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Project Management
Project Management
Project Management
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COURSE DESIGN COMMITTEE
TOC Reviewer Content Reviewer

Ms. Brinda Sampat Mr. H. Parasuram
Assistant Professor, NMIMS Global Professor, SVKM’s NMIMS,
Access - School of Continuing Education Anil Surendra Modi School of Commerce
Specialization: Information Technology Specialization: Operations Research,
Operation Management, Statistics,
Quantitative Techniques
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Author : Siddesh Kashinath Pai

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Reviewed By: H. Parasuram
Copyright:
2015 Publisher
ISBN:
978-93-5119-496-5
Address:
4435/7, Ansari Road, Daryaganj, New Delhi–110002
Only for
NMIMS Global Access - School for Continuing Education School Address
V. L. Mehta Road, Vile Parle (W), Mumbai – 400 056, India.
NMIMS Global Access - School for Continuing Education

C O N T E N T S
CHAPTER NO. CHAPTER NAME PAGE NO.
1 Introduction to Project Management 1
2 Project Organisation 37
3 Operating and Environmental Feasibility 57
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4 Market Analysis in Project Management 79
5 Financial Feasibility of a Project 101

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6 Capital Budgeting Techniques in Project Selection 135
7 Nature of Project Decisions and Project Planning 175

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8 Monitoring and Controlling a Project 193

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9 Project Scheduling 215
10 Computer Application in Project Management 271
11 Case Studies 287

P r o j e ct Ma n a g e m e n t
c u r r i c u l um
Introduction to Project Management: Defining Project, Meaning of Project Management, Project

Management Framework, Project Management Body of Knowledge (PMBOK), Project Integration
Management, Success Factors in Project Management, Role of a Project Manager, Role of Consul-
tants in Project Management
Project Organisation: Concept of Project Organisation, Project Organisation Structures, Project

Management Offices (PMOs), Project as a part of Functional Organisations
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Operating and Environmental Feasibility: Meaning of Operating Feasibility, Capacity Require-
ments in a Project, Plant Capacity, Selecting Plant Location, Technological Requirements, Envi-
ronmental Feasibility of Projects
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Market Analysis in Project Management: Concept of Market Analysis, Demand Forecasting,
Product Mix Analysis, Technical Appraisal, Distribution Channel Analysis
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Financial Feasibility of a Project: Financial Analysis, Profitability Analysis, Cost and Benefit Anal-
ysis, Assessing Tax Burdens, Appraisal Criteria used by Lending Institutions
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Capital Budgeting Techniques in Project Selection: Concept of Capital Budgeting, Time Value of
Money, Evaluation of Capital Budgeting, Importance of Cash Flows in Project Selection, Impor-
tance of Cost of Capital in Project Selection, Risks Involved in Project Selection
Nature of Project Decisions and Project Planning: Project Decisions, Concept of Project Plan-
ning, Project Planning Estimation, Project Management Life Cycle
Monitoring and Controlling a Project: Planning-Monitoring-Controlling Cycle, Project Monitor-

ing, Project Controlling, Management Control System

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Project Scheduling: Concept of Project Scheduling , Estimating Time, Project Network Analysis, Gantt
Chart, Concept of Resource Scheduling, Process of Resource Scheduling, Project Progress Report
Computer Applications in Project Management: Management Information System for Projects, Intro-
duction to Project Management Software
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Ch a
1 p t e r
INTRODUCTION TO PROJECT MANAGEMENT
CONTENTS
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1.1 Introduction
1.2 Defining Project
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1.2.1 Characteristics of a Project
1.2.2 Lifecycle of a Project
Self Assessment Questions
Activity
1.3 Meaning of Project Management
1.3.1 Objectives of Project Management
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1.3.2 Advantages of Project Management

1.3.3 Role of Project Management
1.3.4 Scope of Project Management
1.3.5 Importance of Project Management
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1.3.6 Principles of Project Management

Activity
1.4 Project Management Framework
1.4.1 Project Constraints: ‘Triple Constraints’
1.4.2 Management by Objectives (MBO)
Activity
1.5 Project Management Body of Knowledge (PMBOK)
Activity
1.6 Project Integration Management
Activity
1.7 Success Factors in Project Management
Activity

2 Project Management
CONTENTS
1.8 Role of a Project Manager

1.8.1 Project Manager as an Entrepreneur
Activity
1.9 Role of Consultants in Project Management
Activity
1.10 Summary
1.11 Descriptive Questions
1.12 Answers and Hints
1.13 Suggested Reading for Reference
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INTRODUCTION TO PROJECT MANAGEMENT 3
Introductory Caselet
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PROJECT MANAGEMENT HELPS DMRC

IN THE DELHI METRO PROJECT
The Delhi Metro project gave Delhi a world-class mass rapid

transportation system. It stood out from most other public sector
projects in India in that it was completed on schedule and within
the allotted budget. However, the project encountered several is-
sues before and during its implementation. These issues were as
follows:
Preliminary activities to be taken up before a large infrastruc-
ture project can be started
Role of a project manager in project execution
Importanceof the right work culture in successful project
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management
Recognise the importance of managing the various stakehold-
ers in a project
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Difficultiesinvolved in the execution of large infrastructure
projects in developing countries, and how these can be over-
come
Delhi Metro Rail Corporation (DMRC) employed principles and

techniques of project management to ensure the successful com-
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pletion of the project. DMRC managed the various stakeholders

like the central and state governments, the contractors, and the
citizens of Delhi, to ensure that the project was implemented
smoothly.
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learning objectives
After studying the chapter, you will be able to:

>> Define the term project
>> Discuss the meaning of project management
>> Describe the project management framework
>> Explain the project management body of knowledge
(PMBOK)
>> Describe the process of project integration management
>> Discuss the success factors in project management
>> Explain the role of a project manager
>> Explain the role of consultants in project management
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1.1 INTRODUCTION
Project is a term that is widely used in the business world, such as
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power projects, software projects, railway projects, etc. An organisa-
tion may work on various projects at a given time. Performance stan-
dards of the organisation are measured on the basis whether the the
projects have been executed successfully on time or not. Therefore,
projects are integral to the survival of an organisation. Let’s under-
stand what exactly the term project means.
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A project is a set of pre-defined activities having a defined beginning

and end, which are undertaken to achieve a specific goal. Let’s un-
derstand this better with an example. Suppose a real estate company
undertakes a new housing development project. The project would
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involve several activities, such as creating a plan, preparing land,

and constructing buildings. It would have a definite beginning, which
would include planning for the land and designing the buildings, and
a definite end, which would be the completion of the project.
Different activities undertaken by an organisation, such as setting up

plants, launching products, and constructing buildings are examples
of projects. Different types of organisations undertake different types
of projects. For example, construction companies take up construc-
tion projects, software companies take up software development proj-
ects, and consumer goods companies, such as HUL, take up product
development projects.
Unless an organisation has requisite knowledge of project manage-

ment, it cannot manage a project successfully. As a discipline, project
management entails various skills pertaining to budgeting, planning
and resource management.

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These skills are essential to ensure that a required end deliverable is

completed within the timeframe allocated for it. Let’s take an exam-
ple to understand this better. Suppose an organisation undertakes a
road construction project. Before starting the project, the organisa-
tion needs to prepare a proper project plan. To ensure that the proj-
ect runs smoothly, the organisation also needs to set targets and mile-
stones, procure the resources, recruit the workforce, implement the
plan, monitor the project’s progress, and finally ensure its successful
completion. Each of these activities of the project involves a standard
set of practices and procedures that make up the discipline of project
management.
This chapter deals with different aspects of project management in

detail. It begins by defining the term and then goes on to discuss the
objectives and advantages of project management. It also explains the
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principles and knowledge areas of project management. Apart from
this, the chapter describes the project management framework, which
includes ‘Triple Constraints’, Management by Objectives, and Proj-
ect Management Body of Knowledge (PMBOK). Moreover, you learn
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about project integration management, the success factors in project
management, the role of a project manager, and the role of consultants
in project management.
1.2 DEFINING PROJECT

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A project is a pre-determined set of activities with a definite beginning

and a definite end. This means that it is a temporary undertaking the
purpose of which is to create a unique product, service, or result. Each
project is unique because the product, service, or result it hopes to
produce is different from all other similar products or services.
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Each project also has a unique objective that it seeks to attain. It is

very important for the organisation to attain that objective. However,
the budget to attain it is limited. Examples of projects are the vari-
ous activities that organisations undertake, such as setting up plants,
launching products, constructing buildings, putting a new business
process or procedure in place, etc.
Project as a term can be defined in a number of ways. The Project

Management Institute (PMI) defines a project as “a temporary en-
deavor undertaken to create a unique product or service. Projects
usually include constraints and risks regarding cost, schedule, or per-
formance outcome.”

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note
PMI is one of the world’s largest non-profit membership associa-

tions for project management professionals. The institute plays an
important role in in the field of project management and is respon-
sible for developing standards, conducting research, providing ed-
ucation and training and networking opportunities.
A project is an activity that is non-routine and conducted by organ-

isations and individuals to achieve definite goals. For example, if an
organisation wants to know why its sales are falling, it may decide to
do a survey and collect customer feedback. This survey, which is a
non-routine activity, is an example of a project. Such a project has a
specific goal, that is, to determine the reasons for the decline in sales.
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Projects can be classified on the basis of various parameters. These
parameters may be size (small, medium, or large), level of complexity
(easy, moderate, or complex) location (national or international), na-
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ture (industrial or non-industrial), and deliverables (cement projects,
telecommunication projects, refinery projects, steel projects and fer-
tiliser projects).
All projects consist of a number of activities. Let’s understand this

with the customer survey project mentioned earlier. The activities
in this project may include defining the sample group, determining
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the sample size, designing a questionnaire, getting the questionnaire

filled by the target customers, etc. These activities may be divided fur-
ther into a number of tasks. For example, the designing questionnaire
activity may involve tasks such researching on the suitability of var-
ious types of questionnaires, finalising the questions, inserting them
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in the Word processor, printing the questionnaires, etc. Therefore, a

project may involve numerous activities and tasks, which need to be
successfully executed to achieve the project’s objectives. However, the
number of activities and tasks involved in a project depends on the
nature and the scope of the project and will be discussed later in the
chapter. A market survey project, for example, would involve fewer
activities than those in a new airport construction project.
1.2.1 CHARACTERISTICS OF A PROJECT
All projects have a unique goal and fulfil some specific objectives of
an organisation. For example, highway projects undertaken by con-
struction organisations are different in terms of scope, time involved,
and resource requirement than product development projects. How-
ever, in spite of these differences, the general characteristics of all
projects remain the same. Figure 1.1 lists the common characteristics
of a project:

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Specific Purpose
Uniqueness
Lifecycle
Connected Activities
Specified Time
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Interdependency IM
Figure 1.1: Characteristics of a Project
The characteristics shown in Figure 1.1 can be briefly explained as

follows:
Specific Purpose: Each project has certain specified goals that it
has to achieve. These goals differ from project to project. For ex-
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ample, a new terminus may be built to accommodate more traffic

in an airport. In this case, capacity expansion is the main objective
or purpose for constructing the new terminal. In the same way,
projects related to new product development or customer surveys
are undertaken for specific purposes, such as increasing sales or
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studying the tastes and preferences of customers, etc.

Uniqueness: Each project is unique in certain parameters such
as scope, objectives, technology used, budget, number of workers
employed, etc. For example, there are hundreds of road construc-
tion projects undertaken by different construction companies at
any given time. However, all these projects will be unique in some
respects such as their location, nature of project, and the construc-
tion company undertaking the project, etc.
Lifecycle: All projects follow a well-defined life cycle, which be-
gins with the generation of project ideas. In the next stage, the
ideas are documented and a project plan is developed. Next, the
project plan is executed and the project’s progress is monitored.
Finally, the project is completed. The different stages in the lifecy-
cle of a project are shown in Figure 1.2:

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Total cost
Design
Plan
Allocate
Carry
Carry Deliver
Out
out Review
Idea Plan
plan Support
Concept
concept Plan
plan Execute
execute Termination
termination
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Figure 1.2: Stages in the Lifecycle of a Project
The figure represents the different stages of a project as well as the

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costs and time involved in the different stages.
Connected Activities: A project consists of a number of activities,
which are required to be executed in a certain order or sequence.
For example, you can build the floor of the bridge only after the
beams supporting the floor are put in place. A logical flow of activ-
ities is at the heart of every project.
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Specified Time: When an organisation undertakes any project, it

must ensure that the goals of the project are achieved within the
allotted time. Failure to do so may result in the organisation suf-
fering a financial loss. For example, suppose an organisation de-
cides to launch a new product in the market and has fixed a certain
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time period for it. However, due to some reason, it fails to launch
the product during that period. When the organisation does finally
launch the product at a later stage, it may discover that the prod-
uct is no longer in demand as there are already several other or-
ganisations selling the same type of product with better features
and at competitive rates. As a result, the organisation will suffer
financial loss. However, you should note that the time required
to create and launch a project depends on the type and scope of
the project.
Interdependency: Generally, organisations undertake several
projects simultaneously. For example, construction companies
such as DLF or GMR have various national and international proj-
ects running at the same time. In such a multi-project environment,
there is a degree of dependence among the different projects. For
example, allocating funds to one research and development proj-
ect may lead to a situation where they may not be enough funds for
other research and development projects in an organisation. Thus,
interdependency is an important characteristic of a project.

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1.2.2 LIFECYCLE OF A PROJECT
Depending on the activities performed during each phase of a project,

the project’s lifecycle can be divided into seven stages as shown in
Figure 1.3:
Identification Preparation Appraisal
Presentation Implementation Monitoring
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Evaluation
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Figure 1.3: Seven Stages of Project Lifecycle
These stages can be briefly explained as follows:

1. Identification: A project begins with an idea that defines the
purpose of the project. The idea defines what the project seeks
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to achieve. Before a project is taken up by an organisation, it

determines the feasibility of the project idea. Usually, the most
feasible project idea is selected out of several alternative ideas.
Selecting the right project idea is very crucial for the success
of the project and of the organisation taking up the project.
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For example, an organisation may have a number of ideas for

developing new products. However, if the right product idea is
not selected, the organisation may face a heavy financial loss.
2. Preparation: At this stage, the selected project idea is analysed
to determine its pros and cons. The organisation may analyse the
consequences of developing a product, for example, and focus
on the financial aspect, such as cost of development, expected
market return, etc.
3. Appraisal: At this stage, every aspect of the selected idea
is systematically and comprehensively evaluated. The idea
behind this is to prepare the final project plan. At this stage, the
organisation tries to find out the following:
The financial feasibility of the project
The technical feasibility of the project
Whether the project would yield enough returns
Risk involved in the project

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4. Presentation: At this stage, a detailed project plan is prepared

and sent to different stakeholders for approval. For example, a
product development team may present the project idea to the
top management for approval. The management may either
accept or reject the idea on the strength of the presentation. A
project is implemented only after its project idea is approved.
5. Implementation: At this stage, the approved project plan is
implemented. It is therefore, understandably, also the longest
stage of a project as it involves the maximum efforts, cost, and
time. The project activities are also executed to fulfil the project
objectives.
6. Monitoring: The progress of the project is assessed and
monitored for loopholes and corrective action is taken wherever
required. This is a very crucial stage of the project as it prevents
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any deviations from the original project plan, such as increased
costs, non-conformity to project objectives, and inefficient
utilisation of resources.
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7. Evaluation: This is the final stage and involves reassessing the
project to ensure it has been handled efficiently and mas met all
project objectives. A project report is prepared that highlights
the performance and achievements of the project.
self assessment Questions

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1. ___________ is a pre-determined set of activities with a definite

beginning and a definite end.
2. Each project is unique in certain parameters such as scope,
objectives, technology used, budget, number of workers
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employed, etc. This characteristic is known as ___________.

3. All projects follow a well-defined life cycle, which begins with
the generation of project ideas. (True/False)
4. Which of these stages of project life cycle marks the beginning
of a project?
a. Identification b. Preparation
c. Appraisal d. Presentation
5. ______________ is the final stage and involves reassessing the
project to ensure it has been handled efficiently and mas met
all project objectives.
Activity
Give a few examples of projects undertaken by the government of

India for improving literacy rates.

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1.3 MEANING OF PROJECT MANAGEMENT

The term project management consists of two terms, project and man-
agement. Project refers to a process that is temporary in nature and
has certain start and end times. Management, on the other hand, is the
act of achieving predefined goals through people and other resources.
We can also define project management as the execution of knowledge,
competency, and equipment to fulfil the requirements of a project.
The success of a project, whether small or big, depends on how well

it is planned and executed. All projects have specific objectives that
have to be fulfilled within the given time frame. Project management
helps not only in finishing the project on time, but also in optimising
the resource utilisation for an organisation.
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Project management is defined in different ways by different sources.
The Project Management Institute (PMI), for example, defines project
management as “the discipline of planning, organising, and managing
resources to bring about the successful completion of specific project
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goals and objectives.”
According to ISO 10006, “Project management is a unique process con-

sisting of a set of coordinated and controlled activities with start and
finish dates, undertaken to achieve an objective conforming to specific
requirements, including constraints of time, cost, and resources.”
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In most organisations, project management only deals with the im-

plementation of planned activities designed during the proposal of
a project. However, many management experts believe that project
management is more than just executing the project plan into action.
Project management is a discipline that deals with various theories
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and practices of managing projects. It is a functional discipline of

management that involves planning, organising, leading, controlling
activities, and managing resources so that the objectives of projects
are attained using the required tools and techniques. A project man-
ager is a person responsible for proper utilisation of resources and
completion of project within the allotted time. A project manager is
also responsible for defining the goals and objectives of the project
and checking the project quality so that the desired standard of the
project is obtained.
Project management provides a systematic and rational approach to

mitigate the risks associated with executing a project to ensure the proj-
ect goals and objectives are achieved through a phased development.
1.3.1 OBJECTIVES OF PROJECT MANAGEMENT
Now that you understand the meaning of project management, it is

important to discuss the purpose of project management. Project Man-
agement helps in planning, co-ordinating and controlling the complex

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and diverse activities of various industrial and commercial projects.

A project is exposed to risks due to various factors such as change in
government policies, change in technology, shortage of funds, decline
in the demand for products and services, rise in price of inputs, and so
on. Project management enables an organisation to successfully deal
with these risks. The purpose of project management is to foresee or
predict as many risks as possible and to plan, organise and control ac-
tivities so that the project is completed successfully. Figure 1.4 shows
the objectives of project management:
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Figure 1.4: Objectives of Project Management
These objectives help in:

Ensuring timely completion of projects
Meeting the project schedule
Maintaining the quality of the deliverables
Ensuring the completion of project in the given budget
Ensuring customer satisfaction
Project management offers several advantages to organisations. Let

us discuss the advantages of project management in the next section.
1.3.2 ADVANTAGES OF PROJECT MANAGEMENT
Project management helps an organisation in effectively and efficient-

ly carrying out projects through use of tools such as project scheduling
and budgeting. According to Tom Peters, co-author of the book, In

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Search of Excellence, “The whole discipline and art of project man-

agement is going to be the essence of management training, operational
excellence, and value added.”
Project management has a number of advantages. Some of these are

as follows:
It aligns the project with the strategic goals of the organisation.
It reduces the project cost by effective planning and management
of resources.
It focuses on performance of the workforce by providing them
training.
It increases the project success ratio.
It ensures that the pre-stated objectives are achieved.
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It improves the coordination among resources used in a project.
It reduces risks associated with the project.
It
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delivers predictable as well as desired results.
It aligns expectations of stakeholders with project performances.
It reduces the project cycle time.
One of the main advantages that project management offers is to add

value to a project. Let us understand how project management adds
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value to a project. An organisation took up a contract for cleaning up a

nuclear site. Initially, the organisation was under pressure to execute
the project with very limited capital and strict deadlines. However,
the organisation set an example by completing the project ahead of
schedule with less than the estimated cost by effectively implement-
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ing the project management practices, such as reducing the project

budget and focusing on the performance. This was possible due to the
project management initiative that reduced the cost of the project and
increased the efficiency by effectively managing the available money
and manpower.
1.3.3 ROLE OF PROJECT MANAGEMENT
Implementation of a project by an organisation implies managing

manpower, budgetary and supply constraints. However, organisations
using project management for controlling and monitoring their proj-
ect processes and schedules are able to effectively complete their proj-
ects on time and within the estimated budget.
A project manager identifies and provides details about the activities

required in each phase of the project and guides the team members on
how to carry out each phase. Project management enables the team
members to work as per the project plan, project schedule with details
about the completion dates for each task within a project phase.

