8/19/2019

What is a Project?
• A temporary endeavor undertaken to create a
‘unique’ product, service, or result.
• As per PMI,
A project is a one-shot, time limited, goal
directed, major undertaking, requiring the
commitment of various skills and resources.
A project should be
• Technically = feasible
• Commercially = viable
• Politically = suitable
• Socially = acceptable

Three Project Objectives

Scope

Required Deliverables

Performance
Target

Cost

Budget Limit

Due date

Time

1
 8/19/2019

Three Project Objectives

Type of Projects
Project

National International

Non-industrial Industrial

Non Conventional/R&D High Tech Conventional Tech Low Technology

Mega (>1000) Major (150-1000) Medium (20-150) Mini (<20)

Grass Root Expansion Modification

Normal Crash Disaster

2
 8/19/2019

Project Life Cycle

4% Effort 8% 85% Effort 3% Effort

Conceptual Selection Planning Execution Termination

Phase Phase Phase Phase Phase
Project Cost Percentage Factors:
Project Development & DPR : 2%
Engineering & Design : 13%
B.O. Materials and Equipment : 55%
Fabrication and Construction : 30%

Tip of Ice-Berg Syndrome

Many of the problems will surface later in project execution

Source: Project Management – A Systems Approach for planning, scheduling and controlling Dr. Kerzner

3
 8/19/2019

Project
Identification

Social
Cause

Projects

Business
Cause

Project
Owners

Organizations

Project
Executors

4
 8/19/2019

In respect of Project Owners

• A project may be seen as an investment activity where financial

resources are expended to create capital assets that produce
benefits over extended period of time.

• Selection of Project must be based upon the following:

Technical Feasibility
Commercial Viability
Political Suitability
Social Acceptance

Technical Feasibility

Is the technology proposed the latest?

Is the technology a proven technology?
Is the technology easily available?
What is the time for the technology to become
obsolete?
Is the technology cost-effective?

5
 8/19/2019

Technical Feasibility…contd..

 Geographical and infrastructure conditions.

 Natural resources and labor availability.
 Local Government and tax regulations.
 Public interest.

Not many will qualify based on all the above

conditions

Commercial Viability

Is the project workable in respect of raising

financing to meet the investment?
Whether the project will give satisfactory
returns on the investment?

6
 8/19/2019

Profit/Profitability Models

• Models that look at costs and revenues

– Payback period
– Discounted cash flow (NPV)
– Internal rate of return (IRR)

……NPV and IRR are the more common methods

Payback Period Example

Payback Period = Project Cost
Annual Cash Flow
$ 1,00,000
=
$ 25,000
= 4 years

7
 8/19/2019

Payback Period Drawbacks

• Does not consider time value of money
• More difficult to use when cash flows change over
time
• Less meaningful for longer periods of time (due to
time value of money)

NPV
Net present value is the present value of net cash inflows generated by a project
including salvage value, if any, less the initial investment on the project.

It is one of the most reliable measures used in capital budgeting because it

accounts for time value of money by using discounted cash inflows

When cash inflows are even:

1 - (1 + i)-n Initial
NPV = R - Investment
(i)

i* : is the target rate of return ;

R is the net cash inflow expected to be received each period
n: number of periods during which the project is expected to operate and
generate cash inflows.

* discount rate, which is the average cost the company pays for capital from borrowing or selling equity

8
 8/19/2019

NPV

When cash inflows are uneven:

R1 R2 R3 Initial
NPV = + + + ... - Investment
(1 + i)1 (1 + i)2 (1 + i)3

i* : is the target rate of return ;

R1 is the net cash inflow during the first period; PV Factor
R2 is the net cash inflow during the second period;
R3 is the net cash inflow during the third period, and so on ...

* discount rate, which is the average cost the company pays for capital from borrowing or selling equity

NPV …contd..

When cash inflows are uneven:

Decision Rule:
1. Accept the project only if its NPV is positive

2. Reject the project having negative NPV.

3. While comparing two or more exclusive projects having positive NPVs ……

………………..accept the one with highest NPV.

9
 8/19/2019

NPV …contd.. Activity

An initial investment on a Project of $8,320 thousand is expected to

generate cash inflows of $3,411 thousand, $4,070 thousand, $5,824
thousand and $2,065 thousand at the end of first, second, third and
fourth year respectively. At the end of the fourth year, the machinery
used will be sold for $900 thousand.

Calculate the present value of the investment if the discount rate is 18%.
As a PMC decide on project proposal.

