daily needs can be attempted. That is what is called as resources
leveling. Why is leveling needed?
(i) Resources constraint can be one of the reasons. Say, not more than 12
persons are available on any one day, whereas we need as much as 19
persons on one day. By rescheduling non-critical activities using their
slack times, the above purposes can be served.
(ii) Practically speaking, too much needs on some days and too little needs on
other days are not signs of good planning.
(iii) Also, disruption in work is more probable when the peaks and through in
resource needs are not ironed out.
(iv) Optimum utilization of permanent/owned facilities, avoiding ideal time, is
possible with resource leveling exercises.
Say in our case only 12 labours are available on any one day. Is it possible to
complete the project on time with only 12 persons? May be some rescheduling
can be thought of. The method adopted here is called as ‘heuristic programming’.
Heuristic mean ‘rule of thumb’ that works and a collection of these rules is known
as ‘heuristic programming’. One approach of heuristic programming is
rescheduling activities that have larger slack time.
In so doing the labour needs on 9 th ,10th , and 11th days go up to 12 persons each
day and for 12th and 13th days go down to 10 and 12. So, we satisfy the maximum
labour availability condition now.
Time estimates are made based on past experience, the job nature and
availability of resources. In PERT, 3 estimates of time for each activity is made as
was already stated and the expected time worked out using a formula already
dealt with. This is needed since PERT deals with uncertain business environment,
In CPM only one time estimate is made as it assume certainty condition. But
estimates may be revise in both the cases as in assurance in past estimates come to
light.
Once time estimates and sequential relations are known activities scheduling can
be prepared. You have to find out EST, EFT, LST, LFT, total slack and free slack.
All these have been already explained. Then activities can be taken up as per their
EST or LST or some in between times taking advantage of slack of activities. Of
course, for critical activities EST and LST are same, also EFT and LFT are also
same. That is, they have no slack.
Under PERT we can find the probability of finishing a project by certain date. For
this we need to know the standard deviation of activity times for critical activities.
This formula again is unique to beta distribution. Calculate the std. deviation for
each of the critical activities. Square each of std. deviation figures. Add the
squared figures. Take square root for the summated figure. This is taken as the
project std. deviation of the earliest finish time.
Corresponding to the ‘Z’ obtained, from the normal distribution table ‘area’ under
normal curve is found. From that figure, the probability of completion by the due
date is known.
We may find the probability of completion by 22 nd day from commencement for
out car project, given the expected completion by 20th day.
We need to know the three time estimate for the critical activities which are as
follows:
Activity Tp Tm To (Tp-To) / 6
B 10 9 2 (10 – 2) / 6 = 4/3
H 9 4.5 3 (9 – 3) / 6 = 1
J 5 3 1 (5 – 1) / 6 = 2/3
L 5 3 1 (5 – 1) / 6 = 2/3
M 5 1.5 1 (5 – 1) / 6 = 2/3
N 5 1.5 1 (5 – 1) / 6 = 2/3
16 4 4 4 4
= +1 + + + +
9 9 9 9 9
41 6.4
= =
9 3
22 − 20 2 × 3 60
= = = = 0.9375
6.4 / 3 6.4 64
Area under normal curve corresponding to Z = 0.9375 is equal to = 0.825. That is,
there is a probability of 0.825 or 82.5% that the project would be completed by
22nd day.
Sometimes a project has to be completed sooner than the planned time. In our
case the project duration is 20 days. Say, you want o complete the project in 15
days for some pressing reason. Can you? May be you can. By commissioning
extra resources you may be able to achieve this. Why extra cost arises? May be
you have to work overtime incurring double the normal cost per time. May be you
have to hire additional facility paying more than normal hire charges.
Table – 5 gives normal time and cost and crash time and cost for the activities of
out car project. The normal cost is Rs. 1,19,000 and the crash cost is Rs. 1,55,750.
But you can complete this in 15 days, the new critical path duration with a cost
less than Rs. 1,55,750. How? You have to proceed methodically.