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Therefore, project management is essential for organisations to im-

plement their projects. Project management helps in sticking to a stip-
ulated budget through efficient management of available resources.
A comprehensive project management plan recognises the expected
costs early in the project, which enables the development of a realistic
budget. Project management plays a significant role in minimising the
effect of funding new projects on operating capital by optimising the
human resource allocation. It helps in coordinating tasks and iden-
tifying goals or deliverables within each project phase. This helps in
reducing inadequacies in time management, which could result in
higher costs.
1.3.4 SCOPE OF PROJECT MANAGEMENT
Organisations do not immediately implement a project after finalising
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the project idea. Once a project idea is proposed, several aspects of the
project including project goals, project deliverables, requirement of re-
sources, time frame, etc. need to be finalised and documented. This is
where project scope comes into picture. Project scope is the breadth of a
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project providing details about how much a business would be affected,
what resources are required, how much time the project would take to
complete, etc. The bigger the project, the more details and planning
are needed to successfully bring the project to fruition. Project scope
is a part of project planning involving the process of setting project
goals, identifying processes, assigning tasks and allocating resources.
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Defining a project scope is necessary for setting a stage for project plan
development, which needs to be done by elaborating on the collabora-
tive efforts of the project manager and the customers. A project scope
comprises various elements, which are shown in Figure 1.5:
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Figure 1.5: Scope of a Project

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Let us discuss each of these elements in detail.

Project Objectives: The objectives of a project are documented in
project scope. Project objectives refer to the aims of a particular
project. As discussed earlier, all projects have specific objectives.
For example, the objective of a product to launch a new product
would be to capture certain percentage of market share in a par-
ticular region.
Deliverables: These are tangible or intangible outcomes to be
achieved on the completion of a project. A tangible outcome can
be an item or article while an intangible outcome refers to services
delivered to customers or other beneficiaries. For example, a prod-
uct is the tangible outcome of a product development project. On
the other hand, accommodating more passengers is an intangible
outcome of a project for construction of a new airport terminal.
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Milestones: These are significant events that may occur at a point
of time during the project. Milestones indicate the direction of the
project and ensure that project activities are performed accord-
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ing to the schedule. For example, different milestones in a product
development project could be to generate a product idea, create a
product prototype, develop a product, test the market, collect feed-
back, and launch the product. An organisation could set different
time frames to achieve these milestones.
Technical Requirements: These refer to the technical specifica-
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tions for accomplishing project tasks and activities, such as speed

and capacity of database systems. For example, the AADHAR card
project started by the government of India involves various techni-
cal requirements, such as equipment for taking finger prints, ret-
ina images and reliable data storage systems for storing personal
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information of Indian citizens.

Limits and Exclusions: Limits of project scope outline the borders
of project by describing what the project could not achieve. For
example, a project on ‘safe drinking water for all’ project may be
limited to certain districts of a state. This is the geographical limit
of the project. Exclusions of a project outline the elements that are
beyond the scope of the project. For example, poverty eradication
project of the government would exclude the affluent sections of
the society.
Constraints and Risks: Constraints of a project describe the lim-
itations of resources for accomplishing a project. For example,
projects are required to be executed with a given budget; thus,
budgets act as constraints in a project. Similarly, unavailability of
skilled labour or equipment could act as project constraints. Risks
refer to the deviations of the actual outcome from the expected
outcome. The higher the probability of a project to achieve its ob-
jectives, the lower would be the level of risks involved. However,
different projects involve different risk levels.

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1.3.5 IMPORTANCE OF PROJECT MANAGEMENT
Effective project management can help in carrying out a project to

its fullest potential and help in meeting the expected standards. Con-
versely, poor project management can adversely affect productivity,
suppress creativity or dismiss a project entirely.
The importance of project management can be interpreted through

the following:
Managing Chaos: Projects generally face chaotic situations and
the primary function of project management is to organise and
plan projects to minimise chaos. A complex business project can-
not be achieved without organisation and planning.
Managing Risk: A good project is exposed to several risks aligned
with business risks. A project management strategy is designed in
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a way that takes into account all these risks. Uncontrolled projects
may end in asset destruction and compliance issues. Project man-
agement identifies, manages and controls risk.
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Managing Quality: A project cannot be called successful if it
does not meet the expected quality standards. Quality cannot be
achieved if project tasks and activities are randomly performed.
Project management identifies, manages and controls quality.
Managing Integration: Projects need to be integrated with busi-
ness processes and systems. A project which is not aligned to busi-
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ness processes does not add much value. Project management

identifies and manages integration.
Managing Change: Projects are carried out in a setting where
nothing is constant. Managing change is a complicated and chal-
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lenging task. Project management helps in managing the changes

that obstruct the completion of a project.
1.3.6 PRINCIPLES OF PROJECT MANAGEMENT
Principles are a set of standards or laws which serve as the basis of var-
ious ideas, practices and procedures. According to Webster, principle
can be defined as “a general truth, law on which others are founded or
from which others are derived.”
Project management is based on certain universally applicable princi-

ples. These principles are given by James Chapman. Figure 1.6 shows
the various principles of project management:

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Figure 1.6: Principles of Project Management
Let’s discuss the principles in detail:

Principle of Business Nature and Commitment: This principle
states that organisations should identify their project goals and
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business values to fulfill their commitment. Recognizing the na-

ture of business and volumes always help a project manager in
executing the project accordingly. According to James Chapman,
around 50 per cent of project management is all about paying at-
tention and determining what is there inside and outside your op-
N
erational arena. To close the project successfully within the given

time, there must be a mutual commitment between the sponsor
and the project team.
Principle of Project Success: The objectives of a project remain
unfulfilled till the success of a project. Everyone on a project
should know what the term success signifies for that particular
project. The success of a project may be defined in terms of various
deliverables such as scope, return, and fulfillment of commitment,
time, cost, business expansion and efficiency. However, the key to
the success of a project lies is recognising customers’/clients’ re-
quirements and fulfilling their requirements in terms of quality,
services, price, utility etc.

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Principle of Project Strategy: It is one of the vital principles of

project management. The principle of strategy involves setting-up
of a result-oriented project plan that helps the entire project team
to execute the plan effectively. This principle defines the scope,
schedule, and approach for a project. The project strategy should
be structured in adequate detail and have a set process to follow
the project plan and complete the project within the allotted time.
Principle of Team Building: As you know, project is not a one
man show and therefore, it cannot be completed without the syn-
chronised efforts of a team. A project team may comprise of vari-
ous human resources who are very competent in their respective
domains of operations. There should be sound coordination among
the members working as group or team. This principle aims to cre-
ate the sense of integration among team members so that they can
work collectively towards the common goal. Team building not
S
only saves time of the project, but also minimises individual efforts
and develops a good working environment and culture around.
Principle of Project Assessment: This principle focuses on keep-
IM
ing a tab on project status and provides feedback to the linked
workforce on regular basis. It helps enhance the project perfor-
mance and quality. In addition, it also helps consistently deter-
mine the associated risks and opportunities.
Principle of Documentation: Documentation plays a vital role in
every discipline of a project. Right from project planning to its im-
M
plementation, each phase of a project is recorded and maintained

through documentation. Without documentation it becomes quite
challenging for project teams to have baseline controls, commu-
nication, presentation, decisions etc. However, with rapid diver-
N
sification in the field of technology, documentation has become

digital.
Principle of Satisfaction: Every project is initiated with certain
specific objectives. Satisfaction of customers/clients is the utmost
objective of any project. To satisfy customers/clients, some proj-
ects even introduce changes in their plan. For example, the project
plan of an automobile organisation is to facilitate the customers by
providing them better mileage and fuel consumption attributes.
However, keeping in mind the level of competition and customer
satisfaction, the organisation may change its project plan to pro-
vide the customer free servicing facilities. This increases the level
of customers’ satisfaction.
Pro-Active Principle: The issues that are ignored when they crop
up for the first time generally grow complex in future. Therefore,
it is important for project professionals to proactively address the
risks and confront them at the earliest. As a project manager, you
cannot wait for an issue to resolve on its own, a festering issue will
bleed the project to a horrible end.

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6. ________________ is the discipline of planning, organizing, and

managing resources to bring about the successful completion
of specific project goals and objectives.
7. Project management provides a systematic and rational
approach to mitigate the risks associated with executing a
project. (True/False)
8. _____________ identifies and provides details about the
activities required in each phase of the project and guides the
team members on how to carry out each phase.
9. ________________ is the breadth of a project providing details
about how much a business would be affected, what resources
are required, how much time the project would take to
S
complete, etc.
10. ____________ indicate the direction of the project and ensure
that project activities are performed according to the schedule.
IM
11. The principle of strategy involves keeping a tab on project
status and provides feedback to the linked workforce on
regular basis. (True/False)
M
Activity
Make a list of factors related to project management that need to be

documented following the principle of documentation.
N
1.4 PROJECT MANAGEMENT FRAMEWORK

Having studied the knowledge areas of project management, you can
now learn about Project Management Framework (PMF). Put simply,
PMF refers to a tool that helps in planning a project and monitor-
ing its progress. In other words, project management framework is
a statement that lays down all the required activities and tasks to be
undertaken in a project. In addition, the statement also mentions the
timeline for the completion of the tasks and the individuals responsi-
ble for each activity. A typical PMF consists of the following steps:
1. Identifying the key steps and project activities for the completion
of the project
2. Estimating the required time for each task
3. Updating the document containing the project information and
reports
4. Tracking progress of the activities against recorded timeline

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The following are the main functions of PMF:

Supporting the development of the project plan
Serving as a common reference framework for different individu-
als involved in the project, which in turn reduces miscommunica-
tions
Streamlining various tools and techniques used in the project to
help in the project management process
Ensuring completion of the project in accordance with the set ob-
jectives
1.4.1 PROJECT CONSTRAINTS: ‘TRIPLE CONSTRAINTS’
Constraints refer to the limitation of resources. No project has access
S
to unlimited resources. An organisation allocates budget and resourc-
es to a project. In addition, the organisation also sets timeline for the
completion of the project. Therefore, a project needs to fulfil the set
objectives within a given set or resources. In addition, the deadline
IM
and the quality of deliverables are also required to be maintained.
There are three constraints of a project:
Scope/Quality
Resources/Budget
Schedule/Time
M
These constraints are also known as triple constraints. Figure 1.7

shows the balance between the triple constraints of a project:
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Figure 1.7: Triple Constraints of Projects

Source: http://www.bridging-the-gap.com/working-with-pms-to-juggle-the-triple-constraint/
Let us discuss these constraints in detail:

Scope/Quality: The scope or quality of a project is specifically set
before initiating any project. It includes the deliverables of the
project and the specifications of the deliverables. For example, the

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scope of a bridge construction project can be to construct a bridge

of certain length and breadth with a certain load bearing capac-
ity. A project cannot compromise on the scope. Consider a mobile
phone whose quality based on its utility and longevity. While man-
ufacturing it, the project members need to focus on its long-term
prospects so that the mobile phone does not become obsolete soon
after its launch in the market. Thus, scope or quality of a project
acts as a constraint in project management.
Resources/Budget: Resources are always in limited supply in a
project. This is because resources can be procured only by incur-
ring costs and organisations allocate fixed budget for the projects.
Resources required in a project depend on the type of the project.
For example, a construction project would require bricks, stones,
marbles, cement, steel etc. On the other hand, a product devel-
opment project may not require any of these resources. However,
S
all types of resources involve cost. Therefore, resources are a con-
straint for any project. Shortage of financial resources hinders a
project from its successful completion.
IM
Schedule/Time: It is the timeline for the completion of a project.
Organisations cannot continue a project for ever. Every project
needs to be completed in a time bound manner. For example, if you
want to get a house built, you would give a timeline to the contrac-
tor to build the house. On the other hand, if the contractor fails to
close the project in time, it will impact both the cost and the scope.
M
Therefore, schedule is a constraint for any project.
1.4.2 MANAGEMENT BY OBJECTIVES (MBO)
In the triple constraints, you learnt that organisations need to fulfil

N
the project objectives within a set of constraints. The application of

MBO can help organisations in fulfilling the objectives of their proj-
ects. As the name suggest, MBO is a process of defining the objectives
of a project so that the human resources aligned with a project and
the management of the organisation can understand the set objectives
and perform accordingly. MBO was introduced by Peter Drucker in
his 1954 book, The Practice of Management. It gained huge popularity
immediately and most organisations went to adopt this practice. MBO
is also known as Management by Results (MBR)
MBO in project management seeks to align the objectives of each per-

sonnel with the objectives of the project. The following are a few key
features of MBO:
Itinvolves both superior and subordinate managers to define the
objectives of a project.
It requires participation of management to identify if the objec-
tives are feasible and achievable.
It is a systematic and rational technique that enables management
to utilise the available resources to accomplish the set objectives.

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It facilitates effective communication between superior and subor-

dinate personnel for the completion of the project.
Peter Drucker suggested five steps in the MBO process, as shown in

Figure 1.8:
S
Figure 1.8: The MBO Process

IM
12. _____________ refers to a tool that helps in planning a project
and monitoring its progress.
13. There are three constrains of a project:
a. _________
M
b. _________
c. _________
14. ___________ is the timeline for the completion of a project.
N
Activity
Using the Internet, give a few examples where MBO has been used
to define project objectives.
PROJECT MANAGEMENT BODY OF

1.5
KNOWLEDGE (PMBOK)
Project Management Body of Knowledge or PMBOK sets standards
for the successful completion of projects across various industries.
PMBOK defines the process of managing an entire project, and the
tools and techniques used to reach towards a successful outcome of a
project. PMBOK compiles knowledge, practices and processes, which
are generally accepted to be the best in the discipline of project man-
agement. It is an internationally recognised standard (IEEE std. 1490-
2003) that provides fundamental concepts of project management
regardless of the type of the project, be it a construction project, a soft-
ware development project, engineering projector automotive project.

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PMBOK was first published by the Project Management Institute

(PMI) in 1983. PMBOK identifies 47 processes that are categorised
under five basic processes and ten knowledge areas. Figure 1.9 shows
the steps involved in the process of a project:
Initiating Planning Executing
Monitoring and
Closing
Controlling
S
Figure 1.9: Steps in the Processes of a Project
IM
These steps are also referred to as stages of project life cycle. Let us
discuss these steps in detail.
1. Initiation: It is the first stage of the project where, the concept
and objectives of the project are identified. At this stage, the
organisation identifies the requirement of a particular project
and its nature. Completion of this stage leads a project manager
M
to step towards the following stages.

2. Planning: It is the second stage of a project where the project
manager designs the project schedule and the required resources
to accomplish the objectives of the project. Planning involves
N
preparing budget, identifying, procuring and managing the

required resources, etc.
3. Execution: It is the third stage, where the project manager starts
performing according to the plan laid down in the previous stage.
Execution involves putting all the efforts into action to close the
project within the given time. The success or failure of a project
depends on how well it is executed. For proper execution of a
project, you will require proficient workforce, quality materials,
financial support, and effective team.
4. Monitoring and Controlling: It is the fourth stage where the project
manager gauges the progress or drawbacks of a project. In case of
any deviation or loopholes, the corrective measures are required
to be taken by the project manager. Progress, on the other hand,
encourages a project manager to go for continual improvement in
the project for providing better output to customers/clients.
5. Closing: It is the fifth and final stage involved in a project life
cycle. When the set goals of a project are achieved within the
given time, the project is said to be closed. On completion of a

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project, the project manager and other resources are released

for the next project.
note
The fifth edition of A Guide to PMBOK defines the concept of proj-

ect management and also suggests how to manage individual proj-
ects. It also describes the life cycle of project management. In its
previous edition, PMBOK has mentioned about only nine knowl-
edge areas. However, in its fifth edition (2013), the book has includ-
ed one more knowledge area, which is Project Stakeholders Man-
agement.
Figure 1.10 depicts the ten knowledge areas that are recognised by
PMBOK:
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Project Integration Management
IM
Project Scope Management
Project Time Management
Project Cost Management

M
Project Quality Management
Project Human Resource Management

N
Project Communications Management
Project Risk Management
Project Procurement Management
Project Stakeholders Management
Figure 1.10: Ten Knowledge Areas Recognised by PMBOK
Each knowledge area includes some or all the processes of project

management. The project integration management helps you to de-
velop and execute a project plan. Project time management allows you
to estimate the project scheduling and close the project in time. Anoth-
er important knowledge area of project management is cost manage-
ment that guides you to close the project within the approved budget.
A project is said be successful when it fulfils the quality expectations

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of customers/clients. Therefore, quality management is considered

as a key knowledge area of project management. Project human re-
source management is also an important knowledge area that helps
in managing the right human resources at right time, at right place.
Project communication management tells you how to communicate

the project information with stakeholders and team members. In ad-
dition, communication management also communicates the informa-
tion of project performances among various departments. The eighth
knowledge area of project management helps you to monitor the risks
and take corrective measures to minimise the risk. Procurement man-
agement is another important knowledge area that ensures procure-
ment of products and services to complete the project.
In addition to the aforesaid nine knowledge areas of project manage-

ment, PMBOK has recognised project stakeholders management as
S
tenth knowledge area of project management. Project stakeholders
may be the project sponsor, functional management or any other indi-
vidual who is actively associated with a project. Project stakeholders
IM
can guide a project manager by providing result oriented suggestions
regarding decision, budgeting, resource utilisation, time management
etc. One of the key elements of project stakeholder management is
to ensure that the organisation is getting support from the people in
terms of positive responds and feedback.
M
15. __________ defines the process of managing an entire project

and the tools and techniques used to reach towards a successful
outcome of the project.
N
Activity
Using the Internet, list the main events that led PMI to implement
PMBOK.
1.6 PROJECT INTEGRATION MANAGEMENT

Project integration management is needed to coordinate various pro-
cesses/activities and manage the interdependencies. Project Integra-
tion Management can be defined as the process needed to identify,
define, combine, unify, and coordinate activities within the project
management process. It involves unifying, consolidating, articulating,
and integrating the actions critical to project completion. For exam-
ple, managing stakeholder expectations, and meeting requirements
are part of the project integration management. It involves making
trade-offs between project objectives and managing interdependen-

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cies between knowledge areas. The main activities of project integra-

tion management are shown in Figure 1.11:
S
IM
Figure 1.11: Activities in Project Integration Management
Let us discuss each of these activities in detail.

Develop Project Charter: A project charter states the motivation
behind the project and explains the reasons for selecting the proj-
ect. It consists of a document including high level information re-
M
lated to a project such as the background, goals, project authority,

project manager, budget, risks, stakeholders, deliverables, ap-
proval criteria, etc.
Develop Project Management Plan: A project management plan
is a formally documented paper with details on how the project is
N
executed, controlled and closed. It includes all secondary manage-

ment plans related to the project such as project scope, budgetary
and human resource, requirements, possible changes, team con-
figuration, project schedule, quality, process improvement, com-
munication, potential risks, procurement, etc. After a project man-
agement plan is validated by key stakeholders, it could be used as
a basis for comparing and controlling the project.
Direct and Manage Project Work: This step involves the creation
of project deliverables, acquiring and training staff, managing ven-
dors, collecting data and for reporting the project status, approv-
ing process improvement plans, etc. In case there are deviations
from the approved plan, corrective actions need to be taken. For
example, if the project manager discovers a defect, he/she would
instruct the team to restore the process. However, minor necessary
changes can be requested and approved by the project manager.
Monitor and Control Project Work: According to the Project
Management Body of Knowledge (PMBOK), “the Monitoring and
Control Process Group consists of those processes performed to

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observe project execution so that potential problems can be iden-

tified in a timely manner and corrective action can be taken, when
necessary, to control the execution of the project.” The project
performance is measured regularly against the project plan for
ensuring that the project is within acceptable standards of cost,
schedule and scope. Project risks and issues are also constantly
monitored and corrected as required.
Perform Integrated Change Control: The integrated change con-
trol process guarantees that changes resulting from the corrective
actions and other controlling factors are managed across the project
knowledge areas. Integrated change control takes place all through
the project, right from project initiation until project closure.
Close Project: The closure of a project is followed by a Post Imple-
mentation Review. Such a review helps in determining whether
S
the project delivered the estimated benefits and customer require-
ments and was limited to its scope and budget. A project can prove
both successful and unsuccessful. It is important to perform staff
evaluations, document key learning, and ensuring that the deliv-
IM
erables are included in business operations. Even when a project
ends unsuccessfully, the problems and solutions need to discussed
and documented for future references.