Year 1 2 3 4

Net Cash $3,411 $4,070 $5,824 $2,065

Inflow thousands thousands thousands thousands
Salvage
Value
900
Total Cash
Inflow
$3,411 $4,070 $5,824 $2,965

Present
Value Factor
0.8475 0.7182 0.6086 0.5158
Present
Value of $2,890.68 $2,923.01 $3,544.67 $1,529.31
Cash Flows
Total PV of
Cash $10,888
Inflows
Initial
Investment
8,320

Net Present $2,568

Value thousands
PV Factors:
Year 1 = 1 ÷ (1 + 18%)^1 = 1 ÷ (1 + 0.18))^1 ≈ 0.8475
Year 2 = 1 ÷ (1 + 18%)^2 = 1 ÷ (1 + 0.18))^2 ≈ 0.7182
Year 3 = 1 ÷ (1 + 18%)^3 = 1 ÷ (1 + 0.18))^3 ≈ 0.6086
Year 4 = 1 ÷ (1 + 18%)^4 = 1 ÷ (1 + 0.18))^4 ≈ 0.5158

10
 8/19/2019

Social Acceptability
 Social Impact is defined as “the consequences to human
populations of any pubic or private actions/projects that alter the
ways….

………in which people live, work, play, relate to one another,

organize to meet their needs, and generally cope as
members of society.

 Social Impact Assessment (SIA) alerts the project planners with

likely social benefits or losses of a proposed project.

Source: Council for Social Development

SOCIAL IMPACT FACTORS

Breadth of Impact – A measurement of how many people the project impacts.

Depth of Impact – The degree to which a project will provide lasting, positive
changes in a person’s or community life.

Changing Paradigms – The degree to which the project will encourage mindset
and behaviour changes.

Wellbeing – The degree to which a person will experience improved quality of

life.

Empowerment – The degree to which a person or community will be

empowered to do what they wish to do.

Quality of Project Implementation – A measure of how well the project will be

implemented

Source: Council for Social Development

11
 8/19/2019

DECISIONS BASED ON SOCIAL IMPACT FACTORS

The knowledge of these likely impacts in advance can help decision-makers

in deciding whether

 the project should proceed,

or
 proceed with some changes,
or
 dropped completely.

Source: Council for Social Development

Environment Impact Assessment

What is EIA?

Environmental Impact Assessment (EIA) is a process which ensures that

all environmental matters are taken into account quite early in the
project at selection process.

12
 8/19/2019

Environment Impact Assessment….contd..

Why EIA?

EIA is intended to prevent or minimize potentially adverse environmental

impacts and enhance the overall quality of a project.
The main benefits of EIA are:
Increased project acceptance
Improved project design
Informed decision making
Environmentally sensitive decisions
Reduced environmental damage

Which type of projects under go EIA?

Agriculture
Construction (Road networks, Malls, Townships, Dam etc)
All Industry projects
Electrical projects
Waste disposal
Any developmental projects around Protected Areas / Nature Preserves
Clean Development Mechanism (CDM) projects

13
 8/19/2019

The EIA Directive

The EIA should identify, describe and assess the direct and indirect
effects of a project on the following factors:

Human beings
Fauna and flora
Soil, Water & Air
Climate and the landscape
Material Assets
Cultural Heritage
Interaction between all above factors

EIA therefore should have a very strong social dimension

EIA Clearance required

Total EIA clearance is required for 32 categories of developmental
works broadly categorized into following industrial sectors:
Mining
Thermal power plant
River valley
Infrastructure (Road, highway, ports, harbor, airports etc.)
Industries including very small electroplating or foundry units etc.

Certain activities permissible under Coastal Regulation Zone Act

1991, also require similar clearance

14
 8/19/2019

In respect of Project Executors

• Project identification is …….’the best fit

between the Project requirements and
Organisation’s Ability to Perform that Project’

 Is there any clearly defined PM Process?

 Do the manpower have right skills and competencies to
execute the project?
 Do the individuals and teams exhibit leadership at their
respective levels?
 Do the teams are capable to monitor and understand the
external environment?
 Do the Project cost is adequately met, given the available
financial resources?
If organisation does not have the right capabilities, it will be too
difficult to successfully complete the project.

(Source: Contemporary Project Management, Kloppenborg)

15
 8/19/2019

The screening process of projects

 Is the technology appropriate to the project’s objectives or local capabilities?