1,19,000 1,55,750
(i) Find those activities in the critical path (or paths) where time cqan be cut
substantially with minimum extra rupees spent. The goal is greatest
reduction in project time for the least increase in project cost.
(ii) You have to work out the cost of crash per day for each activity. This
simply:
(Crash cost – Normal cost) / (Normal time – Crash time)
Two days you save now and extra cost is Rs. 2 x 3,000 = Rs. 6,000. Now
route III and route II are critical as both have 18 days duration. To cut project
duration you have to reduce the duration of both routes.
In route II the crushable activities are F(Rs. 1,000), J(Rs. 1,250) and
K(Rs. 6,000) and L and M in common with route III. So, the least crash cost
activity is F.
In route III the least crash cost activity is H(Rs. 3,000). By crashing F & H
by one day, the project duration becomes 17 days and extra cost is Rs. 1,000 +
Rs.3,000 = Rs. 4,000.
Now routes II, III & IV becomes critical each with a duration 17 days. To
reduce project duration, crashing has to be done in all these three routes T.
So by crashing ‘C’ in route IV, H in route-I II and ‘J’ in route II, project
duration is cut by a day to 16 days at an extra cost of Rs. 5,250, i.e. (Rs. 1,000 +
3,000 + 1,250). Now all the four routes are critical with 16 days duration each.
We want to reduce the project duration to 15 days i.e. the duration of each of the 4
routes has to be cut by a day.
Cost and time over-runs can be strictly avoided / controlled using network.
So, it is a cost control device.
Once the resource aggregation have been done, the resulting resource
schedule should lie somewhere in between the earliest and latest time aggregation.
It should look much smoother than the time analysis based results. The
improvement over the earliest/latest case should show the amount of effective
work the resource analysis process has carried out.
Early in the history of critical path analysis methods, attempts were made
to automate the resource scheduling process. The purpose of this was to enable a
computer to add up the usage required for each type of resource, taking into
account all activities in the network, on a day by day basis.
The computer would then be used to compare this estimated total
requirement with the numbers of resources expected to be available each day.
Should there be insufficient resources available for all the tasks on a given day,
some of the tasks would be rescheduled (delayed) in order to shift the timing of
resource needed. If the float available for delayed activities were sufficient, then it
would be possible to give thee jobs scheduled start dates lying somewhere
between their earliest and latest starts.
These would be the dates at which each activity should be started from the
point of view of sensible resource usage. If this were possible to achieve for all
resource, then the project could be scheduled for completion within its critical
path duration using the available resources.
The planner will have a difficult enough time to create a time analysis
schedule, which will bring the critical path down to the desired length. During the
process, he will probably make a number of sub-critical paths critical also, by
overlapping operations where possible, shortening pessimistic duration estimates,
increasing resources applied to tasks, and so on. The more the time-analyzed
network is squeezed down, the less flexibility will remain for the resource
scheduling algorithm to play with.
The main objection to scheduling projects backwards from the end, as far
as resource are concerned, is that the high priority items tend to be considered
first in the process, to be sure of fitting them in.
Parallel Scheduling
Take all the start activities of the network. Those are all the activities,
which could start at day one. Build an ‘eligibility list’ consisting of those
activities. Take the activity with the highest priority from the eligibility list. Can it
start yet? Is its earliest start less than or equal to the day we4 are considering? If
so, compare its resource requirements for its nest day with the resource
availability on day one of the project. If all relevant resources are available in
sufficient quantity, Schedule the first day of that activity to occur on the first day
of the project.
If that completes the activity, then include all successor activities into the
eligibility list. Repeat the process for the activity with the next highest priority
from the eligibility list, and so on until all eligible activities have been considered
for that day.
Then move to the next day of the project. Any amounts remaining of
‘pool’ resources are rolled over to day two. The actions described in the above
paragraph are repeated for day two scheduled.
Notice that this process works more naturally when the resources available
to a project are limited, and the time available to complete it can be extended
indefinitely.