M

16. Project Integration Management involves unifying,
consolidating, articulating, and integrating the actions critical
to project completion. (True/False)
N
Activity
List the important things that should be discussed during a ‘post

implementation review’.
SUCCESS FACTORS IN PROJECT

1.7
MANAGEMENT
The success of a project directly depends on various factors includ-
ing extensive front-end planning and project definition work, effective
project delivery among others. Some of the key factors that lead to the
successful closure of a project are as follows:
A clear mission/vision with agreed goals and success criteria and
clear understanding of desired and expected values driving the
project culture
Clear understanding of key stakeholders, objectives with a defined
statement of outcomes

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Project plan and methodology being understood and agreed by all

key parties, including provision of adequate resources and contin-
gencies
Projectfeasibility in terms of resources, contingencies, risks and
outcomes
Adequate resources being dedicated for the project
Understanding, ability, and experience of the project manager and
support staff including project governance, dispute resolution pro-
cedures to stimulate trust
Adequate communication and project tools
Project competencies and organisation structure
Integrity, commitment, support, approach and training of staff
External factors such as political and cultural awareness
S
IM
17. External factors such as political and cultural awareness do
not affect the success of a project. (True/False)
Activity
List the external factors that can impact the success of a project.
M
1.8 ROLE OF A PROJECT MANAGER

The project manager is the anchor of a project. He or she needs to
N
take result-oriented decisions while ensuring proper utilisation of re-

sources for the fulfilment of project objectives. Figure 1.12 shows the
responsibilities of a project manager:
Figure 1.12: Responsibilities of a Project Manager

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Let us discuss the responsibilities of a project manager in detail, as

follows:
Acquiring Resources: As a project manager you are responsible
for acquiring the required resources to carry out the project. For
example, if you are involved into any car manufacturing project,
you would be responsible for acquiring resources like engines,
seats, plastics, glasses, rubbers, copper, etc. However, your respon-
sibilities do not stop here; you are also responsible for acquiring
quality resources to deliver a quality output in the end.
Dealing with Obstacles: Irrespective of the size or scale of a proj-
ect, as a project manager you should be capable and ready to face
challenges of any kind. The project may need your assistance at any
stage. It is your responsibility as a project manager to deal with var-
ious obstacles such as sudden changes in project plan, technical is-
S
sues, mishaps at project location, increase in project cost, etc.
Taking Project Decisions: A project manager is required to make
decisions regarding selection of the project, manpower, machine,
IM
raw materials, etc. Before taking any decision, the project manag-
er should consider various factors, such as cost and budget of the
organisation. A single wrong decision may ramp down the entire
project of any organisation. This makes decision making a critical
responsibility of a project manager.
Motivating Team Members: Tight schedule and deadline-based
M
work always keep the workers under pressure. This may result
in higher level of stress and dissatisfaction among the workers.
Therefore, it is the responsibility of a project manager to keep
boosting the morale of the team members working on the project.
The project manager should motivate his or her team members
N
by acknowledging their performance, rewarding the best perform-

ers and listening to their personal and professional concerns. This
helps team members to perform efficiently.
Negotiating with Clients: The project manager is responsible for
dealing with various stakeholders, such as clients, suppliers and
financers. Apart from this, the project manager should also inter-
act with customers to identify their needs, tastes and preferences
and fulfill them.
Resolving Conflicts: The project manager is responsible for man-
aging and controlling the workforce associated with a project. As
you know, a project team is comprises various individuals with
various personalities, traits, attitudes. Therefore, the possibility of
conflict among them is higher. To guard against such conflicting
environment, a project manager should come forward to pre-empt
and resolve conflicts and develop a better understanding among
team members. In addition, the project manager should encour-
age the team members to focus on project goals rather than indi-
vidual interests.

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1.8.1 PROJECT MANAGER AS AN ENTREPRENEUR
According to Joseph Schumpeter, “the capabilities of innovating, in-

troducing new technologies, increasing efficiency and productivity,
or generating new products or services, are characteristic qualities of
entrepreneurs”. While most project managers are dedicated to stat-
ed guidelines, it is only an entrepreneurial project manager who con-
sciously takes initiatives to ensure project success. Entrepreneurial
project managers associate personal equity with the success of a proj-
ect. These project managers take extra initiatives to ensure a project’s
completion. Such a mind-set of “personal ownership” is what sets en-
trepreneurial PM apart from others. An entrepreneurial PM sets high-
er standards for performance and achievement. They realise the im-
portance of their team’s effort and work to deliver inordinate results.
They understand the fact that while they themselves do not perform
S
all the tasks and roles on a project, they are ultimately responsible for
its success or failure and the consequent impact on stakeholders.
IM self assessment Questions
18. The mindset of “personal ownership” is what sets on

entrepreneurial PM apart from others. (True/False)
Activity
M
Give examples of entrepreneurial initiatives taken by project man-

agers.
ROLE OF CONSULTANTS IN PROJECT

N
1.9
MANAGEMENT
Project management consultants are professionals with knowledge
and experience, who assist organisations to improve their project pro-
grammmes. The role of project management consultants is complex
and requires a deep understanding of the project. Some of the major
roles that project management consultants are as follows:
Help in Achieving the Desired Return on Investment: Consul-
tants add value by using their skills and expertise to help deliver
an outcome while also mitigating the risks to achieve a meaningful
‘return on investment’ to a client.
Increase the Speed of a Project: Since consultants are already
experienced and trained they can engage promptly with the situa-
tion, and quickly become effective in the client organisation.
Provide Expertise: Project management consultants provide ex-
pertise and leadership to successfully complete a project.

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Maintain Objectivity: Project management consultants are hired

from outside the client organisation and are thus indifferent to or-
ganisation politics or culture. They provide a fresh perspective to
the team for project completion.
Take Accountability: Project management consultants are not
only advisors but also practitioners who take the responsibility to
manage a project or programme.
Measure Effectiveness: A project management consultant works
with senior management in the client organisation. He/She is
granted some authority and credibility to effect significant chang-
es within the organisation to help in the implementation and com-
pletion of a project.
S
19. _________________ are professionals with knowledge and
experience, who assist organisations to improve their project
programs.
IM
Activity
Document the role of a project consultant who has been consulted

for implementing new software in an IT firm.
M
1.10 SUMMARY
A project is a pre-determined set of activities with a definite begin-
ning and a definite end.
N
All projects have a unique goal and fulfill some specific objectives
of an organisation.
Allprojects follow a well-defined life cycle, which begins with the
generation of project ideas.
The lifecycle of a project consists of the following stages: Identi-
fication, Preparation, Appraisal, Presentation, Implementation,
Monitoring, and Evaluation.
Project management is a unique process consisting of a set of coor-
dinated and controlled activities with start and finish dates, under-
taken to achieve an objective conforming to specific requirements,
including constraints of time, cost, and resources.
Project management enables the team members to work as per
the project plan, project schedule with details about the comple-
tion dates for each task within a project phase.
Project scope is the breadth of a project providing details about
how much a business would be affected, what resources are re-
quired, how much time the project would take to complete, etc.

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Project Management Framework (PMF) refers to a tool that helps

in planning a project and monitoring its progress.
There are three constrains of a project—Scope/Quality, Resources/
Budget, and Schedule/Time.
MBO is the process of defining the objectives of a project so that
the human resources aligned with the project and the manage-
ment of the organisation can understand the set objectives and
perform accordingly.
Project Management Body of Knowledge or PMBOK sets the stan-
dards for successful completion of projects across various indus-
tries.
Project Integration Management can be defined as the process
needed to identify, define, combine, unify, and coordinate activities
S
within the project management process.
The success of a project directly depends on various factors in-
cluding extensive front-end planning and project definition work,
IM
effective project delivery among others.
The role of a project manager include acquiring resources, dealing
with obstacles, taking project decisions, motivating team mem-
bers, negotiating with clients, and resolving conflicts.
Some of the major roles that project management consultants are
to help in achieving the desired return on investment, increase the
M
speed of a project, provide expertise, maintain objectivity, etc.
key words
N
Conflict Management: It is the process of preventing the nega-

tive aspects of a conflict to restore organisational harmony.
MBO: It is on acronym for Management by Objectives (MBO),
a system that strives to align employees’ objectives with the or-
ganisations goals.
Project Appraisal: It is a process of assessing, in a structured
way, the proceeding of a project.
Project Charter: It is a document that provides the project
manager with written authority to begin project work.
Project Scope: It is a part of project planning that involves de-
termining and documenting a list of specific project goals, deliv-
erables, tasks and deadlines.
1.11 DESCRIPTIVE QUESTIONS

1. Describe the life cycle of a project.
2. Discuss the meaning of project management.

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3. Describe the process of Management by Objectives (MBO).

4. What are the ‘triple constraints’ of a project?
5. Explain the significance of Project Management Body of
Knowledge (PMBOK).
6. Describe the process of Project Integration Management (PIM).
7. Discuss the success factors in project management.
8. Explain the role of a project manager.
9. Explain the role of consultants in project management.
1.12 Answers and hints
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answers for Self Assessment Questions
Topic Q. No. Answers

IM
Defining Project 1. Project
2. Uniqueness
3. True
4. a. Identification
M
5. Evaluation
Meaning of Project 6. Project Management
Management
7. True
N
8. Project manager
9. Project scope
10. Milestones
11. False
Project Management 12. Project Management Framework
Framework
13. a. Scope/Quality
b. Resources/Budget
c. Schedule/Time
14. Schedule
Project Management Body 15. PMBOK
of Knowledge (PMBOK)
Project Integration 16. True
Management

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Success Factors in Project 17. False
Management
Role of A Project Manager 18. True
Role of Consultants in 19. Project Management Consultants
Project Management
hints for Descriptive Questions

1. Lifecycle of a project consists of the following stages:
Identification, Preparation, Appraisal, Presentation,
Implementation, Monitoring, and Evaluation. Refer to Section
1.2 Defining Project.
2. Project management is a unique process consisting of a set of
S
coordinated and controlled activities with start and finish dates,
undertaken to achieve an objective conforming to specific
requirements, including constraints of time, cost, and resources.
IM Refer to Section 1.3 Meaning of Project Management.
3. MBO is a process of defining the objectives of a project so that
the human resources aligned with a project and the management
of the organisation can understand the set objectives and
perform accordingly. Refer to Section 1.4 Project Management
Framework.
M
4. There are three constrains of a project; Scope/Quality, Resources/

Budget, and Schedule/Time. Refer to Section 1.4 Project
Management Framework.
5. Project Management Body of Knowledge or PMBOK sets
N
standards for successful completion of projects across various

industries. Refer to Section 1.5 Project Management Body of
Knowledge (PMBOK).
6. Project Integration Management can be defined as the process
needed to identify, define, combine, unify, and coordinate
activities within the project management process. Refer to
Section 1.6 Project Integration Management
7. The success of a project directly depends on various factors
including extensive front-end planning and project definition
work, effective project delivery among others. Refer to Section
1.7 Success Factors in Project Management.
8. The role of a project manager include acquiring resources,
dealing with obstacles, taking project decisions, motivating team
members, negotiating with clients, and resolving conflicts. Refer
to Section 1.8 Role of a Project Manager.

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9. Some of the major roles that Project Management Consultants

are to help in achieving the desired return on investment,
increase the speed of a project, provide expertise, maintain
objectivity, etc. Refer to Section 1.9 Role of Consultants in
Project Management.
1.13 SUGGESTED READING FOR REFERENCE
SUGGESTED READINGS
Garland, R. (2009). Project governance (1st ed.). London: Kogan
Page.
Gray, C., & Larson, E. (2008). Project management (1st ed.). Bos-
ton: McGraw-Hill/Irwin.
S
Meredith,J., & Mantel, S. (1995). Project management (1st ed.).
New York: Wiley.
E-REFERENCES
IM
Chadwick, B. (2014). Role of Project Management Consultants |
Daysha Consulting. Dayshaconsulting.com. Retrieved 7 November
2014, from http://www.dayshaconsulting.com/role-project-man-
agement-consultants/
Chung, E. (2013). PMP Certification Study Notes 4 - Project Inte-
M
gration Management - Professional Development- PMP Certifica-

tion, ITIL v3, Zend PHP. Professional Development- PMP Certifi-
cation, ITIL v3, Zend PHP. Retrieved 7 November 2014, from http://
edward-designer.com/web/pmp-project-integration-management/
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Project Management Documents and Templates,. (2014). Project

Monitoring and Control Activities. Retrieved 7 November 2014,
from http://www.pmdocuments.com/project-monitoring-and-con-
trol-documents/

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S
Ch a
2 p t e r
PROJECT ORGANISATION
CONTENTS
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2.1 Introduction
2.2 Concept of Project Organisation
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Activity
2.3 Project Organisation Structures
2.3.1 Functional Organisations
2.3.2 Matrix Organisations
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Activity
2.4 Project Management Offices (PMOs)
2.4.1 Supportive PMO
2.4.2 Controlling PMO
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2.4.3 Directive PMO

Activity
2.5 Projects as a Part of Functional Organisations
Activity
2.6 Summary
2.9 Suggested Readings for Reference

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SASOL’S REPAIR SUCCESS THROUGH TEAMWORK
Sasol is a leading South African coal, chemical, and crude oil com-
pany. A few years back, fire broke out in the carbonate regenera-
tion column in one of its facilities, which was required to be fixed
instantly. It was decided that the damaged section consisting of
19 feet wide and 231 feet long column would have to be cut and
replaced before the facility could resume operations. The desig-
nated timeframe for the task was decided to be 40 days. To ac-
complish the repair project, a number of guidelines were issued,
which are as follows:
The project should be schedule driven and not cost driven.
The progress of the project should be well communicated.
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The project should be planned to reduce scheduled time-
frames.
Safety and quality should not be compromised.
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A communication board was established for communicating the
progress of the project. There were meetings held to communi-
cate scheduled shifts to each team member twice daily. This mo-
tivated each member to complete the project in the minimum
possible time. The transport division ensured that transport was
always available, the canteen head ensured that food was always
M
available, the procurement team made sure that resources were

always available, and so on. As a result, the repair project was
completed within a time frame of just 25 days (15 days ahead of
the scheduled time) with a corresponding cost saving of over $21
N
million out of an $85 million budget.

PROJECT ORGANISATION 39
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learning objectives

>> Explain the concept of project organisation
>> Discuss project organisation structures
>> Explain the role of Project Management Offices (PMO)
>> Discuss project as a part of a functional organisation
2.1 INTRODUCTION
In the previous chapter, you have studied about project goals, which
help an organisation in attaining the desired project deliverables.
However, defining project goals only cannot guarantee the success of
S
a project. A proper structure defining the roles and responsibilities
of each member of a project team is equally important for a project’s
success. Such a structure is called the project organisation structure.
IM
A project organisation structure divides, organises and coordinates
the different activities of a project. In other words, this framework
helps to achieve project goals and objectives by distributing tasks
among individuals in a hierarchy. It also determines how business de-
cisions are taken and implemented at different levels of a project. The
project organisation structure also improves the efficiency of the proj-
M
ect team members by clearly defining their roles and responsibilities

in a project. Consider the example of an organisation where project
roles are not clearly defined. This situation may result in total chaos
in the work process as well as wastage of valuable time and resources.
Thus, it is necessary for an organisation to have an appropriate proj-
N
ect structure.
There can be different types of project organisation structures used

across organisations depending on their size and nature of business,
budget, etc. There are two most common organisation structures,
namely functional organisation structure and matrix organisation
structure. In this chapter, you will study about the concept of project
organisation in detail.
2.2 CONCEPT OF PROJECT ORGANISATION

Project organisation is all about the human infrastructure of a project.
In an organisation, the successful execution of a project depends on
the efficient assignment of jobs involved in a project to people. Here,
the role of a project organisation comes into the picture.
Project organisation is a framework or chart that defines the roles of

the members of a project team and relationships among them.

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In other words, project organisation defines a governance structure

that encompasses key responsibilities, accountabilities, authorities
and decision making. It provides a standard set of roles and responsi-
bilities that can be customised for a particular project.
In a nutshell, it can be said that project organisation:

Defines the terms of reference and accountabilities for all key roles
in a project
Explains clear interfaces at all levels and associated responsibilities
Defines the ways of working for a project team

Develops key controls, specific measures of performance and met-
rics to be used by the project team
Project organisation categorises individuals involved in a project into
S
three different groups, which are as follows:
Directors of a Project: This group includes a project manager,
project secretary and managing director, who provide strategic di-
IM
rection during the project planning process.
Project Team: This comprises a group of individuals who are as-
signed duties to complete a project within the stipulated time.
Steering Committee: This group involves organisational peers,
customers, and stakeholders, who provide a strategic direction to
M
a project.
Here, it should be remembered that project organisation can be suc-

cessfully implemented if project team members are well aware of their
roles, responsibilities, and efforts required for each activity. Moreover,
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the members should know the objectives of the project and how they
work as a team so that the project can be accomplished successfully.
1. Project organisation is all about the ______________ of a

project.
2. Project organisation defines a governance structure that
encompasses key responsibilities, accountabilities, authorities
and decision making. (True/False)
3. Which group involves organisational peers, customers, and
stakeholders, who provide a strategic direction to a project?
Activity
Using the Internet, find out project organisation of any road con-
struction project by the Government of India.

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2.3 PROJECT ORGANISATION STRUCTURES

The effectiveness of a project organisation structure is the basis for
the success of the project planning process. A project organisation
structure is a framework of activities performed by the project teams
to accomplish the goals of a project. The project organisation struc-
tures are temporary structures as they last till the completion of a par-
ticular project. These structures comprise individuals from different
organisations to complete tasks related to the specified project of the
organisation.
The level at which the roles and responsibilities are assigned to indi-
viduals to fulfil the goals of a project is also determined in the project
organisation structure. In this organisational structure, individuals
related to the project coordinate among themselves in a hierarchy to
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accomplish a common goal. Thus, project organisation arranges its
lines of authority and channels of communication and assigns rights
and duties to individuals.
IM
The project organisational structure depends on project objectives
and strategies followed to attain them. Project Structure Plan (PSP)
can be devised to form the project organisation structure, which in-
volves the arrangement of project activities in the form of various sub-
tasks. Tabular or structural form shows the relationship amongst the
different sub-tasks/activities, which help in deciding the expiration,
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scheduling and cost planning of the project. The most popular and
widely accepted PSP is the tree structure. Therefore, PSP is a hierar-
chical arrangement of all the sub-tasks or activities of a project, which
ensures the proper distribution of resources and employment of team
members.
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Designing a project organisation structure involves the following

steps:
1. Dividing project work into divisions and sub-divisions, and then
assigning it to individuals, groups, functional departments and
organisational units
2. Classifying people involved in the project into higher, middle and
lower levels
3. Identifying global project organisations
4. Defining the basis of grouping at various levels of the organisation
5. Integrating people, working on the project in terms of
communication, coordination, reporting, team-building, conflict
management, etc
6. Deciding how authority, decision making, and responsibilities
are delegated within the project organisational structure

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The following criteria should be considered while determining the

structure of a project organisation:
Strengths and weaknesses of different project organisational forms
Legal aspects of all available project organisational structures

Growth patterns of the project organisation
Decision-making roles and accountabilities
Relationships between a manager and his/her subordinates
Flow of information and the frequency of communication
Number of subordinates under a manager
Autonomy given to employees at various levels of the project or-
ganisation
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Flexibility and need for innovation
Project organisations can have different types of structures that may

vary according to the type of a project and other aspects, such as bud-
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get and duration of the project and availability of resources. The two
most common types of project organisation structures are functional
organisation and matrix organisation. Let us discuss these two struc-
tures in the subsequent sections.
2.3.1 FUNCTIONAL ORGANISATIONS

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In this type of project organisation structure, grouping of individuals

is done on the basis of their functional roles. Here, individuals with
similar functional areas or skills are grouped in separate units, which
are directly controlled and coordinated by the top management of the
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organisation. Thus, the functional organisation structure is suitable

for organisations that handle a single project. This structure works
well in a steady environment where there are lesser changes in busi-
ness strategies. However, the functional organisation structure is
also suitable for large-scale organisations having a limited number of
products.
Usually, the specialised units in a functional organisation structure

directly report to the top management, as sharing of a superior’s ex-
pertise with subordinates maximises the level of performance. Each
aspect of a project is handled by a separate functional unit, which, in
turn, is coordinated by the top management. Figure 2.1 shows an ex-
ample of a functional organisation structure:

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Figure 2.1: Functional Organisation Structure
The functional organisation structure offers greater operational effi-

ciencies for employees as it is formed on the basis of various func-
IM
tional areas like IT, finance, and marketing. Employees having simi-
lar roles form departmental units and the projects are accomplished
inside these units. The efficiency of employees tends to increase with
the shared skills and knowledge. For example, accounting, marketing,
finance, and human resources departments are brought together to
perform a certain task based on the functions they perform. Suzlon,
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which is one of the world’s leading wind turbine suppliers, is an exam-

ple of an organisation having a functional structure.
There are certain limitations found in the functional organisation

structure. As the functional units report directly to the top manage-
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ment, it sometimes leads to complicated communication and decision-

making processes. Consequently, the project completion process be-
comes more bureaucratic and takes longer to accomplish.
2.3.2 MATRIX ORGANISATIONs
In the matrix organisation structure, employees from different de-

partments of an organisation temporarily work together for complet-
ing a project. For example, a machinery development project requires
specialists from different departments, such as finance, engineering,
and research and development.
The matrix structure does not follow any definite direction of author-
ity and responsibility. In this structure, command may be issued from
two different sources to a single subordinate at the same time.

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Figure 2.2 shows an example of a matrix organisation structure:
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Figure 2.2: Matrix Organisation Structure
Two or more organisation structures like functional organisation

structure and pure project management organisation structure com-
M
bine to form a matrix organisation structure. In this structure, the or-

ganisation is divided into various functions like purchase, production,
R&D, etc., and each function is headed by a functional manager like
purchase manager, production manager, marketing manager, etc.
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Apart from functional division, the organisation is also divided on the

basis of various on-going projects. Each project has a separate project
manager. The project team members work under two authorities and
report to them simultaneously.
Therefore, in this organisational structure, the functional manager

and project manager together share the responsibility of accomplish-
ing a project. On one hand, the project manager decides which tasks
need to be done, what should be the time schedule, etc. On the other
hand, the functional manager decides which individual would be suit-
able to work on the project and the technologies that will be used in
the project. In other words, the functional managers are responsible
for the project managers’ staffing and for directing the administrative
work needed for project team members. The project managers direct
the bulk of the work done by employees.