 Is the risk involved manageable?

 Will the supply of project materials or skills be adequate?

 Is there adequate commitment by the intended beneficiaries and support

from project owners?

(Source: Contemporary Project Management, Kloppenborg)

Detailed Project Report

(D.P.R.)

16
 8/19/2019

DPR will contain almost same information contained

in the “Techno-Commercial” Feasibility Report
Main objective of DPR :

1. To formally communicate to the project promoters for decision making

2. To arrange to get financial assistance for funding the project
Details of the proposed Project
 Description of the project
 Capacity of the plant
 Design of the plant
 Technology (technical know-how)
 Details of land, building, plant & machinery
 Details of infrastructural facilities (viz., power, water, transport
etc.)
 Raw material requirement/availability

 Effluent (hazardous gases etc.,) produced by the plant

 Efficient effluent treatment arrangements
 Labour requirement/availability
 Specifications and relevant standards
 Estimated Bill of material
 Warranty and Performance Guarantee
 Operations and Maintenance Requirements
 Project implementation schedule
 Project cost
 Means of Project Financing
 Requirements of Government approvals and Local body/other
statutory permissions
 Social & Environmental Issues
 Annexures of Drawings etc.

17
 8/19/2019

The Project Manager

• The project manager can be chosen and installed as
soon as the project is selected for funding
– This simplifies several start up activities
• The project manager can be chosen later
– This makes things difficult
• Senior management briefs the project manager
• Project manager begins with a budget and schedule
– As people are added these are refined

Three Major Questions facing Project Managers

• What needs to be done?

• When must it be done?
• How are the resources required to do the
job to be obtained?

18
 8/19/2019

Project Manager Responsibilities

• The parent company
• The project and the client
• The project team

The Parent Company

• Proper usage of resources
• Timely and accurate reports
• Keep project sponsor informed

19
 8/19/2019

The Project and the Client

• Preserve the integrity of the project
– This may be difficult with all sides wanting
changes
• Keep the client informed of major changes

The Project Team

• Very few people will work for the project
manager
• The “team” will disband at the end of the
project
• The project manager must look out for
everyone’s future
– This is in the best interest of the project,
otherwise as the project winds down, everyone
will be looking after themselves

20
 8/19/2019

Special Demands on Project Manager

• Acquiring adequate resources
• Acquiring and motivating personnel
• Dealing with obstacles
• Making project goal trade-offs
• Maintaining a balanced outlook
• Breadth of communication
• Negotiation

Risk Management
• Projects are risky, uncertainty is high
• Project manager must manage this risk
• This is called “risk management”
• Risk varies widely between projects
• Risk also varies widely between organizations
• Risk management should be built on the
results of prior projects

21
 8/19/2019

Risk
• Risk is a measure of the probability and consequence of not
achieving a defined project goal.
• Most people agree that risk involves the notion of uncertainty.
• Risk has two primary components for a given event:
– A probability of occurrence of that event
– Impact (or consequence) of the event occurring (amount
at stake)
• Risk for each event can be defined as a function of probability and
• consequence (impact); that is,
• Risk = f (probability, consequence)
OF OCCURANCE

Overall Risk is a function of its components

22
 8/19/2019

• Risk constitutes a lack of knowledge of future events.

• Typically, future events (or outcomes) that are favorable are
called opportunities, whereas unfavorable events are called
risks
• Another aspect of risk is its cause or, more specifically, the
root cause(s)
• Since risks are related to future events, the root cause(s) may
not be known and in some cases will never be known.

TOLERANCE FOR
RISK

23
 8/19/2019

Utility

Amount of money at stake

Risk Preference and the Utility Function

• The Y axis in Figure represents utility,

…………..which can be defined as the amount of satisfaction or
pleasure that the individual receives from a payoff.
• The X axis in this case is the amount of money at stake
….(but can also potentially represent technical performance
or schedule).
• Curves of this type can represent the project manager or
other key decision-makers’ tolerance for risk.

24
 8/19/2019

• With the risk averter:

utility rises at a decreasing rate. In other words, when
more money is at stake, the project manager’s satisfaction
diminishes.

With a risk-neutral position:

utility rises at a constant rate. (Note: A risk-neutral
position is a specific course of action, and not the average of
risk averter and risk taker positions as is sometimes erroneously
claimed.)

With the risk taker:

the project manager’s satisfaction increases at an
increasing rate when more money is at stake

A risk averter prefers a more certain outcome and will demand

a premium to accept risk.