Serial Scheduling
Serial scheduling considers each activity in turn, rather than each day of
the project in turn. It can be visualized as follows: Consider a two-dimensional
table of resource availabilities. It will have an amount available for every resource
for every day of the project. Against this there is a pre-sequenced list of
activities, which comprise the projects. In addition to its time analysis results,
each activity will have an ‘earliest feasible start’ figure, which will initially be the
same a sits earliest start.
Each activity is taken from the list of activities in turn. The section of the
resources tables between the activity earliest feasible start and the activity late
finish is scanned to see if the activity ban be scheduled as a whole. If so, it is
scheduled at the first available point.
If not, then if the activity is split able, an attempt is made to fit the activity
in between its earliest feasible start and latest finish in sections. If this is
impossible, an extra layer of resource availability is called in for any resource
which was in inadequate supply, and the process is repeated for the activity, until
it can be fitted in.
If an activity is scheduled at a point later than its early start, the earliest
feasible start of all successor activities are updated to the greater than the finish of
the activity that his just been scheduled. When all this has been done for every
activity in the network, the project has been scheduled.
Notice that this process works more naturally if there is a fixed end date to
the project, but the resources can be exceeded if necessary.
Serial methods are now more popular than parallel methods, for a number
of reasons. Parallel scheduling tends to split activities rather more than serial.
Ideally, a parallel scheduling a algorithm would like to be able to split any activity
into one-day sections, particularly if activities have complex resource
requirements, or resource availability changes during the project.
The above descriptions of the parallel and serial techniques show the basic
method involved in each case. There are many in finements and special features,
which can be added to both processes.
Serial leveling schemes sometimes have a feature whereby two project end
dates are specified a desired project end and a project end. Resources are
classified into two sections – ‘important’ and ‘exceedable’. If the scheduling
system would have exceeded the availability of an ‘important’ resource, and (its
threshold level, if there was one), then the activity is allowed to delay itself pats
its latest finish. It is not allowed to delay past its secondary latest finish – that is,
the latest finish relative to the maximum project end date.
Even if the planner does have access to a large company computer with an
appropriate program, he should consider that he will be sharing a facility with
other users. He will not necessarily have the highest priority among them. Before
committing himself to use the locally available facilities, he should experiment to
see whether delays in computer across or in calculation time when using this
equipment are acceptable in the context of the project he is controlling.
Consider in a little more detail some of the factors, which affect the choice
of software package. Many of the categories already summarized will overlap a
little. Capacity and speed, for example, are interrelated in that a theoretical ability
to handle networks of many activities may in fact be unusable because long
calculation times make the analysis of large networks undesirable.
The maximum network size which a computer program can handle may
vary from a few tens of activities to millions. The limitation almost always applies
to a single network. The user is allowed to have many independent network but
no one of them may exceed (say) 2000 activities.
The number of passes of the data tends to grow rapidly as the number of
independent network sections, and as the number of points of contract between
them increases too.
The above comments should not be taken as advice to avoid subnets and
interfaces in general – only in those cases where they are forced upon the user by
computer – related limitations. It may well be convenient to divide a project into
subnets, provided that the computer program being used can take them in a single
mouthful for calculation purposes.
The fewer connection points for each subnet, the simpler will be the
evaluation of parts which cross several subnets and hence perhaps more than one
are of responsibility. If each planner working on a projects has activities separated
into his own individual subnet of subnets, he can more easily update the tasks
under his control with progress information, without needing close co-ordination
with his colleagues.
Such a counter can count up to 32,767 easily, and with some difficulty can
be persuaded to count up to double that figure. This is why many programs quote
a theoretical limit of 32,000 or 64,000 activities. Nevertheless, the practical
maximum network size may be well below this figure, either because a very large
computer memory could be needed for the program in question to attain such a
maximum, or because calculation time might be unacceptably long.
PROJECT REVIEW
OBJECTIVES
PROJECT REVIEW
Thus the role, function, objective and purpose and of Project Review is not
only to help, guide, direct and aid the planners, project sponsors, policy
formulators but also help the administrators, executives, scholars and
academicians. In review, the most fundamental task is the formulation of criteria
of review and also determination of the time for the study. On the basis of these
criteria of Review and also determination of the time for the study. On the basis of
these criteria the results or outcome of the projects are assessed.