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In the case of functional manager, the authority flows horizontally,

whereas in the case of project manager, the authority flows vertically.
General Electric, Citibank, Dow Chemicals, Shell Oil, etc., are some
organisations that have such type of organisational structure. Let us
now discuss the features of a matrix organisation structure:
Hybrid Structure: The matrix organisation structure is a hybrid
of two or more organisation structures. Therefore, it has both mer-
its and demerits of the component structures.
Problem of Unity of Command: In the matrix organisation struc-
ture, the subordinates receive orders from two different heads,
namely project manager and functional manager, thus, there ex-
ists a problem of the unity of command. This sometimes results in
confusion, disorder, disruption, inefficiency, etc., which, in turn,
reduce the productivity of the project.
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Specialisation: The matrix organisation structure works as a spe-
cialised structure. The project manager looks after the administra-
tive aspects of a project, while the functional manager deals with
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the technical aspects of the project.
Suitability: The matrix organisation structure is suitable for or-
ganisations that deal in multiple projects. It is mostly used by large
construction organisations that work in different locations at the
same time. Each project is handled by a project manager who is
supported by the functional managers and employees of the or-
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ganisation.
One of the advantages of a matrix organisation structure is that the

main focus is on the project. As a result, the client’s needs are ad-
dressed faster. In case of multiple projects, the matrix structure facili-
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tates better utilisation of resources of the organisation. This structure

is recommended for those projects where the integration of inputs
from different functions is required.
However, there are several limitations found in the matrix organisa-

tion structure. It is one of the most complex organisation structures
with very high work load. In this organisation structure, apart from
regular work, managers and employees have to do additional work
related to other projects. Moreover, it incurs a high operational cost
as it involves a lot of paperwork, reports, meetings, etc. The matrix
structure also lacks a unity of command. Sometimes, because of the
power struggle between the project manager and the functional man-
ager, it becomes difficult to balance responsibilities assigned by them
simultaneously.

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4. The project organisation structure lasts till the completion of

a particular project. (True/False)
5. _________ can be devised to form the project organisation
structure, which involves the arrangement of project activities
in the form of various sub-tasks.
6. The efficiency of planning and controlling functions of a
project can be enhanced by developing the PSP at the starting
phase of the project. (True/False)
7. In which of the following organisational structures do
employees from different departments of an organisation
temporarily work together for completing a project?
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a. Functional organisation
b. Matrix organisation
8. The matrix organisation structure is a hybrid of two or more
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organisation structures. (True/False)
Activity
Give a few examples of Indian organisations using functional and

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matrix structures.
2.4 PROJECT MANAGEMENT OFFICES (PMOs)

In the previous section, we have discussed about various types of or-
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ganisational structures. You have learned how the structure of an or-

ganisation affects its functioning and operation. It should be noted
that irrespective of its size and structure, every organisation under-
takes various projects in the course of its business. However, just as
merely appearing in an exam does not guarantee that a student will
pass it; similarly, implementing a project is not sufficient to achieve
the desired outcome. On many occasions, the project undertaken by
an organisation fails to achieve the desired goal, which results in the
loss of valuable resources of the organisation. Therefore, to ensure
proper utilisation of resources, it is of utmost importance to control
the project failure rate of an organisation.
The responsibility of increasing the success rate of projects in an or-

ganisation is assigned to an organisational body called Project Man-
agement Office (PMO). PMO is a branch of an organisation that de-
termines and maintains the standard of a project. This is similar to a
sales team in an organisation, which is responsible for increasing the
sale of products/services.

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Project Management Institute (PMI), one of the world’s largest

non-profit membership associations for project management pro-
fessionals, defines PMO as “an organisational body or entity that is
assigned various responsibilities related to the centralised and co-
ordinated management of those projects under its domain. The re-
sponsibilities of PMO can range from providing project management
support functions to actually being responsible for the direct manage-
ment of a project.”
The ultimate objective of PMO is to ensure that each and every project
of an organisation yields the desired result. PMO makes continuous
improvements in order to make an organisation capable of success-
fully managing its project.
The following are some of the functions of PMO:
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Maintains Consistency: PMO keeps track on the performance of a
project, and thus maintains consistency and efficiency of the proj-
ect. Moreover, it tries to ensure that the project undertaken by an
organisation is in line with its corporate objectives.
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Eliminates the Duplication of Efforts: PMO helps in eliminating
the duplication of efforts by efficiently distributing project work-
load in an organisation.
Defines Goals and Objectives: PMO helps in the proper execution
of a project by clearly defining the goals and objectives of a project.
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Maintains Knowledge Database: PMO makes efforts for the

continuous improvement of an organisation by preparing and
maintaining a knowledge database regarding the performance of
various projects undertaken by the organisation. The database
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maintained by PMO contains project related information that

can be used for designing project organisation in the future. The
knowledge database comprises information such as project per-
formance, difficulties and constraints faced in a project, etc. Such
information can later be utilised for making improvements in fu-
ture projects.
Assists in Managing Project Finances: PMO regulates the prog-
ress of a project in order to ensure its completion within the pre-
scribed budget and financial means. Moreover, by keeping track
of the progress of the project, it assists the management in making
informed decisions.
Provides Templates: PMO provides various standardised docu-
ments, such as risk logs, issue logs, etc., to an organisation, which
save the time and efforts of project managers in creating these
documents.
Establishes Metrics: PMO helps in establishing the metrics of a
project, which assists an organisation in measuring the perfor-
mance of a project.

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note
Metrics: A measurement standard, used for evaluating the effi-

ciency of a process, plan or product
Risk log: A document that provides information regarding var-
ious types of risks associated with a project
Issue log: A document that contains a list of project issues (both
on-going and closed) of an organisation
It should be noted that PMO is mainly of three types, as depicted in

Figure 2.3:
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Figure 2.3: Types of PMOs
Let us discuss these three types of PMOs in detail in the subsequent

section.
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2.4.1 SUPPORTIVE PMO
Supportive PMO provides templates, best practices, on-demand ex-

pertise, etc., to an organisation in successfully implementing a project.
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This type of PMO is mainly beneficial for those organisations that do

not require additional control and have successfully completed proj-
ects in a controlled manner. A supportive PMO assists in the following:
Planning and scheduling of a project
Preparation and administration of contracts
Administrative and financial services
Tracking, reviewing and auditing of a project
Management of documents
Defining project metrics
2.4.2 CONTROLLING PMO
A controlling PMO acts as a central governance office for monitoring

on-going projects in an organisation. It is beneficial for those organisa-

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tions that aim at governing their documentation, processes, and other

project-related activities. This type of PMO demands an organisation
to comply with governance and to adopt certain methodologies, forms
and templates.
A controlling PMO usually performs the following activities:

Identification of best practices
Standardisation of projects
Enhancement of the competency of project manager
Project metrics benchmarking
Training and internal consulting
2.4.3 DIRECTIVE PMO
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Directive PMO provides the resources and management experience
required for managing a project in an organisation. In directive PMO,
a professional project manager is assigned to give proper direction
IM
to projects. Each project manager reports directly to directive PMO,
thereby ensuring a high degree of consistency and quality across all
organisational projects. Directive PMO usually performs the following
activities:
It directs stakeholders, and assigns and supervises their work.
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Itreports project outcome to executives focusing on how capable

they are for running a project.
Itassists an organisation by ensuring that projects are complet-
ed and deliver acceptable results on time and within the specified
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budget.
9. PMO regulates the progress of a project in order to ensure its

completion within the prescribed budget and financial means.
(True/False)
10. _____________ provides the resources and management
experience required for managing a project in an organisation.
Activity
List the functions of a directive PMO in a new project of an IT com-

pany.

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PROJECTS AS A PART OF FUNCTIONAL

2.5
ORGANISATIONS
As discussed earlier in the chapter, a functional organisation is a
form of project structure in which all activities of an organisation are
grouped into functions such as production, marketing, finance, and
human resource management. When a project is implemented in a
functional organisation structure, it is made a part of one of the func-
tional divisions of the organisation; usually, the function that could
play a major role in ensuring the success of a project. For example, in
an installation project of a new production machine, the old machine
is replaced with the new machine. In such a case, the most probable
way to run the project would be involving and assigning the main re-
sponsibility of a project to the manufacturing division of the organisa-
tion where the production system is located.
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Although the project responsibility in the functional structure is as-
signed to a single function based on the skills and knowledge required
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for project completion, the project is not always independent of the
other functions of an organisation. For example, if the manufacturing
division of an organisation handling a project requires the expertise
of a person from the human resource division, the head of the manu-
facturing division could make a formal request to the head of the hu-
man resource division for the same. The human resource head could
then provide the manufacturing division with the required human re-
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source to assist on the project. This has been illustrated in Figure 2.4:
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Figure 2.4: Relationship with other Functions

Source: http://www.dummies.com/how-to/content/using-the-functional-structure-to-adminis-
ter-proje.html
In a functional structure, the line of authority extends through each

group to the group head and finally to the project head. This makes it
easier for the project head in overseeing and coordinating project ac-

n o t e s
tivities. Apart from this, there are many advantages of implementing

a project in a functional organisation. Some of these advantages are
as follows:
Functional organisations offer maximum flexibility in the use of
the organisation’s staff. Experts from various divisions within an
organisation are temporarily assigned work responsibility. After
the completion of their tasks, these experts can immediately re-
sume their routine assignments.
Functional organisations are the reservoirs of skills and knowledge
in their areas of expertise. Project team members are selected on
the basis of their technical knowledge and skills, which are contin-
ued to develop through their project assignments.
Functional organisations have well-established communication
processes leading to timely decision-making and continuous sup-
S
port to team members.
Functional organisations provide team members with a focused
and supportive work environment. A project in a functional organ-
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isation is assigned to co-workers with similar professional inter-
ests. The established interpersonal relationships among members
help in collaborative work efforts.
However, there are certain limitations of implementing projects in a

functional organisation, which are as follows:
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The primary limitation of this arrangement is that the project is

not the focal point as the functional unit (handling the project) has
its own work to accomplish. This might compromise the perfor-
mance of team members and affect the successful completion of
the project.
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A project in a functional organisation may lack support from other

functional groups. This is because each function within an organi-
sation could initiate its project without consulting other functions.
For example, people working in the marketing division may be re-
luctant to support a project going on in the human resource divi-
sion if the project does not address their needs.
In such arrangements, there is a tendency to sub-optimise a proj-
ect. If project issues are not within the interest area of a functional
unit, they could be dealt with less determination and responsibility.
Projects in a functional group do not facilitate a holistic approach
to the project.
There could be a lack of motivation to complete a project. This is
because the project is not the mainstream activity of team mem-
bers. Often, team members view projects as professional deviation.

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11. A project in a functional organisation is assigned to co-workers

with similar professional interests. (True/False)
Activity
Give examples of a few projects undertaken by organisations which

involve the contribution of more than one division.
2.6 SUMMARY
In an organisation, the successful execution of a project is accom-
plished with the help of project organisation, which is a crucial
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part of project planning and scheduling.
The project organisation categorises the individuals involved in a
project into three different groups, which are directors of a proj-
IM
ect, project team, and steering committee.
A project organisation structure is a framework of activities per-
formed by project teams to accomplish the goals of a project.
The level at which the roles and responsibilities are assigned to
individuals to fulfil the goals of a project is also determined by the
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project organisation structure.

PSP is the hierarchical arrangement of all sub-tasks or activities of
a project, which ensures the proper distribution of resources and
employment of team members.
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In the functional organisational structure, grouping of individuals

is done on the basis of their functional roles. This structure is suit-
able for organisations that handle a single project.
In the matrix organisation structure, employees from different de-
partments of the organisation temporarily work together for com-
pleting a project.
PMO is a department or branch of an organisation that determines
and maintains the standard of a project. The ultimate objective of
a PMO is to ensure that each and every project of an organisation
yields the desired result.
Although in a functional organisation, the project responsibility
is assigned to a single function based on the skills and knowledge
required for its completion, projects are not always independent of
the other functions in the organisation.

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key words
Project Expiration: It refers to the termination of a project due

to various reasons, such as lack of management support, unre-
alistic or unclear goals and technical difficulties.
Project Schedule: It refers to a tool for communicating tasks to
be performed, resource utilisation and timeframes with regard
to a project.
Project Methodology: It refers to a set of tools and templates
for assisting a project manager in maintaining consistency and
completion of project workload.
Unity of Command: It refers to the basic principles of manage-
ment that no subordinate in an organisation should report to
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more than one superior.
Pure Organisational Structure: It refers to a business model
where project managers have total control over assigned projects.
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Project Metrics Benchmarking: This refers to a project eval-
uation technique involving real-time project performance in
graphical and tabular forms against a large sample of projects
from reputable organisations.

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1. Explain the concept of project organisation.

2. Differentiate between the functional and matrix organisational
structures.
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3. Why do organisations need PMO?

4. Explain the three main PMOs in an organisation.
5. Write a short note on projects as a part of functional organisations.

Concept of Project 1. Human infrastructure
Organisation
2. True
3. Steering committee

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Project Organisation 4. False
Structures
5. Project Structure Plan
6. True
7. b. Matrix organisation
8. True
Project Management 9. True
Offices (PMO)
10. Directive PMO
Projects as a Part of 11. True
Functional Organisations
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1. A project organisation structure defines the sequence of project
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activities. Refer to section 2.2 Concept of Project Organisation.
2. In functional organisations, grouping of individuals is done on the
basis of their functional roles whereas in matrix organisations,
employees from different departments of an organisation
temporarily work together for completing a project. Refer to
Section 2.3 Project Organisation Structures.
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3. The responsibility of increasing the success rate of projects in

an organisation is assigned to an organisational body called
Project Management Office (PMO). Refer to Section 2.4 Project
Management Offices (PMO).
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4. Supportive PMO provides templates, best practices, on-demand

expertise, etc., to an organisation in successfully implementing
a project. Controlling PMO acts as a central governance office
for monitoring on-going projects in an organisation. Directive
PMO provides necessary resources and management experience
required for managing a project in an organisation. Refer to
Section 2.4 Project Management Offices (PMO).
5. When a project is implemented, it is made a part of one of the
functional divisions of the organisation usually the function that
could play a major role in ensuring the success of the project. Refer
to Section 2.5 Projects as Part of Functional Organisations.

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2.9 SUGGESTED READINGS FOR REFERENCE
Suggested Readings
Page.
Meredith,J., & Mantel, S. (1995). Project management (1st ed.).
New York: Wiley.
E-REFERENCES
Projectsmart.co.uk,.(2014). Three Types of Project Management
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Organizations | Project Smart. Retrieved 14 October 2014, from
http://www.projectsmart.co.uk/forums/viewtopic.php?f=2&t=730
Sites.google.com,. (2014).2.2. Functional project organization - Or-
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ganizing Projects within a large Organization - Managing Relation-
ship between Projects and other parts of Organization. Retrieved
14 October 2014, from https://sites.google.com/site/organizingproj-
ects/organization-structure/2-2-functional-project-organization
Small Business - Chron.com,. (2014). The Advantages of Functional
Project Organizational Structure. Retrieved 14 October 2014, from
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http://smallbusiness.chron.com/advantages-functional-project-or-
ganizational-structure-2739.html
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Ch a
3 p t e r
OPERATING AND ENVIRONMENTAL FEASIBILITY
CONTENTS
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3.1 Introduction
3.2 Meaning of Operating Feasibility
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Activity
3.3 Capacity Requirements in a Project
Activity
3.4 Plant Capacity
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Activity
3.5 Selecting Plant Location
3.5.1 Location Decision Objectives
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3.5.2 Factors Affecting Location Decisions

3.5.3 Policies of Central Government for Plant Location
3.5.4 Legal Aspects in Selecting Plant Location
Activity
3.6 Technological Requirements
Activity
3.7 Environmental Feasibility of Projects
3.7.1 Concept of Industrially Backward Areas
3.7.2 Incentives for Selecting Plant Location in Industrially Backward Areas
Activity
3.8 Summary

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FEASIBILITY STUDY FOR GALAXY MINING COMPANY
Galaxy Mining Company is an Indian mining company with about

50 mines located at approximately eight states in the country. The
miners are exposed to various health and safety risks while work-
ing in these mines. The company decides to operate a Special
Provident Fund (SPF) for the miners in addition to the employee
provident fund that they already benefitted from. The intention of
the SPF was to quickly distribute some compensation to the min-
ers before the EPF is released. The mine in-charge would deduct
SPF instalments from each miner on a monthly basis and deposit
the same with the Central Special Provident Fund Commissioner
(CSPFC). The CSPFC in turn would maintain all details about the
SPF instalments collected from the miners. However, the CSP-
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FC charges high fees for the services and also does not maintain
records regularly. Galaxy Mining Company employe a reputed
software vendor, Adventure Software Inc., to undertake the task
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of developing software for automating the maintenance of SPF
records of the miners. The organisation realise that besides sav-
ing manpower on bookkeeping, the software would also help in
speedy settlement of claims. The project cost was `1 million.
However, the project manager of Adventure Software insists on

carrying out a feasibility study of the project. The main problem
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in the implementation of the project was the scattered database

owing to several miners working at different mines. The project
manager identifies two main approaches to solve the issue. One of
these is to have a central database which could be accessed and
updated through a satellite connection at different mine stations.
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The other approach is to have local databases at every mine sta-

tion and updating the local data on the central database using a
dial-up connection. With more research and experimentation, the
project manager concludes that with the given project resources
and money, the second approach is more affordable and conve-
nient to adopt.

OPERATING AND ENVIRONMENTAL FEASIBILITY 59
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learning objectives

>> Explain the concept of operating feasibility
>> Discuss the capacity requirements in a project
>> Explain the concept of plant capacity
>> Discuss the criteria for selecting plant location
>> Describe the technological requirements in a project
>> Discuss the environmental feasibility of projects
3.1 Introduction
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In the previous chapter, we have studied about project organisation.
In this chapter, we will discuss the operating and environmental fea-
sibility of a project. Analysing a project’s feasibility involves evaluat-
ing the probability of the project’s success in terms of the operational,
IM
economic, technological, environmental and other factors. Instead
of simply starting a project and hoping for its successful completion,
a feasibility study allows project managers to investigate the possi-
ble negative and positive outcomes of a project before investing their
time and money. Therefore, before starting a project, organisations
must conduct an operating feasibility study and an environment fea-
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sibility study. Operating feasibility helps organisations to determine

whether the project would be able to achieve its desired goals. On the
other hand, environmental feasibility study is conducted to ascertain
whether or not the project is compatible with the environment. An en-
vironment-unfriendly project should not be carried out even if it has
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good financial potential.
This unit elaborates on the various aspects of operating and environ-

mental feasibility. A discussion on the meaning of operating feasibility
is followed by what a plant capacity is, how to determine the capacity
requirements, and how to increase the plant capacity. Other topics in
this unit include factors that play a crucial role in selecting plant loca-
tion, and studying the environmental feasibility of a project.
3.2 MEANING OF OPERATING FEASIBILITY

In the previous units, you have already read about the importance of
conducting an operating feasibility study as it enables an organisation to
evaluate whether the potential of a project to achieve the desired goals
and objectives. Through operational feasibility, an organisation assesses
the level to which a project is suitable to meet the organisational objec-
tives in an existing business environment. Operational feasibility helps
organisations to:

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Assess the potential of a project to fulfill organisational goals

Analyseand handle any opposition from various sectors, such as
management, team, and individuals
Evaluate the probable impact of the project on the environment
Implement the project efficiently
Review the implemented project periodically
Analyse the impact of the project on end users
Utilise economical resources judiciously
An organisation decides to conduct operational feasibility after con-

sidering various factors. These factors are shown in Figure 3.1:
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Development Schedule
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Date of Delivery
Organisational Culture
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Existing Business Process

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Figure 3.1: Factors Affecting Operational Feasibility
Let us understand these factors in detail, as follows:

Development Schedule: Suppose you intend to drive to a new
destination but you neither know the way nor the distance and
the time required to reach there. In such a situation, it would be
very difficult for you to reach there. Undertaking such a journey
without having any idea of how to reach the destination is pretty
similar to working on a project without any schedule. A project
schedule can be defined as a timetable or more specifically a plan
to develop a project. The project schedule keeps track of all the
activities in a project and tracks its progress.
Date of Delivery: The date on which a project is scheduled to be
delivered to a client is known as its date of delivery. The delivery
date is met if all the activities associated with a project are per-
formed according to the project plan.

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Organisational Culture: It is also known as the corporate culture,

and consists of norms, values, common perceptions and unwritten
codes of conduct of an enterprise. Every organisation has its own
unique organisational culture, which defines the standards of ac-
ceptable behaviour and guides the conduct of its employees.
Existing Business Process: It can be defined as a method that is
used by an organisation to achieve a crucial objective. A business
process, if broken up into smaller processes, forms a series of indi-
vidual events that must be performed in a sequential order. Figure
3.2 shows an example of a real-world business process:
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Figure 3.2: An Example of a Business Process

Source:http://publib.boulder.ibm.com/infocenter/dmndhelp/v6rxmx/index.jsp?topic=/com.ibm.
wbit.help.bpel.ui.doc/concepts/cunder.html
If a project is in conformity with the project schedule, date of delivery,

organisational culture, and the existing business process of an organ-
isation, then the project is said to be operationally feasible. The oper-
ating feasibility of a project can also be predicted with the help of the
following questions:
Will the workers/employees require training to accomplish the
project? If yes, is the organisation ready to provide training to the
workers/employees?
Willthe project require changes in operations? Will the perfor-
mance of the organisation be hampered by the project?
Will the project have any adverse effect on the customers?