A risk taker prefers the more uncertain outcome and may be

willing to pay a penalty to take a risk.

While the project manager’s or other key decision-makers’,

tolerance for risk may vary with time, different representations
of this tolerance (e.g., risk averter and risk taker) should not
exist at the same time…..
else inconsistent decisions may be made.

25
 8/19/2019

• The Project Management Institute (PMI) has categorized

risks as follows:

• External-unpredictable: government regulations, natural

hazards, acts of God
• External-predictable: cost of money, borrowing rates, raw
material availability
• The external risks are outside of the project manager’s
control but may affect the direction of the project.

• Internal – non-technical: labor stoppages, cash flow

problems, safety concerns, health and benefit plans

The internal risks may be within the control of the project

manager and present uncertainty that may affect the project.
• Internal – Technical: changes in technology, changes in state
of the art, design concerns, Technical risks relate to the
utilization of technology and ….

• ……..the impact it has on the direction of the project.

26
 8/19/2019

Legal: licenses, patent rights, lawsuits, subcontractor

performance, contractual failure

Risks can also be mapped according to life-cycle phases

Life-cycle risk analysis

27
 8/19/2019

DEFINITION OF RISK MANAGEMENT

• Risk management is the act or practice of dealing with risk.
……….It includes planning for risk, identifying risks, analyzing
risks, developing risk response strategies, and monitoring and
controlling risks to determine how they have changed.

• Risk management is not a separate project office activity

assigned to a risk management department…
….. but it is one aspect of sound project management.

• Risk management should be closely coupled with key project

processes, including but not limited to ….

……..overall project management, cost, design, quality, schedule,

scope, and test……

28
 8/19/2019

Parts to Risk Management

• Risk management planning
• Risk identification
• Qualitative risk analysis
• Quantitative risk analysis
• Risk response planning
• Risk monitoring and control
• The risk management register

Risk Management Planning

• Need to know the risk involved before selecting a
project
• Risk management plan must be carried out before
the project can be formally selected
• At first, focus is on externalities
– Track and estimate project survival
• Project risks take shape during planning
• Often handled by project office

29
 8/19/2019

Risk Identification
• Risk is dependent on technology and
environmental factors
• Delphi method is useful for identifying project
risks
• Other methods include brainstorming,
nominal group techniques, checklists, and
attribute listing
• May also use cause-effect diagrams, flow
charts, influence charts, SWOT analysis

Qualitative Risk Analysis

• Purpose is to prioritize risks
• A sense of the impact is also needed
• Each objective should be scaled and weighted
• Construct a risk matrix
• Same approach can be used for opportunities

30
 8/19/2019

Example: Considering five threats

1. Tight Schedule
2. Can’t acquire technical knowledge
3. Client changing scope of the project
4. Cost Escalation
5. Recession

Risk Matrix

Risk Matrix

31
 8/19/2019

Quantitative Risk Analysis

FMEA: Failure Mode and Effect Analysis
1. List ways a project can fail
2. Evaluate the severity (S) of the impact of each type of failure on a 10-point
scale where “1” is “no effect” and “10” is “very severe.”
3. For each cause of failure, estimate the likelihood (L) of its occurrence on a 10-
point scale, where “1” is “remote” and 10 is “almost certain.”
4. Estimate the inability to detect (D) a failure associated with each cause. Using
a 10-point scale, where “1” means detectability is almost certain using normal
monitoring/control systems and “10” means it is practically certain that failure
will not be detected in time to avoid or mitigate it.
5. Find the Risk Priority Number (RPN) = S  L  D

Example:

Sl. Threat Severity Likelyhood Inability to detect RPN

No. (S) (L) (D)

1 Tight Schedule 6 7.5 2 90

2 Can't acquire Tech. Knowledge 8.5 5 4 170

3 Client changes scope 4 8 5 160

4 Costs escalate 3 2 6 36

5 Recession 4 2.5 7 70

32
 8/19/2019

Example ….contd..

From the RPN numbers, the biggest threats are: 2 (Can’t acquire technical
knowledge) and 3 (Client changes scope).

Threat 2 has a great severity and threat 3 is quite likely, though the
severity is much less damaging.

The cost threat (4) and the recession threat (5) can probably be ignored
for now since their likelihoods are so low.

The tight schedule (1) will have some consequences and is also
quite likely, but we will see it coming early and can probably take steps to
avoid or mitigate it…..

………by implementing Agile PM practices.

33