Once the data is collected, it is necessary to shift the same for eliminating
the irrelevant and retain only the significant information. On the basis of the data
collected and collated an estimate may be prepared of the cost of the project
starting from cost of the land and building and going through elements like cost of
plant going through elements like cost of plant and machinery, duties, and taxes,
working capital needs, estimated pre-operative expenses and contingencies to
arrive at an estimate of total cost of the project.
♦ Initial review
♦ Performance evaluation
♦ Abandonment analysis
♦ Behavioural issues in project abandonment
♦ Administrative aspects of capital budgeting
♦ Evaluating the capital budgeting system of an organization.
INITIAL REVIEW
It is the first stage in the project review process. The initial review of a
project is of two types.
Post audit
Classification
Submission of proposals
Decision Making
The optimal capital budget for the firm as a whole can be drawn up only
when capital investment decisions are completely centralized. In most cases,
decentralization is required to facilitate quick decisions, develop executives, and
conserve top management time for important natters. That is why most of the
companies empower executives at different levels to take investment decisions
involving outlays up to certain limits.
Performance Review
REVIEW PROCESS
Financial Review
While assessing the capital cost estimates efforts are made to ensure that:
Adequacy of Rate of Return: The general norms for financial desirability are as
follows:
A requirement that promoter should contribute 15% to 20% of the project cost.
The means of the promoter and his capacity to contribution reasonable share of
the project finance.
Financial institutions view a project from the total funds point of view: Let us see
how the cash flow stream defined by them compares with the cash flow stream
applicable to the total funds points of view.
Risk analysis: The ten year projection and subsequent analysis based on them is
done under a single set of assumptions. In view of the risks characterizing
investment projects it is advisable to look at the possible variations in the key
factors and examine their impact on profitability. For this purpose, the techniques
of sensitivity analysis and scenario analysis should be employed routinely. In
addition, the technique of montre earlo simulation may be employed for projects
involving substantial commitments and considerable risks.
Inflation analysis: Typically, financial projections are based are based on current
prices/costs. Implicit in this procedure is the assumption to move in random.
Where different inflation rates are applicable to various items of revenues and
costs, the same should be explicitly incorporated in financial evaluation.
Technical Review
The technical review done by the financial institution focuses mainly on the
following aspects.
1. Project mix
2. Capacity
3. Process of manufacture
4. Engineering know-how and technical collaboration
5. Raw materials and consumables
6. Location and site
7. Building
8. Plant and equipments
9. Break-even point
Marketing Review
The importance of potential market and the need to develop a suitable marketing
strategy cannot be over-emphasized. Hence efforts are made to:
Managerial review also involves an assessment of the caliber of the key technical
and managerial personnel working on the project, the schedule for training them
and the remuneration structure for rewarding and motivating them.
Economic Review
The economic review looks at the project from the large social point of view. The
methodology adopted by the financial institutions for the purpose of economic
evaluation is lebelled as “Partial little Mirrless” approach. In addition to the
calculation of economic rate of return as per this approach, they also look into two
other economic indicators viz.
The economic review done by the financial institutions is not very rigorous and
sophisticated. Also the emphasis place on this review is rather limited. So, it is
essential to give increased emphasis and improved methodology for vital aspect
of project review.
The World Bank evaluation of project includes all the above factors. Additional
special features which are covered by the World Bank in evaluation of the project
are given below.
There are varied opinions about the requirements for adequate evaluation.
So, the project can be evaluated under the following conditions.:
Time and cost overruns are the most commonly used indicators of project
performance. Well managed project could be completed with minimum of time
and cost overruns.
Turn-key Trap
Those who don’t have adequate expertise, often decide to use the turn-key
approach for efficient execution of a project. The owner expects that, the turn-key
contractor can take care of all the troubles of project execution and hand over the
key to the owner, when the plant is ready of operation. Some people believe that,
this is the surest way to complete the project not only in the shortest possible time
but also at least cost. But, the lessons fro turn-key contract say that, if the owner
does not select the right contractor, there will be no end of trouble for him.