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Will the project hurt the goodwill and image of the organisation?
Will the schedule and date of delivery conflict with other priority
projects of the organisation?
Will the project be socially accepted?
Are the management and the users encouraging the project?
Are there any legal issues related to the project?
1. Through ____________ feasibility, an organisation assesses the

level to which a project is suitable to meet the organisational
objectives in an existing business environment.
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2. The delivery date of a project is met if all the activities
associated with it are performed according to the project plan.
(True/False)
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3. A project is said to be operationally feasible if it conforms
to the project schedule, date of delivery, organisational
culture, and existing business process of an organisation.
(True/False)
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Activity
Outline the business process of a manufacturing unit and segregate

it as individual events.
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CAPACITY REQUIREMENTS IN A
3.3
PROJECT
While starting a new project, several new skills may be required for
which an organisation would need to conduct specific training pro-
grammes. Apart from this, new staff may need to be hired; new pro-
cesses might need to be implemented, etc. Assessing the capacity
requirements enables an organisation to put the required people,
structures and processes in place to deliver the project on time. Capac-
ity requirements are performed to generate replenishment schedules
for production orders and components for resources that are used in
a project. The capacity requirements of a production plant can be de-
termined by expressing its production schedule into standard hours
Table 3.1 lists the production schedules on the basis of which capacity
requirement can be determined:

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Table 3.1: Production Schedule and its Unit of

Measurement
Production Schedules Unit of Measurement Production Units for
Forming the Basis for of Production which Capacity
Capacity Schedule Requirement is
Requirement Determined
Production plan Aggregate number of Organisation, plant
end items
Master schedule Number of end items Organisation, plant
Planned order sched- Number of parts and Department
ules for parts and assemblies
assemblies
Open order schedules Number of parts and Work centre/machine
for parts and assem- assemblies
blies
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Capacity requirement can also be determined by assessing the level
at which capacity should be defined. For example, you would need de-
tailed information about a machine to estimate the capacity require-
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ment at the machine level as compared to the estimation of capacity
requirement at the plant level. In other words, the capacity require-
ments for different levels are determined by using different methods
and on the basis of available information.

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4. The capacity requirements of a production plant can be

determined by expressing its production schedule into
standard hours. (True/False)
5. Which of these is the unit of measurement of the master
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schedule?
a. Number of end items
b. Number of parts and assemblies
c. Aggregate number of end items
d. None of the above
Activity
Assess the production schedule of a manufacturing plant and com-

ment on its capacity requirements.
3.4 PLANT CAPACITY

Project capacity refers to the total production achieved in a specific
period of time under normal working conditions. It is also known as
production capacity or plant capacity. Plant capacity can be explained
in the following terms:

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Feasible Normal Capacity (FNC): Also known as the design ca-

pacity, FNC is the production capacity of a plant working under
normal conditions. It is determined on the basis of the installed
technology, normal on and off time, break-time for maintenance
and replacement of parts, and work shifts.
Nominal Maximum Capacity (NMC): Also known as the system
capacity, NMC is the production capacity of a plant working under
optimum conditions. NMC is generally less than the design capac-
ity due to the limitations of product mix, quality specification, and
breakdowns.
Actual Output: It is the exact output obtained from a production
facility. Actual output is usually less than the system capacity due
to short-term effects, such as breakdown of equipment and short-
age of labour.
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Increasing Plant Capacity
The capacity of a plant can be increased by controlling the factors

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affecting its production capacity. Some of these factors are shown in
Figure 3.3:
Input
Constraints
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Factors
Government Affecting Plant Investment
Policies Capacity Cost
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Market
Situation
Figure 3.3: Factors Affecting Capacity of a Plant
Let us discuss each of these factors in detail:

Input Constraints: These refer to the difficulties faced by an or-
ganisation in procuring certain basic inputs, such as raw materi-
als, power supply, and skilled labour. These difficulties are gener-
ally faced by organisations of developing countries.
Investment Cost: These refer to the finances invested in the estab-
lishment of a plant. Organisations can assess their future benefits
by comparing investment costs with the capacity of the production
plant. In the initial stages of a project, the investment costs of a
plant per unit of production are higher. These costs decrease with
increase in production.

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Market Situation: These refer to the conditions that affect the

production capacity of a plant to a large extent. The production
capacity of a plant increases with the increase in the demand of
products.
Government Policies: These refer to rules and standards that
influence the production capacity of a plant and the operations of
a project.
6. ____________ is the production capacity of a plant working

under normal conditions.
7. ____________ refers to the difficulties faced by an organisation
in procuring certain basic inputs, such as raw materials,
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power supply and skilled labour.IM
Activity
Give examples of some government policies that influence the pro-

duction capacity of a plant.
3.5 SELECTING PLANT LOCATION

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The success of an industrial venture depends a great deal on the geo-

graphical location where its plant is set up. Various factors are consid-
ered to select the site for setting up the plant, such as a plant should
be set up at a location where production and distribution costs can be
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kept to a minimum, where there is more room for warehousing and ex-
pansion, etc. Thus, we can surmise that it is crucial for an organisation
to select a proper plant location. The decision to select a proper plant
location depends on various factors such as demand of the product,
size of the market, availability of raw materials, and production cycle.
3.5.1 LOCATION DECISION OBJECTIVES
The following objectives should be considered before choosing a plant

location:
It must be comfortable for workers and cater to their’ tastes and
likings.
It must have good working conditions.
Itmust contribute in minimising production delays and make effi-
cient use of the available space.
It must allow managers to have a better control over the produc-
tion cycle by having greater flexibility for changes in the design of
the product.

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The decision for location is made after ranking various factors. This
method is known as the factor-rating method, which involves the fol-
lowing steps:
1. Examining various factors and assigning weights to them
according to their importance. The least important factors may
be given a weight of 1 and all other factors can then be expressed
as multiples of 1, as whole numbers.
2. Examining each location and ranking them on the basis of
factors.
3. Multiplying each ranking by the appropriate weight factor and
the total score of each possible location. The result indicates the
desirability of the possible locations as compared to each other.
Figure 3.4 shows an example of location evaluation using the
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factor-rating methodology:
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Figure 3.4: Factor Rating Method for Location Evaluation

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3.5.2 FACTORS AFFECTING LOCATION DECISIONS
The final site should be selected first on the basis of a complete survey
of the advantages and disadvantages of various geographical areas
and ultimately, on the advantages and disadvantages of the available
real estate. Figure 3.5 depicts the main factors that affect the selection
of a plant location:
Proximity to market
Proximity to raw materials

Factors affecting plant
Proper infrastructure
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location
Labour and wages

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Government policies
Climatic conditions
Safety needs
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Figure 3.5: Factors Affecting Plant Location
Let us discuss these factors in detail:

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Proximity to Market: There are many benefits if a plant is located

near the market. Some of these benefits include low transporta-
tion cost, timely delivery of final products to the customers at a
lesser cost, which eventually results in a larger market share. This
factor is a prime concern for organisations that deal in perishable
products, such as milk, meat, fish, vegetables, etc., as these prod-
ucts must be delivered in the market without any delay.
Proximity to Raw Materials: It is necessary for any organisation
to procure raw materials on time and at a reasonable price, as
these comprise almost 50-60 per cent of the cost of a project. By
keeping raw materials near to the plant, the transportation and
inventory cost can be greatly reduced as the organisation can avail
these materials at a short notice. This is particularly useful in case
of fast moving consumer goods and other perishable products, as
the delay in the delivery of these goods may damage them.
Proper Infrastructure: The plant must be located at a place hav-
ing an adequate supply of power, water, and waste decomposition
facilities. Apart from this, the road and transportation facilities

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and the electronic means of communication also play an important

role in the overall operations of any organisation. Power is needed
to run machines, good roads and transportation facilities to carry
goods from one place to another, and electronic means of commu-
nication are needed for proper and timely sharing of information.
Any shortage in these facilities can lead to the failure of the entire
project.
Labour and Wages: Easy availability of labour on low cost is also a
fundamental requirement of any organisation. Hiring labour from
distant places leads to increased costs; whereas, hiring individuals
from local areas saves the organisation from bearing extra costs of
their transportation and accommodation.
Government Policies: The location for setting up a plant must also
be approved by certain rules and regulations made by the gov-
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ernment regarding the approval of the project location. The gov-
ernment directly selects the plant location in case of public sector
projects; whereas, it imposes certain restrictions in case of private
projects. For example, the government does not allow setting up of
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industrial projects, such as steel and leather plants, in urban areas.
This is done to ensure that ecological balance and social security
are not compromised.
Climatic Conditions: The plant must be located at a place with
suitable or adaptable climatic conditions. Modernisation has min-
imised the impact of climatic conditions on the productivity of an
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organisation. For example, nowadays, organisations are equipped

with air conditioners and heaters, which help in maintaining the
normal temperature in the office premises in case of extreme heat
or cold. Although modernisation has reduced the impact of cli-
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matic conditions, it cannot be ignored completely. It may be a vital

factor for some industries, such as textile mills, which require high
humidity. For example, most textile mills in India are set up in or
near Mumbai and Ahmedabad because of the humidity conditions
that prevail in these areas.
Safety Needs: Certain plants, such as nuclear power plants and
explosive plants, must be located away from the city area. These
plants should be equipped with adequate safety provisions for the
labour. The individuals employed in such projects must be given
proper training to operate machines and protect themselves in
case of accidents, such as fire, gas leakage, etc.
3.5.3 POLICIES OF CENTRAL GOVERNMENT FOR

PLANT LOCATION
The decisions regarding the location of a plant are very crucial as

wrong plant location may adversely affect the total set up in many
ways. Location decisions have a direct impact on transportation, la-
bour availability, resource availability, etc. Thus, they need to be taken

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after a thorough analysis. The way in which an organisation operates

largely depends upon the industrial policies issued by the state/cen-
tral government. The Central Government has devised various poli-
cies for assigning location for setting up the plants. These policies are
mainly based on the following factors:
Regional Factors: Consideration for regional factors in plant lo-
cation decisions involves an in-depth analysis of the proximity of
the plant to the market, sources of raw materials, available trans-
portation facilities, the infrastructural development, availability of
skilled labour, the legal and political situation in the region, taxa-
tion policies, work attitude of available manpower, etc.
Community Factors: These factors include the characteristics
that are typical to a certain community. In other words, commu-
nity factors include the qualities of a community that makes it de-
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sirable over another community for setting a plant. Community
factors such as availability of desirable land, availability of ade-
quate housing facilities, community recreation and health facil-
ities, good schools, community services such as police and fire
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protection, transportation facilities for the employees. Apart from
these, a good civic financial status and favourable tax structure are
important to organisations.
Safety Factors: Another major aspect to be considered before fi-
nalising the location of a plant is safety. Identifying safety hazards
in plants involves assessing situations that could potentially cause
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harm to the employees. The safety of the location should be as-

sessed in terms of harmful emissions, fluids, gases, etc. In 1984, the
Bhopal gas tragedy came as a major industrial disaster affecting
both the employees and people living in the nearby areas.
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3.5.4 LEGAL ASPECTS IN SELECTING PLANT LOCATION
Several legal functions such as state and local tax rates, excise duty,
octroi duty, etc. vary across locations. Likewise, the local regulations
on waste disposal, transportation norms, labour laws, etc. can have a
major impact on the final selection of a plant. Some of the most com-
mon legal aspects that the management on an organisation considers
while selecting a plant location are as follows:
Disposal of Waste Material: The legal requirements for waste
disposal provide the legislative outline for the collection, trans-
portation, recovery and disposal of waste material generated by
industries. As per these policies, the conditions under which the
selected plant location should have adequate waste disposal facili-
ties are specified to organisations.
Availability of Labour: Labour laws in India were developed ow-
ing to the demands of workers for better working conditions. How-
ever, these laws also restrict the powers of workers in organisations
and optimise labour costs. These laws provide a framework within

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which employers and workers can achieve workplace democracy

for harmonious industrial relations. In addition, these laws serve
as a reminder of fundamental principles and rights at workplace.
Labour legislation establishes the way in which workplace princi-
ples and rights can be implemented and enforced.
Protection from Flood and Fire: These regulations specify the
need to analyse the risk and consequences of breaking out of fire
inside a plant and take necessary actions for protection from pos-
sible damages. Apart from this, there are legal regulations for pro-
tection of humans and property from the damage due to natural
disasters such as floods. Organisations in flood-prone areas should
take necessary measures to protect their employees, plant and ma-
chinery from damage due to floods.
Power and Water Supply: A consistent, steady and efficient supply
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of power and water is critical to keep a plant in working condition.

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8. The decision for plant location is made after ranking various
factors. This method is known as _______________.
9. Community factors include the qualities of a community that
makes it desirable over another community for setting up a
plant. (True/False)
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10. _______________ laws provide a framework within which

employers and workers can achieve workplace democracy for
harmonious industrial relations.
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Activity
Use the Internet to find the general policies for the disposal of waste
material by industries.
3.6 TECHNOLOGICAL REQUIREMENTS

The technological requirements of a project must be analysed in de-
tail to evaluate its technical feasibility. Organisations can acquire the
same product or service by using different technologies. For example,
electricity could be generated using solar energy, thermal energy, hy-
draulic energy, nuclear energy, etc. In order to run a successful proj-
ect, it is important to weigh all the available alternative technologies
and select the one that is most appropriate in the prevailing circum-
stances. The feasibility of a technology can be measured on the basis
of the following:
Specifications of a product/service
Uncertainties and interdependence on other technologies

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Developmental imperatives such as employment opportunities,

maximum use of indigenous resources, reduction in income dis-
parities, etc.
Project schedule
Relevance of the technology with the project objectives
Ease of availability
Indigenous availability of relevant technology
Dependence on non-renewable sources of energy
Organisation’s capacity to adopt the technology
Operational parameters required to adopt the technology
Timely availability of manpower with required skill set for installa-
tion, operation and maintenance of the technology
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Cost of' acquiring, installing, and maintaining the technology
Safety parameters of using the technology
Requirement or availability of research and development in the
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organisation
Obsolescence of technology
The selected technologies also need to be assessed with respect to

their acquisition aspects. These aspects include the available modes
of procuring the technology and the associated costs. Some of the
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important questions that organisations should seek to answer before

adopting a technology for a project are as follows:
Is the technology available as a technical know-how, a technical
collaboration, or a joint venture?
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Are any patents, trademarks, or licence’s involved in the adoption

of the technology?
What are the terms and legal obligations for adopting the
technology?
Does the technology need to be procured from a specific country
or company?
Assessing the selected technologies on this basis would help an organ-

isation in finalising a particular technology for its projects.
11. After the selected technologies are compared and ranked on

different aspect, they have to be assessed with respect to their
__________________.
12. Cost of acquiring, installing, and maintaining technology is
not an important criteria in assessing technological feasibility
of a project. (True/False)

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Activity
List the factors that influence the adoption of a new production ma-
chine in a manufacturing unit.
ENVIRONMENTAL FEASIBILITY OF
3.7
PROJECTS
We have seen the importance of market feasibility, operational fea-
sibility, and technical feasibility in the successful management of a
plant or project. Another major factor to be considered while setting
up a plant is assessing its impact on the environment. For example,
an industrial project that involves the use of chemicals may produce
poisonous gases and other hazardous solid and liquid wastes that can
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cause environmental pollution. In addition, the machines used in the
project may also produce sound, heat, and radiation, which can be
harmful for living organisms. Therefore, before selecting the location
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of a plant, the organisation must properly examine the environmental
impact of the project. Environmental feasibility assesses the impact
that a project might potentially have on its surrounding environment.
Organisations need to consider the following issues before selecting
the location of a project:
The types of waste materials produced
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Provisions for the decomposition of waste materials

The impact of poisonous gases and other wastes on the environment
Alternatives to minimise the hazardous effect of the wastes

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3.7.1 CONCEPT OF INDUSTRIALLY BACKWARD AREAS
The industrial policies of the governments are considered while tak-

ing location decisions of organisations for setting up new plants. In
India, the industrial development of backward areas for balanced re-
gional development has always been a priority. As per the Industrial
Policy Resolution of 1977, “the Government attaches great important
to balanced regional development of the entire country so that dispar-
ities in levels of development between different regions are progres-
sively reduced”. Majority of the industrial development since India’s
independence has been restricted around metropolitan areas and big
cities. The country faced rapid deterioration in the living conditions of
the working classes in the metropolitans and bigger cities, problems
of slums and environmental pollution. Later in 1993, the Ministry of
Finance created a study group on ‘Fiscal Incentives for Industrialisa-
tion’. This group was assigned the task to make guidelines for identify-
ing backward areas in India and to look into the issue of indicators for
determining backwardness. The criteria and indicators for identifying

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the extent of backwardness as suggested by the study group on Fiscal

Incentives are shown in Table 3.2:
Table 3.2: Criteria and Indicators for

Identifying the Extent of Backwardness
Criteria Indicators of Backwardness
A. Financial criteria zz Per capital credit given by scheduled
commercial banks
zz Per capital deposit received by scheduled
commercial banks
B. Infrastructural criteria zz Phones per thousand population
zz Per capital power consumption
zz Urbanisation (urban population of dis-
tricts as a proportion of total population)
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zz Metalled roads per 100 square kilometres
C. Industrial criteria zz Workers in registered factories at the rate
of per thousand of the total population
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zz Per capital gross value added from regis-
tered manufacturing sector
3.7.2 INCENTIVES FOR SELECTING PLANT LOCATION IN

INDUSTRIALLY BACKWARD AREAS
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The Government of India has identified several backward areas and

classified these into three categories; A, B and C. Based on the relative
backwardness, the government proposed a subsidy to industrial proj-
ects in backward areas at differential rates of 10-25% for investment in
land, building and plant and machinery with a maximum subsidy of `
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25 lakh. The A, B, C categories of backward areas and their eligibility

for subsidy on investment in fixed assets is shown in Table 3.3:
Table 3.3: A, B, C Categories of Backward Areas

and Their Eligibility for Subsidy
Category Percentage of Subsidy Maximum Limit
A 25 `25 lakh
B 15 `15 lakh
C 10 `10 lakh
Apart from the subsidy on fixed assets, the government has offered
certain special facilities and incentives to these backward areas. The
backward areas have been further scrutinised as ‘especially backward
areas’. The government provides with additional incentives such as
capital subsidy, special import facilities, etc. for industrial projects in
these areas. Small Scale Industries (SSI) located in these areas are
offered special concessions and facilities, which are enumerated as
follows:

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An outright subsidy of 15% on the fixed capital investment up to a

maximum of `15 lakhs.
Allotment of factory on convenient terms and conditions.
Interest free loans to SSI projects are available up to 7 years, pro-
vided the loan in a particular year does not exceed 8% of the cap-
ital investment.
Loans and advances to SSI units for the construction of factory
buildings, purchase of machinery and equipment and working
capital on easy terms.
The State Financial Corporations (SFCs) grant loans to SSIs for
acquiring fixed assets worth `30 lakhs. For limited companies, reg-
istered co-operative societies, the loan amount is worth `15 lakhs.
S
These loans are granted at a liberalised rate of interest with longer
repayment periods.
In some states, the SSI projects in the backward areas with a capi-
IM
tal investment in plant and machinery of up to `1 lakh are relieved
from the following taxation in some states:
Exemption from payment of electricity duty up to a period of
7 years.
Exemption from payment of property tax for a period of 5 years.
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Exemption from payment of octroi duty on capital equipment

and building materials for a maximum period of 3 years from
the date of registration
Essential and controlled raw materials are sanctioned to the SSI
N
projects in backward areas on priority and at liberal terms.

State Governments have set up independent testing laboratories
for testing the goods of SSI in backward areas for making industri-
al products of good quality.
13. The three criteria for an industrially backward area are:

a. _________________
b. _________________
c. _________________
14. The government proposes a subsidy for industrial projects in
backward areas at differential rates of 10-25% for investment in
fixed assets with a maximum subsidy of `25 lakh. (True/False)

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Activity
List a few incentives that the Government of India offers to small

scale industrial projects.
3.8 SUMMARY
Operational feasibility helps an organisation to assess the level to
which a project is suitable to meet the organisational objectives in
an existing business environment.
An organisation decides to conduct operational feasibility after
considering various factors such as development schedule, date
of delivery, organisational culture, and existing business process.
S
The capacity requirements of a production plant can be deter-
mined by expressing its production schedule into standard hours.
Capacity requirements for different levels are determined by us-
ing different methods and on the basis of available information.
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Project capacity refers to the total production achieved in a specif-
ic period of time under normal working conditions.
The plant capacity can be explained in terms of feasible normal
capacity, nominal maximum capacity, and actual output.
The decision to select a proper plant location depends on various
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factors such as demand of the product, size of the market, avail-

ability of raw materials, and production cycle.
Factors affecting plant location are proximity to market, proximity
to raw materials, proper infrastructure, labour and wages, govern-
N
ment policies, climatic conditions, and safety needs.

The Central Government has devised various policies for assign-
ing location for setting up the plants. These policies are mainly
based on regional factors, community factors, and safety factors.
Some of the most common legal aspects that organisational man-
agement considers while selecting a plant location are disposal of
waste material, availability of labour, protection from flood and
fire, and power and water supply.
Environmental feasibility assesses the impact that a project might
have on its surrounding environment.
The Government of India has identified several backward areas
and classified these into three categories: A, B and C.
Based on the relative backwardness, the government proposed
a subsidy to industrial projects in backward areas at differential
rates of 10-25% for investment in land, building and plant & ma-
chinery with a maximum subsidy of `25 lakh.

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key words
Factor Rating Method: It refers to the method used for evalu-

ating the alternatives based on comparison after establishing
a composite value for each alternative using qualitative and
quantitative inputs.
Feasibility Study: It refers to the assessment and analysis of a
proposed project based on examination and research for sup-
porting the process of decision making.
Master Schedule: It refers to the plan developed by an organi-
sation for each individual area such as production, staffing, in-
ventory, etc.
Project Schedule: It refers to the tool for communicating the
S
tasks to be performed, resource utilisation and the timeframes
with regards to a project.
Production Plan: It refers to the administrative process aimed
at minimising production time and costs, organising the use of
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resources and maximising workplace efficiency.
Subsidy: It refers to a form of financial support offered to an
economic sector with the aim of promoting economic and social
policy.
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1. Explain the concept of operating feasibility.
2. Discuss the capacity requirements in a project.
N
3. Explain the concept of plant capacity.

4. Discuss the criteria for selecting plant location.
5. Describe the technological requirements in a project.
6. Discuss the environmental feasibility of projects.

Meaning of Operating 1. Operational
Feasibility
2. True
3. True

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Capacity Requirements in 4. True
a Project
5. a. Number of end items
Plant Capacity 6. Feasible Normal Capacity
7. Input Constraints
Selecting Plant Location 8. Factor rating method
9. True
10. Labour laws
Technological Require- 11. Acquisition aspects
ments
12. False
S
Environmental Feasibility 13. a. Financial criteria
of Projects
b. Infrastructural criteria
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c. Industrial criteria
14. True

1. Through operational feasibility, an organisation assesses the
M
level to which a project is suitable to meet the organisational

objectives in an existing business environment. Refer to Section
3.2 Meaning of Operating Feasibility.
2. Capacity requirements for different levels are determined by
N
using different methods and on the basis of available information.

Refer to Section 3.3 Capacity Requirements in a Project.
3. The plant capacity can be explained in terms of feasible normal
capacity, nominal maximum capacity, and actual output. Refer to
Section 3.4 Plant Capacity.
4. The decision to select a proper plant location depends on various
factors such as demand of the product, size of the market,
availability of raw materials, and production cycle. Refer to
Section 3.5 Selecting Plant Location.
5. The technological requirements of a project must be analysed
in detail to evaluate its technical feasibility. Refer to Section
3.6 Technological Requirements.
6. Environmental feasibility assesses the impact that a project
might potentially have on its surrounding environment. Refer to
Section 3.7 Environmental Feasibility of Projects.

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SUGGESTED READINGS
Page.
Meredith, J., & Mantel, S. (1995). Project management (1st ed.).
New York: Wiley.
E-REFERENCES
(2014).Retrieved 27 October 2014, from http://www.ciilogistics.
S
com/knowledge/project_materials_management/
Deolalikar, R. (2008). Safety in nuclear power plants in India. In-
dian J Occup Environ Med, 12(3), 122. doi:10.4103/0019-5278.44693
IM
Hse.gov.uk,. (2014). Plant Layout. Retrieved 27 October 2014, from
http://www.hse.gov.uk/comah/sragtech/techmeasplantlay.htm
Labour.gov.za,. (2014). Legislation — Department of Labour. Re-
trieved 27 October 2014, from http://www.labour.gov.za/DOL/leg-
islation
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N

Ch a
4 p t e r
MARKET ANALYSIS IN PROJECT MANAGEMENT
CONTENTS
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4.1 Introduction
4.2 Concept of Market Analysis
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4.2.1 Collection of Market Information
4.2.2 Factors Affecting Market Information
Activity
4.3 Demand Forecasting
4.3.1 Qualitative Approach of Demand Forecasting
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4.3.2 Quantitative Approach of Demand Forecasting

4.3.3 Process of Demand Forecasting
Activity
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4.4 Product Mix Analysis

Activity
4.5 Technical Appraisal
Activity
4.6 Distribution Channel Analysis
Activity
4.7 Summary

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U
S ESCO Industry Market Trends - An Empirical
Analysis of Project Data
Recently, the US Energy Service Company (ESCO) industry con-

ducted a comprehensive empirical analysis of trends and perfor-
mance. This analytical case revealed differences in project data
from the last few years with the current one.
US ESCO applied two parallel analytical approaches, i.e. a com-

prehensive survey of various energy firms to determine the total
industry size and a database of approximately 1500 ESCO proj-
ects. Out of these 1500 projects, target markets, typical project
characteristics, energy savings, and consumer economics were
reported. The projected industry investment on energy-efficiency
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associated services was US $2 billion after a sustained growth pe-
riod. Most activities of ESCO occurred in places of high economic
activity and strong policy support. Typical projects saved 150-200
MJ/m2/year and were cost-effective with median benefit/cost ra-
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tios of 1.6 and 2.1 for institutional and private sector projects, re-
spectively. The median simple payback time was 7 years among in-
stitutional customers, whereas it was 3 years in the private sector.
Preliminary evidence suggested that state-enabling policies had

enhanced the industry in medium-sized states. ESCO had suc-
cessfully withstood restructuring and other issues while focusing
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on selling energy solutions, with energy-efficiency forming an

integral part of its services. This case represents that a private
sector energy-efficiency services industry, which targets major in-
dustrial and commercial customers, is viable and self-sustaining
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helped by appropriate financial and non-financial policy support.

MARKET ANALYSIS IN PROJECT MANAGEMENT 81
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learning objectives

>> Explain the concept of market analysis in terms of collection
of market information and factors affecting it
>> Discuss qualitative approach, quantitative approach, and
process of demand forecasting
>> Describe product mix analysis
>> Describe the technical appraisal of a project
>> Explain distribution channel analysis
4.1 INTRODUCTION
S
Organisations need to first identify the specific objectives of a project,
collect necessary primary and secondary information and research
the market to establish its characteristics. For instance, organisations
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need to analyse the actions and strategies of its competitors.
A project’s technical design and financial viability will depend on the

required services to be delivered, size of the project and options to
reduce the project cost. Large, medium and small organisations need
to consider these factors in their market analysis.
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Market analysis offers an essential foundation to determine the scope

of a project. Market analysis considers the price and distribution
channels of the market, taste and preferences of consumers, the level
of supply, market competition and government policies.
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After the initial market analysis, organisations will conduct demand

forecasting and market planning. Effective demand forecasting is
based on past project feasibility, geographical division, etc.
This chapter focuses on the concept of market analysis and demand

forecasting. In this chapter, you will learn about product mix analysis,
technical appraisal and distribution channel analysis.
4.2 CONCEPT OF MARKET ANALYSIS

Market analysis holds a very important place in project management.
It is a research inducted to gauge the complete potential and likeli-
ness of the market in which the organisation operates. In other words,
market analysis is a way of understanding the potential of a market
for the purpose of investing and launching a project. For example, you
want to start a project on a new concept. You wish to understand the
views and ideas of the people about your project. For this purpose,
market analysis will help you in evaluating the scope of the new idea
and recognising the areas of improvement much before the launch of

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the project. It even assists you in identifying the market opportunities

and threats related to the project.
David A. Aaker, a well-known author from the marketing field, has

pointed out the following factors that need to be considered in market
analysis:
Market Size: It means the complete potential of the market from
the current as well as future growth perspective towards financial
data, government reports and customer surveys.
Market Growth Rate: It points towards the detailed study of his-
torical data of demand and supply and how they correlate with
each other. This helps you to estimate a considerable percentage
of growth that would be targeted in a fixed span of time.
Market Profitability: This refers to an estimated level of profit
S
extracted from a certain market. Market profitability is affected by
a number of factors, such as the threats involved while entering a
certain market and healthy/unhealthy competition in the market.
IM
Industry Cost Structure: This is a simple tool that helps in craft-
ing strategies and budgeting to gain an upper hand over the com-
petitors, resulting in an organisation becoming the market leader.
Channel of Distribution: This signifies the flow of a project from
the initial stage to the end stage. In this flow, the direct channel of
distribution is somehow the preferred channel, as it decreases the
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cost of the project but increases its demand.

Market Trends: An organisation must carefully analyse trends of
the market while analysing it. If there is a change in the tastes and
preferences of customers, it would result in price sensitivity and
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demand variety. Both these factors can be identified for variation

against the current or future supply perspective.
Now, let’s consider a hypothetical situation to understand the impor-

tance of market analysis for project management. You want to set up
a new brick manufacturing plant. Before you enter the market, you
want to identify the viability of the plant in a certain market using the
market analysis tool. For this, you need to gauge the factors highlight-
ed by Aaker in the following manner:
Market Size: To estimate the complete size of the market, you can
use customer survey reports or rely on government reports. This
will help you in estimating the quantity to be produced.
Market Growth Rate: To estimate the rate of growth in the mar-
ket, you can refer to the historical data of sales, such as the past
demand for cement in the area and the future potential of the area.
Market Profitability: To estimate the profitability of the market,
you can consider various factors, such as the percentage of increas-
ing sale for cement in the area, cost of raw materials and labour,

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total planned production amount, seasonal effects on demand and

supply and cost of transportation.
Industry Cost Structure: The industry cost structure will help
you in estimating the expenditure of the project.
Channel of Distribution: To enhance the demand of your product
in the market, you can use direct channels of distribution, such as
selling bricks directly to the customer via retail or online stores and
avoiding the long-crafted channel of distributors and agents. This
would help to reduce the cost of brick manufacturing and selling
them drastically to the customers. This in turn will increase the
profitability of your organisation, giving you more scope to grow.
Market Trends: To understand the market trend, you can check
the sales and growth pattern of other brick manufacturing organ-
isations in the area over the years to know about the changing
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tastes and preferences of residents and users. The bigger data you
have, the better your analysis would be.
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Thus, market analysis helps the turnkey project manager in executing
the project more effectively and efficiently. The initial and the most
important step in market analysis is collecting market information.
4.2.1 COLLECTION OF MARKET INFORMATION
Investigation for the market analysis must be backed by proper avail-

M
ability of information. An organisation relies completely on the col-

lected data from the market to estimate the demand of a project. Con-
sider an example of an organisation planning to undertake a project of
manufacturing a specific kind of tool. Before initiating the project, it
would be really crucial for the organisation to understand the earlier
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demand and supply pattern, as well as the challenges involved for the
specific tool in the market. The organisation should be careful while
collecting the market information, as the data that is collected will
be crucial in forecasting the demand for future, growth rate, profit-
ability, sustenance and market share of the machine that it intends to
produce.
For collecting market information, the organisation can use a ques-

tionnaire containing the following questions:
Who are the people most likely to benefit from the project?
What is the existing demand for the project in the market?
What is the estimated growth in sales per year?
What is the geographical distribution pattern of demand and sales
per year?
What is the break-up of the demand for the project in different
segments?

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What features would make the project attractive at an affordable

cost?
What would be the most appropriate channel of distribution for
the project?
What are the future prospects of the project?
An organisation can collect market information from a number of

sources, such as consultants, research houses, general public, compet-
itors and other related people. The organisations select the sources of
market information according to their personal requirements. There
are two sources of market information, as shown in Figure 4.1:
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IM
Figure 4.1: Sources of Market Information
The two sources of market information (as shown in Figure 4.1) are
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explained in detail in the following sections.
Primary Sources of Market Information
Primary sources of market information include scientific journals, in-

N
terviews, surveys, government data, experimental research findings,

technical reports, newspapers and findings over the Internet. Infor-
mation is generally collected from these sources by examining, ob-
serving, experimenting and analysing the market situations. This type
of information is original, neither interpreted nor derived from any
earlier findings. This information is conducted on a macro level and
hence it is specific in nature, as it is collected to obtain information on
particular segment of the organisation.
The primary sources of market information have certain advantages

because of the following:
Original in Nature: The information obtained from the primary
sources is more reliable and accurate, and not derived from any
previous source. Therefore, such information can be used to make
the project viable.
Current Facts and Findings: The information obtained from the
primary sources consists of updated information on the related
topic and its underlying facts.

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Non-ambiguous in Nature: The information obtained from the

primary sources is clearly defined and is intended to attain the
objectives of market analysis. This plays a pivotal role in decision
making.
Collecting market information from the primary sources is an expen-

sive and time consuming process. So most organisations opt for sec-
ondary sources of market information.
Secondary Sources of Market Information
Information gained from primary sources is narrowed down and or-

ganised into secondary market information. Therefore, secondary
sources of market information include the studies previously per-
formed by government agencies and departments, industry and trade
S
associations, media, and chambers of commerce. An organisation
can narrow down the information from these sources according to
its requirement to get a fair amount of market information from the
project’s perspective. An example of the secondary source of market
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information is Nielsen’s television ratings used for advertising deci-
sions. Some advantages of secondary sources of market information
are as follows:
Ease of Collection: Information from secondary market source
can be easily derived from primary market information. The find-
ings and results can be manipulated to derive the required infor-
M
mation for the project.

Less Time-consuming: It takes less time to gather information
from secondary sources than from primary sources.
Inexpensive: The total cost involved in collecting information
N
from secondary market sources is a fraction of the cost involved in

gathering information from primary sources.
The main disadvantage of secondary sources of market information is

that the information collected may be wrongly derived and obsolete,
which can lead to inaccuracy in market analysis.
4.2.2 FACTORS AFFECTING MARKET INFORMATION
An organisation can identify the basic factors that affect market infor-
mation in the following ways:
Analysing current market trends
Analysing tastes and preferences of the masses
There are various factors that affect the collection of market-related

information, which are as follows:
Cultural Diversity: It means differences in choices and preferenc-
es of people, as they are highly differentiated by their culture, the

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way they have been brought up, their surroundings, etc. It is one
of the most crucial factors to be accounted in the collection of mar-
ket-related information.
Geographical Location: The geographical location is also a major
differentiating factor affecting the market information collection
process. A country may be subdivided into a number of counties,
regions, states, cities and localities, depending on geographical
boundaries inhabited by different people whose choices and pref-
erences are different from their neighbours. In such cases, it be-
comes a little tricky to collect information from all the locations
of the country, which results in inadequate and not so accurate
market information.
Multiple Languages: It is difficult to collect information from a
market where multiple languages are spoken. In a multilingual
S
country like India, there is a change in the language people speak
after every 100 km. This type of language barrier can become a
hindrance in collecting data.
IM
1. __________ is a research inducted to gauge the complete

potential and likeliness of the market in which an organisation
operates.
2. Name two sources of market information.
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3. Collecting market information from the secondary sources is

an expensive and time-consuming process. (True/False)
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Activity
Assume you are the project manager of a construction plant. You

have to collect market information for a new project. How will you
do that?
4.3 DEMAND FORECASTING

Organisations forecast the demand for a project by using the market
related information collected from different sources. Forecasting of
demand involves estimating the project completion timeframe.
Organisations try to predict the demand for their projects before un-
dertaking any production activity because they want to minimise the
sale; yet, they cover the entire demand for a certain project. They col-
lect data from different departments, such as marketing, production,
operations, sales and finance to estimate the response for the project.
Therefore, the forecasted demand is the compiled effort of the manag-

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ers from different departments in a project. The project manager can

also involve a planning group, comprising people from the concerned
departments if they wish to further diversify the forecasting report.
Demand forecasting can be done by using a number of approaches,

which are grouped into two major categories, as shown in Figure 4.2:
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Figure 4.2: Different Approaches of Demand Forecasting
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The two types of demand forecasting approaches (as shown in
Figure 4.2) are explained in the following sections.
4.3.1 QUALITATIVE APPROACH OF DEMAND FORECASTING
An organisation can use the qualitative approach for forecasting the

M
demand when there is inadequate market information available. For

example, in case of a new project, which does not have any pre-exis-
tent similar project to compare with, it is difficult to carry out proper
demand forecasting. In such cases, forecasts are made by analysing
the qualitative aspects of the project. Generally, an organisation uses
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the qualitative approach for either short-term projects or a complete-

ly new project. The qualitative approach is based on an individual’s
experience and estimations. It includes various methods shown in
Table 4.1:
Table 4.1: Description of the Qualitative

Forecasting Methods
Qualitative Methods Description
Executive Opinion In this method, opinions of individuals from
the top management of the organisation are
pooled to estimate the demand.
Sales Force Composite In this method, the demand is estimated
on the basis of sales projections made by
individual salespersons of the organisation,
flaring as per their potential. These projec-
tions are later added in the overall demand
forecasts.

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Qualitative Methods Description

Delphi Method It refers to a systematic and structured tech-
nique in which a panel of industry experts is
identified to make their individual demand
estimations. The estimations provided by the
experts are reviewed by a third party. This
process is repeated till a final outcome is
obtained.
Consumer Market Survey In this method, the demand is forecasted
on the basis of tastes and preferences of the
masses.
4.3.2 QUANTITATIVE APPROACH OF DEMAND

FORECASTING
S
You can use the quantitative approach for forecasting demand for
long-term projects of the organisation. This approach is a little com-
plex as compared to the qualitative approach and involves mathemat-
ical calculations. However, this method is generally opted for when
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seeking longevity in the market. The quantitative approach is based
on the quantity aspects of the project and takes into account the time
factor. It involves various methods, as shown in Table 4.2:
Table 4.2: Description of Quantitative

Forecasting Methods
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Quantitative Methods Description

Naive Approach In this method of demand forecasting, an
organisational assumption is taken into
consideration over demand for a project in
future that it will remain the same as it was
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in the recent past. However, the demand

pattern is not stable and varies from time to
time. This is why, as the name suggests, it is
a naive approach.
Moving Averages (MA) This method is a mean of time series data
(observation equally spaced in time) and
is called moving because it is continually
recomputed as new data becomes available;
it progresses by dropping the earliest value
and adding the latest value. This method is
highly applicable to a product with stable
demand having no specific behavioural pat-
terns, which is not affected by seasons.
The equation for calculating MA is as fol-
lows:
F 4 = [D 1 + D2 + D3 + D4] / 4
Where
F = Forecast
D = Demand

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Quantitative Methods Description

Exponential Smoothing It is an averaging method in which all the
(ES) current changes in demand are factored
in by taking a smoothing constant for the
current change in demand. This method is
mostly opted for data that has a lot of vari-
ation in nature. It is by far the most appro-
priate method of demand forecasting. The
equation for calculating ES is as follows:
F t + 1 = a D t + (1 - a ) F t
Where
F t + 1 = forecast for the future period
D t = actual demand in the current period
F t = the pre-determined forecast for the
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current period
a = weighting factor, also known as the
smoothing constant
Time Series Decomposition
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In this method, an estimated figure of de-
mand for a project is calculated by consid-
ering the seasonal demand forecast and
multiplying the normal forecast of demand
by a seasonal factor.
Now, let us take a hypothetical example to explain how demand is

forecast.
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Example 1: In the past five months, the demand pattern of a project

is as follows:
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Month 1 2 3 4 5 6
Demand (in lakhs) 15 17 21 25 29 32
How do you estimate the demand for the month 7 using a two-month
moving average? Also, find the forecast for the month 7 using expo-
nential smoothing with a smoothing constant of 0.8. Which one do you
suggest and why?
Solution:
The two months’ moving averages of the month 2 to 6 are as follows:
Moving average for month 2 (f2) = (15+17)/2 = 16
Similarly, the moving average for month 3(f3) = (17+21)/2 = 19

(f4) = (21+25)/2 = 23
(f5) = (25+29)/2 = 27
(f6) = (29+32)/2 = 30.50

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Therefore, the forecasted demand for the month 7 (f7) is just the mov-
ing average calculated for the month 6 (f6), that is, 30.50 lakhs.
note
Students should also practice 3-year, 4-year, and 5-year moving av-
erages as well
We can also find the demand for the month 7 by using exponential
smoothing with a smoothing constant 0.8, as follows:
F1= D1 =15
F2= 0.8D2+ (1-0.8)F1= 0.8×17 + 0.2×15 = 16.60
F3= 0.8D3+ (1-0.8)F2= 0.8×21 + 0.2×16.60 = 20.12
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F4= 0.8D4+ (1-0.8)F3= 0.8×25 + 0.2× 20.12 = 24.02
F5= 0.8D5+ (1-0.8)F4= 0.8×29 + 0.2× 24.02 = 28.00
IM
F6= 0.8D6+ (1-0.8)F5= 0.8×32 + 0.2× 28.00 = 31.20
Therefore, the forecasted demand for the month 7 is the average for
the month 6, that is, 31.20 lakhs.
Now, if you want to compare the two forecasts, you can use Mean
Squared Deviation (MSD) in both the cases.
M
The MSD for the moving average is as follows:

MSD = [(16-21)2+(19-25)2+(23-29)2+(27-32)2]/4
MSD = 30.50
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Similarly, the MSD for exponential smoothing is as follows:

MSD = [(15-17)2+(16.60-21)2+(20.12-25)2+(24.02-29)2+(28-32)2]/4
Therefore, MSD = 21.99 or 22
Since, the MSD for exponential smoothing is smaller than the MSD
for moving average, you can conclude that the exponential smoothing
gives better forecast for month 7. Thus, the forecast of 31.20 lakhs is
the recommended forecast.
4.3.3 PROCESS OF DEMAND FORECASTING
The efficiency of market analysis depends on the effectiveness of the

demand forecasting process of the organisation. The demand fore-
casting process can be divided into seven different steps, which are
depicted in Figure 4.3:

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Figure 4.3: Steps in the Demand Forecasting Process
The steps involved in the demand forecasting process (as shown in

Figure 4.3) are explained as follows:
1. Determining the Purpose of Forecast: In this step, you
determine the basic objectives of forecasting as in why a specific
forecast is being conducted. These objectives help in deciding
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the type of market information required for demand estimation.