The owner, when he is not doing things himself, needs someone who is
not working for profit. These are the CM (Construction Management) and DM
(Design Management) companies. These companies work as the owner’s agents
for a fee and have the owner’s interest uppermost in mind. They do not gain any
profit from the sale of hardware; they earn a fee from the sale of their services and
their fee represents a small precent of the project cost. As owner’s interest is,
therefore, likely to be best sewed and the project cost is likely to be the lowest,
when the project is handled by a competent CM or DM company.
CONCLUSION
PROJECT AUDIT
The objectives of project auditing can be viewed in terms of the help it renders to
the enterprise management in:
The project auditor has to investigate the underlying records. Ascertain the
tangible results of work done, look at the process and caliber of project
management, examine the projecxt methodology and techniques and et a clear
picture of rthe project organization and controls. Having gone through the above
aspects, he has to express his comments deliberately one the following lines:
The project audit report on current status covers aspects of project cost
performance, project’s performance in relation to schedule, progress performance
quality performance compliance with work commitments and compliance with
management’s expectations.
Statement on progress performance compares the work done with related costs
and highlights deviations from the financial assumptions made at the time of
planning the project. A separate report focuses on the quality of performance of
the project to enable revisions or modification of methods or work or control
mechanisms.
In the light of the progress to date, the forecast of the project status for future time
periods or milestones has to be made and compared with contract or work
commitments and management expectations. These reflect the project auditor’s
considered conclusions assuming the observed trends persist, except to the extent
that some observable trends of improvements are reckoned.
If the management has special expectations from the project audit these have to be
listed out. The contractual documents and agreements have to be studies and their
adequacy assessed. The commitments of the owner or management in respect of
providing infrastructure or other facilities also have to be studies and the impact
of inadequacy, if any, in this regard on project’s success has to be assessed. The
project’s organization, administration, record keeping and controls also come for
scrutiny.
FUNCTIONS OF PROJECT AUDITOR
Unsolicited action plans should come up only if the project auditor feels strongly
the items covered in his recommendations are very important in the context of the
findings of project unit.
The auditor will have to evaluate the contract base lines and give his judgment on
their adequacy or otherwise for achieving the objectives of the project. Contract
baseline comprises the set of documents that establish what the project should do,
when and how. It is the baseline with reference to which the auditor should
measure the present and future state of the project. The current documents relating
to commandments and agreements relevant to the project constitute the formal
contract baseline. There can be informal baselines also in the form of verbal
agreements or document not signed by authorized persons. The contract baselines
also relate to contractor’s agreements with subcontractors, suppliers, etc., and
these will also come under project auditor’s purview.
The phase of audit programme execution will have the following steps:
Then will follow the preliminary analysis and presentation of results accompanied
by audit report preparation and transmittal.
The purpose of project audit is to clarify the state of the project in certain
key areas for the enterprise management. It is part of a quality control effort. The
auditor could often be misled by wrong information or out of date or incorrect
documentation. He should have a system of cross verification and checks so as
not to be led astray. It might sometimes be found that persons who are to be
working on the project are not there and those who are not supposed to be in the
project are there. The auditor will have to report these aberrations indicating their
implications for the project. Difficulties might arise in identifying the baseline
contract or work statement set. Work could be carried out on the basis of verbal
agreements without proper contract documentation. Absence of deliverable
specifications in the contract baseline and inadequacies in delivery procedure or
acceptance criteria are often problems requiring special attention. The auditor will
have to resolve such ambiguities.
CONCLUSION
Thus, this chapter vividly narrate the significance of Project Audit, steps
involved in Project Audit Programme, Auditor’s role and Problems encountered
in Project Audit. Having identified and analyzed a variety of problems pertaining
to the formulation and implementation of the project audited by him, the project
auditor can evolve guidelines that can be useful for other projects, present or
future, of the enterprise.
SELF ASSESSMENT QUESTIONS
******************
Model Question Paper
Paper 2.5 : Project management
(4 x 15 = 60)
PART – B
Answer any Four questions
Question No. 15 is Compulsory