2. Selecting the Matter for which Forecasting is to be Done:
In this step, you identify the underlying project content to be
forecasted.
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3. Deciding the Time Period of the Forecast: In this step, you

establish the time frame for forecasting the demand of the
project. The forecasting depends on the project requirement and
may be for:
A short range, which is one month to six months
A medium range, which is 6 months to a year
A long range, which is anything beyond a year
4. Selecting the Forecasting Approach: In this step, you ascertain
the forecasting approach to be used for demand prediction.
As discussed in the previous section, there are two separate
approaches of demand forecasting, the qualitative approach and
the quantitative approach. The forecasting approach is selected
on the basis of the duration of the project.

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5. Collecting Data: In this step, you gather, sort and arrange all
possible relevant data and information for forecasting demand.
Then, you do a final forecast on the basis of a comparative study
of the past data and the recent market trends.
6. Generating the Forecast: This step involves preparing a forecast
by gathering, manipulating and interpreting all the information.
7. Authenticating and Executing Results: Finally, the generated
forecast is validated, after which the final forecast is put into
practice.
4. Demand forecasting involves estimating the project completion

time frame. (True/False)
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5. The project manager can also involve the __________ group
comprising people from the concerned departments if they
wish to further diversify the forecasting report.
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6. Name two approaches of demand forecasting.
7. In which step is the time period of a forecast decided in the
demand forecasting process?
a. First b. Second
c. Seventh d. Third
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Activity
Assume you are the project manager of a manufacturing organisa-

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tion. Your organisation has recently launched a new project. Com-

pile a report detailing the approaches you will take to forecast de-
mand for the project.
4.4 PRODUCT MIX ANALYSIS

Product mix is the sum total of various product lines of an organisa-
tion. It is a set of similar as well as non-similar products produced by
any organisation. It is also known as product assortment or spread.
There can be one or more product lines in a product mix. Sometimes,
these product lines are fairly similar, such as bath soap and dish wash-
ing liquid; at other times, these product lines are considerably differ-
ent, such as food articles and schools. Figure 4.4 shows the product
mix of Hindustan Unilever Limited:

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Figure 4.4: Product Mix of Hindustan Unilever
The product mix of an organisation has four basic elements, i.e., width,
length, depth and consistency. Let us briefly discuss these elements.
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Width: It refers to the total number of product lines (i.e. category)

in an organisation. In Figure 4.4, food, water, nutrition, home care,
personal care and beauty products are the six product lines that
are collectively called width of product mix. Small and new busi-
nesses will usually not have a wide product mix.
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Length: It refers to the total number of products available in a

product mix. In Figure 4.4, the length of the product mix of Hindu-
stan Unilever Limited is 34.
Depth: It refers to the total number of variations in a specific prod-
uct line. Variations can include size, flavour and any other dis-
tinguishing characteristic. Depth is more narrowed than length.
In Figure 4.4, the product line of personal care has the depth of
13 items.
Consistency: It measures the extent to which product lines of an
organisation can relate to each other at a certain level, in terms of
use, production and distribution. For example, if an organisation
produces oil, conditioners, shampoos and other hair care prod-
ucts, then it is maintaining consistency in its product lines.

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8. __________ is the sum total of various product lines of an

organisation.
9. Which element of product mix measures the total number of
products available in a product mix?
a. Consistency b. Depth
c. Length d. Width
10. Length is more narrow than depth in a product mix (True/False)
11. _____________ measures the extent to which product lines of
an organisation relate to each other.
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Activity
Conduct a product mix analysis of a company of your choice. Use

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the Internet to avail to necessary resources.
4.5 TECHNICAL APPRAISAL

Technical appraisal is an in-depth study to ensure that a project is
properly designed and engineered, and follows specific guidelines and
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standards. Although these considerations differ from one project to

another, the main focus still remains on the inputs required for the
project and the resulting outputs of goods and services.
A technical appraisal helps to estimate if the prerequisites of a suc-

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cessful project have been adequately covered and correct choices are
made in terms of place, plant capacity, requirement of raw materials,
and availability of required technicians and workers. Moreover, proj-
ect costs are determined and accordingly, manufacturing costs are es-
timated. In addition, adverse environmental effects are also analysed
and subsequent efforts are made to reduce them through better proj-
ect design, which is done by waste management, sewage treatment,
noise reduction techniques, etc.
Technical appraisal means upgradation of the technique being imple-

mented at present. If you constantly keep on upgrading to the latest
technique, you would have many constructive advantages such as sav-
ing time, reducing cost and increasing production.
Financial institutions call for a detailed project review meeting after

every due course of time and this is when they decide which technical
part is obsolete and needs to be upgraded.

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12. A __________ helps to estimate if the prerequisites of a

successful project have been adequately covered.
13. Technical appraisal means upgradation of the technique being
implemented at present. (True/False)
Activity
Write a short note on the technical analysis of a project in the road

transport sector. Use the Internet to avail necessary resources.
4.6 DISTRIBUTION CHANNEL ANALYSIS
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Once a project is over, it has to be distributed properly using effective
distribution channels. A distribution channel is a significant part of
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marketing; it is how an organisation delivers its products and services
to its customers. Distribution channels include wholesalers, e-com-
merce websites, catalogue sales, consultants, dealers, home shopping
networks and retailers. Depending on the chosen distribution chan-
nel, a company can decide its remaining marketing strategy, as it af-
fects the buyer directly.
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When conducting a market analysis, it is essential to consider distri-

bution channel analysis to ensure that you are using the right chan-
nels to deliver your products to customers. Small businesses with
limited resources must carefully analyse the market to determine the
most suitable distribution channel for their customers. For example, a
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company called Concord Wilshire has established comprehensive and

exclusive marketing distribution channels in both the US and Cana-
da. The distribution channels are custom-made for major multi-fam-
ily residential communities. They help in effective communication
by delivering the right message to the right people at the right time.
Concord Wilshire uses a ‘Ripple Effect Distribution’ to reach multiple
targets using newspapers, radio, television and Internet channels. In
addition, research and trials are carried out at each stage of the dis-
tribution process to find the best and most cost-effective distribution
channel.
Sometimes, organisations use auctions to determine the initial pricing

or to conclude a project. Additionally, organisations form partnerships
with many private local firms to distribute their projects efficiently
and effectively. The distribution channels help organisations to reach
thousands of agents in a single day on a local level, state level, national
level and international level.

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Further, organisations also use online marketing distribution service

for their broker networks. This helps in quick and easy creation and
management of their project components. The exclusive distribution
channels and unique precision selling formula help organisations to
maintain sales velocity and maximise proceeds for their projects.
14. Once a project in over, it has to be distributed properly using

effective distribution channels. (True/False)
15. The exclusive distribution channels and unique precision
selling formula help organisations to maintain __________ and
maximise proceeds for their projects.
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Activity
Analyse the distribution channel of an FMCG company selling

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breads and dairy products. Compare it with a luxury brand retailer,
such as automobile manufacturer or high-end fashion house. Out-
line the significant differences in the distribution channels of both
companies.
4.7 SUMMARY
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Market analysis assists in identifying the market opportunities

and threats to the project.
Market analysis helps the turnkey project manager in executing
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the project more effectively and in a better form.

An organisation relies completely on the collected data from the
market to estimate the demand of a project.
The primary sources of market information include scientific jour-
nals, interviews, surveys, government data, experimental research
findings, technical reports, newspapers and findings over the In-
ternet.
The secondary market information is obtained from narrowing
the studies previously performed by government agencies and de-
partments, industry and trade associations, media and chambers
of commerce.
Organisations forecast the demand for a project by using the mar-
ket-related information collected from different sources. Forecast-
ing of demand involves estimating the project completion time-
frame.
The efficiency of market analysis depends on the effectiveness of
the demand forecasting process of the organisation.

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key words
Exponential Smoothing: It refers to a statistical technique ap-

plied to time-series data to make forecasts or produce smoothed
data (ignoring any fluctuations).
Moving Average: It refers to the mean of time-series data (ob-
servations equally spaced in time) from many consecutive pe-
riods. The term ‘moving’ is given as the calculation changes on
availability of new data and it progresses by ignoring the previ-
ous value and adding only the latest value.
Sustenance: It refers to the maintenance or support of some-
thing, for example, continuation of a project.
Turnkey Project Manager: It refers to a project manager in an
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organisation who is responsible to ensure the project is opera-
ble right from the starting stage to the finishing stage.
Viability: It refers to the capability of something to be success-
ful, for example, a project.
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1. How can market information be collected?
2. Describe the factors affecting market information.
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3. What are the two approaches of demand forecasting?

4. Explain the process of demand forecasting.
5. Discuss product mix analysis.
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6. Elaborate on technical appraisal.

7. Explain distribution channel analysis.

Concept of Market 1. Market analysis
Analysis
2. Primary sources and secondary
sources
3. False
Demand Forecasting 4. True
5. Planning

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6. Qualitative and quantitative
7. d. Third
Product Mix Analysis 8. Product mix
9. d. Length
10. False
11. Consistency
Technical Appraisal 12. Technical appraisal
13. True
Distribution Channel 14 True
Analysis
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15. Sales velocity

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1. Market information can be collected mainly from two sources:
Primary and secondary. Refer to Section 4.2 Concept of Market
Analysis.
2. Cultural diversity, geographical location and multiple languages
are some of the factors affecting market information. Refer to
Section 4.2 Concept of Market Analysis.
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3. The two approaches of demand forecasting are qualitative and

quantitative. Refer to Section 4.3 Demand Forecasting.
4. The efficiency of market analysis depends on the effectiveness
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of the demand forecasting process of the organisation. Refer to

Section 4.3 Demand Forecasting.
5. Product mix is the sum total of various product lines of an
organisation. Refer to Section 4.4 Product Mix Analysis.
6. Technical appraisal means upgradation of the technique
being implemented at present. Refer to Section 4.5 Technical
Appraisal.
7. Once a project finishes, it has to be distributed properly using
effective distribution channels.. Refer to Section 4.6 Distribution
Channel Analysis.

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SUGGESTED READINGS
Garland, R. (2009). Project Governance. (1st ed.). London: Kogan
Page.
Gray, C., & Larson, E. (2008). Project Management. (1st ed.). Boston:
McGraw-Hill/Irwin.
Meredith, J., & Mantel, S. (1995). Project Management. (1st ed.).
New York: Wiley.
E-REFERENCES
Slideshare.net. (2014). Market and demand analysis 2. Retrieved 28
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October 2014, from <http://www.slideshare.net/joybutt5033/mar-
ket-and-demand-analysis-2>
Small Business - Chron.com. (2014). Distribution Channels and
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Marketing Analysis. Retrieved 28 October 2014, from <http://
smallbusiness.chron.com/distribution-channels-marketing-analy-
sis-60985.html>
Toolkit.pppinindia.com. (2014). PPP Toolkit. Retrieved 28 October
2014, from <http://toolkit.pppinindia.com/ports/module2-ffaapdd-
maaps.php?links=ffaapdd1b>
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Ch a
5 p t e r
Financial Feasibility of a Project
CONTENTS
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5.1 Introduction
5.2 Financial Analysis
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5.2.1 Estimating Cost of a Project
5.2.2 Estimating Working Capital Requirements
5.2.3 Estimating Cash Flows
5.2.4 Estimating Funds Flow Statement
Activity
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5.3 Profitability Analysis

Activity
5.4 Cost and Benefit Analysis
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Activity
5.5 Assessing Tax Burdens
Activity
5.6 Appraisal Criteria used by Lending Institutions
Activity
5.7 Summary

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CONSTRUCTION OF A GEOTHERMAL POWER PLANT
The objective of the case study was to estimate the practicabil-

ity of building a geothermal plant capable of producing electricity
and heat. High capital cost is involved in setting up geothermal
power plants; however, as compared to other means of electricity
production, they are still very cost effective. Since no fuel is re-
quired in power production, the financial feasibility is not affected
by fluctuations in fuel cost. However, considerable risk is involved
in drilling wells to extract geothermal fluid. This exercise is very
expensive. The feasibility of the project therefore depends on the
success of exploration.
The financial feasibility assessment model was designed and de-

veloped by an Icelandic company that specialised in developing
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and constructing geothermal power plants.
Projected cash flows were used to calculate the financial feasi-

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bility. Electricity and/or heat production capacity was calculated,
projected financial statements were obtained, and profitability of
the prospective project was calculated. Thermodynamic formulas
were used to calculate electricity and heat production. Calcula-
tions regarding income generation were based on the estimated
production and anticipated energy prices.
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Several technical parameters were also estimated. Input for pow-

er plant operations such as plant running hours, operation cost,
maintenance cost, etc. were calculated on the basis of the estima-
tions given by specialists. Market information analysis required
cost estimation for the electricity sales price, electricity purchase
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price, hot water sales price, etc.
The financial inputs and assumptions included sources of financ-

ing, tax and accounting regulations, the minimum acceptable rate
of return, capital cost to be paid with equity, the proportion of
profits, income tax, depreciation, loan interests and profitability
among a host of other factors.

Financial Feasibility of a Project 103
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learning objectives

>> Discuss the concept of financial analysis
>> Explain profitability analysis
>> Explain cost-benefit analysis
>> Explain the concept of tax burdens
>> Discuss the appraisal criteria used by lending institutions
5.1 INTRODUCTION
The previous chapter discussed market analysis in project manage-
ment. Apart from market analysis, financial analysis is carried out to
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check the financial feasibility of a project.
One of the most vital aspects of a project is its financial viability. This
viability is generally assessed after analysing the market viability. A
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financial feasibility study provides an elaborate and detailed analy-
sis and evaluation of the market as well as identifies the operational,
technical, managerial and financial aspects of the project/ business. It
is the road map for all subsequent decisions. In other words, it is an
assessment of the viability of the business under consideration and
is done to assess whether or not the project will prove profitable to
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the organisation. It is always advisable for the organisations to take

economic feasibility of a project into consideration before starting to
work on it. This type of assessment enables the organisation to collect
information about and take care of various financial issues, such as
the revenue needed for beginning the project, the source of income,
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investment earnings and other economic needs. In this chapter, you

will learn to assess the financial feasibility of a project.
5.2 Financial Analysis

Financial analysis is the study of all economic aspects of a project or
business. It involves the assessment of the feasibility, stability and
profitability of a proposed business venture. This study helps an or-
ganisation to thoroughly analyse all the financial aspects of a proj-
ect, such as production expense, working revenue, cash flow, etc. This
knowledge allows investors to calculate the anticipated dangers and
profits linked with the project; thus, enabling them to take crucial de-
cisions on time.
To begin a new project or business, an organisation requires some

start-up capital. This is the revenue required to begin a business and
support it till it is able to sustain itself. It involves the finances gener-
ated from the capital sources and the potential returns from the inves-
tors. As execution of a project needs large amounts of capital invest-

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ments, an organisation needs to assess the economic viability of the

project. This kind of assessment enables an organisation to identify
the complete investment layout and compare the capital and costs
linked with the project.
Figure 5.1 shows the various steps for assessing the economic viability
of a project:
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Figure 5.1: Assessment of Economic Viability
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These steps are discussed as follows:
Estimation of the Cost of a Project: It is the initial move taken to
assess the economic viability which aims at calculating different
types of expenses involved in the project.
Estimation of Project Cash Inflows: In this, calculation is done
regarding the cash inflows that are anticipated during the lifetime
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of the project.
Estimation of the Expected Rate of Return: In this, the anticipat-
ed rate of profit is assessed by analysing the available funds and
the risk percentage of losses.
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Application of the Decision Rule: In this, the final decision is tak-

en on the basis of the assessment of the economic viability of the
proposed project.
An example of the financial analysis form/economic viability sheet of

a project is as follows:
Financial Analysis Form

Borrower Name:___________Loan #_______________ Co-Borrower Name: __________________
Income/Expenses for household_______________ Number of people in household
1. Monthly Household Income 2. M

onthly Household Expenses/ 3. Household Assets
Debt
Gross Salary/Wages Gross salary/ $ First Mortgage Payment $ Checking Accounts(s) $
wages= total monthly income Balance
before any tax withholding or
employer deductions.

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1. Monthly Household Income 2. Monthly Household Expenses/ 3. H

ousehold Assets
Debt
Overtime $ Second Mortgage $ Checking Accounts(s) $
Payment/Liens/Rents Balance
Child Support/Alimony* $ Insurance-hazard, wind, $ Savings/MoneyMar- $

flood, etc. ket
Social Security/SSDI $ Property Taxes) $ CDs $
Other monthly income from $ Credit Cards/Instalment $ Stocks/Bonds $

pensions, annuities or retirement Loans(s) (total minimum pay-
plans ment per month)
Tips, commissions, bonus and $ Alimony, child support pay- $ Other Cash on Hand $
self-employed income ments
Rents Received $ Health Insurance $ Other Real Estate(es- $
timated value)
Unemployment Income $ HOA/ Property $ Other $
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Maintenance
Food Stamps/Welfare $ Car Payments $
Other (investment income, $ Medical Expenses $

royalties, interest,
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dividend, etc.)
Child Care $
Student Loans/Personal Loans $
Auto Expenses/Gasoline/ $
Insurance
Food/Household Supplies $
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Water/Sewer/Utilities/ $
Phone(s)/Cable
Other $
Total (Gross Income) $ Total Debt/Expenses $ Total Assets $
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5.2.1 Estimating Cost of a Project
The economic viability of any project cannot be assessed without cal-

culating the expenses involved in it. The total cost includes both fixed
and variable costs. The fixed cost involves the expenditure of the or-
ganisation that does not change with the change in the production
level. Some examples of fixed cost are rents, taxes, etc.
Fixed costs of a project always remain the same irrespective of the

quality of the product produced. On the other hand, variable costs
change with the change in the production level. Some examples of
variable costs are the expenses incurred in procuring raw material,
labour, etc.
The correct estimation of the both fixed and variable costs helps in
ascertaining the economic viability of the project.

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Figure 5.2 shows some areas on which organisations need to spend

while starting a new project:
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Figure 5.2: Expenses Incurred in a Project
These areas are explained as follows:

Land and Site Development: This includes the costs incurred on
the acquirement and development of land. Some of these costs are
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linked with buying of land, constructing boundaries, wiring, level-

ing of land, constructing internal roads, etc.
Construction Cost: This involves costs encountered while con-
structing a factory and other commercial buildings. One must
note that the cost of reduction charged for factory buildings var-
ies from that charged for other commercial buildings. The charges
for other commercial buildings are less as compared to factory
buildings. Factory buildings may include boiler house, transform-
er room, laboratory, production unit, workshop, etc. On the other
hand, non-factory buildings may consist of stores, parking, securi-
ty house, etc.
Technical Expenses: This includes costs encountered while giving
training to the staff and incorporating machinery. Technical costs
include training employees, buying machinery, etc.
Preliminary Expenses: This is also called opening expenses as the
costs are sustained by the organisation before the start of a project.
Initial costs may consist of legal fees, registration, investment done
in early inventory, inspection of the market, etc.

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Plant and Machinery: This involves costs sustained by an organ-

isation while buying or making use of imported and original tech-
nology. Such costs include machine/technology, piping, excise/cus-
tom duty, sales tax, shipment, etc.
Preoperative Expenses: These are the costs that are sustained be-
fore the start of viable production. Preoperative costs are normal
costs and may include wages, rents, commuting expenses, trial
run expenses and costs related to the formation of the company.
Utility: This includes costs sustained by the organisation by mak-
ing use of the general facilities of the plant. The different types
of utilities are boiler, compressor, generator, underground water
tank, sewage treatment plant, etc.
Contingency:This relates to the fund kept as a safeguard for any
untoward happening like price rise, slump, change in the rules of
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the government, etc.
Miscellaneous Fixed Assets: This includes the costs of buying vari-
ous materials. Some examples of miscellaneous fixed assets are fur-
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niture and fittings, means of transportation, computers, etc.
To estimate these costs and expenditures, organisations must do a

detailed assessment of different sources available for financing the
project.
Figure 5.3 shows some of these financial sources:

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Figure 5.3: Sources of Finance
These sources are discussed as follows:

Debenture Capital: It is the capital generated from the deben-
tures given to people. It is in the form of documentation given by
big organisations to the lender and is used as an acknowledgement
of debt. The one who has this documentation is called the deben-
ture holder. The period of maturity for the debenture is between 5
and 9 years with a fixed rate of interest.

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Share Capital: It is the capital generated by giving shares to peo-

ple. There are two types of share capital: equity and preference
share capital. The capital that is donated by business owners con-
sists of equity share and is mainly generated for fulfilling the ear-
ly requirements of a business. The shares for producing equity
capital are called equity shares. The business is owned by equity
shareholders, who are not given any fixed rate of dividend. Alter-
natively, preference share capital is considered as donation of the
shareholders to fulfil the costs of the project. In contrast to equity
shareholders, preference shareholders get a fixed rate of dividend
on their shares.
Term Loans: This capital is taken to start a fresh business or to
spread and restructure present projects. In this, term loans are
taken by business organisations and individuals. In India, two
types of term loans are given: rupee term loan and foreign curren-
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cy term loan. Rupee term loans are used for buying plant, equip-
ment, land, etc.; whereas, foreign currency term loans are used for
importing machinery and technologies.
Deferred Credit: This is taken by customers or tenants who can
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pay in full or part, before buying goods and services. For instance,
these days, projects related to real estate give offers where 20% of
the total cost of the property can be paid in the beginning and the
remaining can be paid as EMIs.
Incentives: This capital is taken with an aim to develop the unde-
veloped areas of the country. The government usually grants eco-
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nomic support to industrial units to help and encourage people

to establish industrial units in certain areas like hills and villages.
These can be given in the form of special consideration in tax, re-
wards, financial backing, etc.
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Exhibit
Government Incentives Offered to Small-Scale Industries
The following are some of the incentives offered by the Indian gov-
ernment to small-scale industries in rural, hilly and tribal areas:
Land is offered to establish industries without charging any
rental fee for a few years or installments.
A concession of 50% is given in electricity bills.
A concession of 50% is given in water bills for five years.
Sales tax is not charged in any union territory.
Industries in undeveloped areas provide materials, such as ce-
ment, iron and sand, at low cost.
10–15% financial subsidy is given for the production of capital
goods.
Industries in backward and hilly areas do not have to pay taxes
for 5–10 years.

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5.2.2 Estimating Working Capital Requirements
The capital needed to perform day-to-day activities in an organisation

is called working capital. It can be estimated by deducting the existing
accountability of an organisation from the existing goods that it pos-
sesses. The following formula is generally used to estimate working
capital:
Working Capital = Current Assets - Current Liabilities
Working capital indicates the economic condition of an organisation.

If the existing liabilities go beyond the existing goods, this shows poor
economic condition of the organisation and vice versa. Some vital ele-
ments of working capital include money, receivables and inventories.
note
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All components that constitute working capital should be critically
analysed.
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Working capital requirement is different for different organisations.
Some aspects that can affect the quantity of working capital needed
by an organisation are as follows:
Business infrastructure
Cycle of construction
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Policy of credit
Business competition
Policy of dividend
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Providing for an unforeseen event

Requirement of capital
According to financial advisors, if the amount of the working capital is

high, it will lead to flexibility and gives a chance to get highly normal
gains. Table 5.1 shows the method to calculate working capital on the
basis of the existing goods and liabilities:
Table 5.1: Calculation of the Working Capital

Components (a) Cost/unit (b) Cost/year (c) Time (d) Amount (e)
Raw material Purchase price b × annual Average c × d (time
inventory of raw material requirement stock unit ad-
period justed)
of raw
material
Work in progress Raw materials/ b × annual Average c × d (time
unit + ½ (fac- requirement process- unit ad-
tory overheads ing time justed)
wages)

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Components (a) Cost/unit (b) Cost /year (c) Time (d) Amount (e)
Finished goods Raw materials/ b × annual Average c × d (time
inventory unit +factory requirement stock pe- unit ad-
overheads riod for justed)
+wages finished
goods
Debtors Raw materials/ b × annual Average c × d (time
unit + factory requirement collec- unit ad-
overheads tion justed)
+wages + sell- period
ing expense
Stores Lump sum
Cash Lump sum
Creditors Purchase price b × annual Average c × d (time
of raw material requirement payment unit ad-
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period justed)
Outstanding Wages b × annual Average c × d (time
expenses requirement payment unit ad-
period justed)
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After calculating the components of existing assets and liabilities, a
statement has to be prepared, showing the need of the working capital.
This statement is shown as follows:
STATEMENT OF WORKING CAPITAL

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Particulars Amount (`) Amount (`)

Current Assets
Stock/Inventory of:
Raw materials _____
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Work in progress _____

Finished goods _____ _____
Account receivables
Prepaid expenses _____
Cash at bank _____
Debtors/Customers _____
Minimum cash required _____
Total Current Assets (A) _____
Current Liabilities
Creditors/Suppliers _____
Outstanding expenses/overheads _____
Outstanding wages/salary _____
Total Current Liabilities (B) _____
Net Working Capital Requirement (A-B) _____
Now, let’s try to understand the estimation of working capital with the
help of an example.

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Example 1: Calculate the working capital requirement of ABC Ltd. on

the basis of the given information:
Budgeted sales (` 10 per unit) = ` 2,60,000 p.a.
Analysis of cost:
Raw materials = ` 3/unit
Direct labour = ` 4/unit
Overheads = #` 2/unit#
Total cost = ` 9/unit
Profit = #` 1/unit#
Selling price = ` 10/unit
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Additional Information:
After the calculation, it is seen that:

Raw materials are taken into stock for three weeks and completed
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goods are stocked for two weeks.
It took around three weeks to process the work in the factory.
It took five weeks to collect credit from the dealers, and around
eight weeks credit is allowed to the customers.
Solution:
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Statement of Working Capital

Current Assets
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Stock/Inventory of:
Raw materials 4,500
Work in progress 9,000
Finished goods 9,000 22,500
Debtors/Customers 4,000
Total Current Assets (A) 62,500
Current Liabilities
Creditors/Suppliers 7,500 7,500
Total Current Liabilities (B) 7,500
Net Working Capital Requirement (A-B) 55000

Current Assets
Stock/Inventory of:
Raw materials 4,500
Work in progress 9,000

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Finished goods 9,000 22,500
Debtors/Customers 4,000
Total Current Assets (A) 62,500
Current Liabilities
Creditors/Suppliers 7,500 7,500
Total Current Liabilities (B) 7,500
Net Working Capital Requirement (A-B) 55,000
Working:
Budgeted Sales = 2,60,000 p.a.
Budgeted sales (unit) = 26,000 p.a.
26,000
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Budgeted sales (unit) per week= = 500 units
52
i. Cost of raw materials in stocks = (500 units × 3 weeks) ×`3
= 1,500 × 3 = 4,500
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ii. Cost of work in progress
Raw materials = (500 units × 3 weeks) ×`3
= ` 4,500
Labours = (500 units × 3 weeks) × `4 × ½
= ` 3,000
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Overheads = (500 units × 3 weeks) × ` 2 × ½

Total cost of work in progress = ` 9,000
iii. Cost of finished goods = (500 units × 2 weeks) × ` 9
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= ` 9,000
iv. Debtors = (500 units × 8 weeks) × `10
= ` 40,000
v. Suppliers = (500 units × 5 weeks) × `3 = ` 7,500
Exhibit
Difference between Fixed Capital and Working Capital
Basis Fixed Capital Working Capital

Tenure Required for a long period Required for a short period
Capital Capital is blocked; therefore, Capital is not blocked;
Utilisation it cannot be used to perform therefore, it can be used to
routine business activities perform routine business
activities
Uses Used to acquire fixed assets Used to buy current assets
Source Shares, debentures, loans, Cash sales, collection from
etc. debtors, overdraft, etc.


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5.2.3 Estimating Cash Flows
Cash flow is defined as the movement of money in and out of an or-

ganisation, business or project. The cost sustained by an organisation
to begin a project is called cash outflow; while, the profit produced
from the project is called cash inflow. For ensuring productivity, an or-
ganisation needs to ensure that the cash inflow is more than the cash
outflow. Cash flow can be estimated by:
1. Preparing predictions for sales by analysing the data of the last
year’s sales, proposed development and future plans for sales.
2. Preparing information for calculated cash inflows on the basis
of refunds, investments, donations, payments, fees for contract,
etc.
3. Assessing approximated cash outflows and other expenditure
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such as buying material, paying back loans, investments, etc.
4. Preparing cash flow predictions by collecting all the information.
5. Re-evaluating the estimated cash flow against the real cash flow.
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6. Inspecting any variations.
Project cash flow can be put into various groups such as initial layout,
working cash flow and non-working cash flow. Table 5.2 shows the
various kinds of cash flow:
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Table 5.2: Different Categories of Cash Flow

Initial Layout Working Cash Flow Non-Working Cash Flow
Fixed Investment (FI) Earnings Before In- Salvage Value (SV) +
+ Working Capital terest and Tax (EBIT) Working Capital
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(WC) – Tax + Depreciation

Generally regarded as Generally regarded Regarded as inflow
outflow as inflow
Generally in 0th year From 1st year to the nth nth year
year
According to Table 5.2, the working cash flow is estimated without

considering the interest as an expense. Before starting a project,
initial outlay is invested; nevertheless, when the sales go up, added
outlay is engaged for the coming years. The working capital must be
made accessible well in advance. The format of calculating cash flow
in a project is shown in Table 5.3:
Table 5.3: Format of Project Cash Flows

Initial Outlay Operating Cash Terminal Project Cash Flows
Flow Cash Flow
FI +WC ----- ----- Sum of all three
Add. WC EBIT–Tax + Dep. ----- Sum of all three

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Initial Outlay Operating Cash Terminal Project Cash Flows

Flow Cash Flow
Add. WC EBIT –Tax + Dep. ----- Sum of all three
----- EBIT–Tax + Dep. SV + WC Sum of all three
Project cash flow in this situation takes up only real costs. Accounting
costs such as recording expenditure, writing off initial costs, etc., are
not included.
With the help of the following example, we will try to understand the
estimation of cash flows:
Example 2: A fresh product is being introduced in the market by XYZ
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Ltd. The following table shows the expected sales of the product:
Year Expected Sales

1
IM 70,00,000
2 80,00,000
3 90,00,000
4 80,00,000
5 70,00,000
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The estimated fixed cost for each year is 5, 00,000. 35% sales are es-
timated as the cost of raw materials, while 10% sales are considered
for other variable expenditure. There would be 10% of fixed cost, but
the real expenditure is estimated to 5%. 30% is taken as the estimated
need of the working capital.
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The project lasts for only five years. After five years, the project is ex-
pected to attain the value of 17, 00,000. Contribution losses of 3, 00,000
and a poor debt of 3, 00,000 are anticipated. 25% will be the rate of
decline while 30% is the tax. If 70, 00,000 is the fixed investment outlay
of XYZ Ltd, find out the estimated cash flow of the project.
Solution:
0 year I year II year III year IV year V year

Initial Outlay -9100000 -300000 -300000 300000 300000 -
Operating - 2415000 2633750 2885313 2461484 2146113
Cashflow
Terminal Cashflow - - - - - 3500000
Project Cashflow -9100000 2115000 2333750 3185313 2761484 5646113
0 1 2 3 4 5
Fixed Investment -7000000 - - - - -
Working Capital -2100000 -300000 -300000 300000 300000 -
Initial Outlay -9100000 -300000 -300000 300000 300000

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0 1 2 3 4 5
Sales - 7000000 8000000 9000000 8000000 7000000
Raw Material - -2450000 -2800000 -3150000 -2800000 -2450000
Other Variable Cost - -700000 -800000 -900000 -800000 -700000
Overhead Alloca- - -350000 -400000 -450000 -400000 -350000
tion
Fixed Cost - -500000 -500000 -500000 -500000 -500000
Contribution Loss - -300000 -300000 -300000 -300000 -300000
Depreciation - -1750000 -1312500 -984375 -738281 -553711
Bad Debt - - - - - -300000
EBT - 950000 1887500 2715625 2461719 1846289
TAX - -285000 -566250 -814688 -738516 -553887
EAT - 665000 1321250 1900938 1723203 1292402
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Operating - 2415000 2633750 2885313 2461484 2146113
Cashflow
0 1 2 3 4 5
Salvage Value - - - - - 1700000
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Working Capital - - - - - 2100000
Bad Debt - - - - - -300000
Terminal Cashflow - - - - - 3500000
Project Cash Flows in a Replacement Project

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Organisations often take the advantage of technological advance-

ments by replacing their machinery and tools or by evolving their
manufacturing procedure. This advancement helps organisations to
increase their rate of production, decrease costs of labour, etc. Capital
investment is needed when the organisation chooses advancement or
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a replacement. The total investment in a replacement project is less

than that of a fresh project.
In replacement projects, the working capital amounts to the added

cash needed for any fresh machinery. The difference between the cost
price of fresh equipment and the selling price of the present equip-
ment is the cost of the fixed investment.
The difference between the salvage value of new equipment and the
total salvage value of the present equipment is called the final salvage
value of the project.
Example 3: ABC Ltd. decides to replace one of its old machines with
a new one. The market value of the old machine is 40,000, and its book
value is 50,000. Moreover, the old machine can get the total salvage
value of 1,000. The life of the new machine is five years. After five
years, the new machine can fetch a net salvage value of 30,000. The
new machine costs 2 lakhs. It is assumed that the new machine will
lessen the need of the working capital by 1,000. Also, the cost of power
will be cut by 5,000 each year. Considering that the reduction rate and

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tax will be 25% and 30% respectively, estimate the project cash flow of
the replacement project.
Solution: The following table shows the cash flow of the replacement
project:
0 1 2 3 4 5
Initial Outlay -150000 - - - - -
Operating Cash Flow - 47650 44838 42728 41146 39950
Terminal Cash Flow - - - - - 8000
Project Cash Flow -150000 47650 44838 42728 41146 47960
Change in FI -160000 - - - - -
Change in WC 10000 - - - - -
Initial Outlay -150000 - - - - -
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Change in EBIT - 52000 52000 52000 52000 52000
Change in Depreci- - 37500 2815 21094 15820 11865
ation
Change in EBT - 14500 23875 30906 36180 40135
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Change in Tax - 4350 7163 9272 10854 12040
Change in EAT - 10150 16713 21634 25326 28094
Operating Cash Flow - 47650 44838 42728 41146 39960
Change in Salvage - - - - - 18000
Value
Change in WC - - - - - -10000
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Terminal Cash Flow - - - - - 8000
In this example:
Initial outlay is `2,00,000 minus `40,000 (present market value of the

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old machine).
Savings of `52,000 per year is considered as an increase in Earnings
Before Interest and Tax (EBIT).
Depreciation is calculated on the incremental book value (`2,00,000 –
`50,000).
Change in the salvage value is the incremental salvage value of the
new machine over the old machine after five years.
Project Cash Flows with Consideration of Debt and

Repayment
Sometimes, organisations also consider debt and interest while esti-

mating cash flow. Let us see through the shareholders’ point of view
the estimate of cash flow and regard debt as the outsider’s liability.
Take the repayment of loan as cash outflow and interest as expenses
into consideration. The net investment of equity shareholders would
be the initial outlay. When calculating the anticipated cash flows from
the owners’ or equity shareholders’ perception, the investments made

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by them are taken as the cash inflow, while all expenditure is taken as
cash outflow (interest and repayment).
Example 4: XYZ Ltd. makes an investment of 20 million to launch a

new product. Out of the total investment, 5 million will be needed for
the working capital and 5 million for the operating cost. However, no
real cost on operating cost will be charged. It is seen that at the com-
petence level of 100%, the sale of 40 million would be achieved. The
competency of the company is anticipated to be 80% and 90% for the
first and second year, respectively. Hence, the competence of the com-
pany is expected to be 100%.
It has also been calculated that the fixed cost would be 6 million and
the variable cost will be around 60%. The rate of taxation is 40% and
that of reduction is 20%. The life of the project is projected to four
years. Towards the end, the project can get 4 million as its salvage val-
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ue. The economic combination of the project is as follows:
Equity worth ` 7 million
Long-term loan of ` 8 million @ 12%
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14% debentures of `2 million to be redeemed after four years
Short-term loan for the working capital worth ` 3 million
On the basis of the information given above, calculate the cash flows
of the project.
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Solution:
0 year I year II year III year IV year

Intial Outlay -20 - - - -
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Operating Cash Flow - 7.2 8.16 9.17 9.01

Terminal Cash Flow - - - - 9
Project Cash Flow -20 7.2 8.16 9.17 18.01
Fixed Investment -15 - - - -
Working Capital -5 - - - -
Initial Outlay -20 - - - -
Revenue 40 45 50 50
Variable Cost 24 27 30 30
Fixed Cost 6 6 6 6
Depreciation 3 2.4 1.92 1.54
EBT 7 9.6 12.08 12.46
Tax 2.8 3.84 4.83 4.99
EAT 4.2 5.76 7.25 7.48
Operating Cash Flow 7.2 8.16 9.17 9.01

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0 year I year II year III year IV year

Salvage Value - - - - 4
Working Capital - - - - 5
Terminal Cash Flow - - - - 9
5.2.4 ESTIMATING FUNDS FLOW STATEMENT
A funds flow statement is a statement that shows the sources and ap-
plication of funds. Sources means the ways by which the funds are
made available for projects, and the application or use of funds means
the purpose for which the funds are to be utilised.
By analysing the funds flow statement, the inflow and outflow of the
funds can be tracked and compared. It also reflects the changes in the
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financial standing of an organisation by analysing the working capital,
operating profits and the changes in long-term assets and liabilities.
Almond Coleman, in reference to the funds flow statements, stated,
“The funds flow statement summarizing the significant financial chang-
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es which have occurred in the beginning and end of the accounting pe-
riod”.
Funds flow statement is an important concept, and it helps in achiev-

ing the following objectives:
Tracking and understanding the changes in assets and their sourc-
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es, which are often not very clear in other financial statements.
Funds flow statement analysis helps us in knowing where the funds
are being used or in which projects they have been redirected.
Funds flow statements also help in screening the strengths and
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weaknesses of an organisation in terms of sources and application

of funds.
Balance sheet and the funds flow statement both show the financial
position of an organisation at a particular date. There are some subtle
differences between the two. The basis of differentiation are their util-
ity and the purpose of preparation.
The differences between the two are as follows:

A balance sheet shows changes in the total assets and total lia-
bilities of an organisation for a given financial year, whereas the
funds flow statement shows the changes in the current assets and
current liabilities during a given period.
A balance sheet helps in appraising the financial position of an
organisation, whereas funds flow statement helps the organisation
in deciding upon various financial decisions.
Preparing a balance sheet is essential and mandatory for every or-
ganisation that is incorporated under the Companies Act, whereas

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the preparation of a funds flow statement is not mandatory for all

organisations.
A balance sheet is prepared on an annual basis, but a funds flow state-
ment can be prepared monthly, quarterly, half-yearly and annually.
Now, let us look at the process for preparing a funds flow statement.
Before preparing the funds flow statement, an organisation needs to

identify what is to be included in the funds flow statement. It is im-
portant to understand the factors behind the inflow or the outflow of
funds. Let us summarise some important points as follows:
Liability is increased if there is an inflow of funds. On the contrary,
liability is decreased if there is an outflow of funds.
Assets are increased if there is an outflow of funds. On the con-
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trary, assets are decreased if there is an inflow of funds.
Both cash and stock are a part of the working capital, and if the
cash is used to buy stock, it does not have any effect on the assets.
IM
It means that the change in assets of some category do not affect
funds and therefore, have no impact on the funds flow statement.
There are cases when the change in the liability of some category
does not affect funds and therefore, has no impact on the funds
flow statement. For instance, if the organisation pays its creditors
by means of short-term loans, but we know that creditors and
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short-term loan are both a part of current liability and therefore,

they set off each other.
Any transaction that increases or decreases the value of the fixed
assets and/or the long-term liabilities of the organisation will not
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appear in the funds flow statement.
The steps required to prepare a funds flow statement are shown in

Figure 5.4:
Steps to Prepare Funds

Flow Statement
Preparing Statement
Calculation of Preparation of Funds
of Changes in Working
Operational Income Flow Statement
Capital
Figure 5.4: Steps to Prepare a Funds Flow Statement
The statement of changes in the working capital reflects the effect of

changes in assets and liabilities on the working capital of an organi-

n o t e s
sation. Table 5.4 represents the general structure of the statement of

changes in the working capital:
Table 5.4: Pro forma of the Statement of Changes
in The Working Capital
Particulars Balances at the Changes
End of the Year
Previous Year Current Year Increase Decrease
(A) Current As-
sets
Stock
Debtors
Cash balance
Bank balance
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Prepaid ex-
penses
Advances
Total (A)
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Particulars Balances at the Changes
End of the Year
(B) Current Lia-
bilities
Creditors
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Bills payable
Outstanding
expenses
Total (B)
(C) Net Working
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Capital (A -
B)
Net increase/de-
crease during the
year
Total
The statement showing changes in the working capital of __________

(organisation name)
For the year ended 31st March _____ (year)
The person while preparing the statement of changes should keep in
mind the following points:
Increase in current assets increases the working capital
Decrease in current assets decreases the working capital
Increase in current liability decreases the working capital
Decrease in current liability increases the working capital

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Let us now illustrate the process of preparing the statement of chang-

es by taking an example.
Illustration 1: Prepare a statement of changes by using the following

information.
Particu- Year Particulars Year

lars
Liability 31 March, 31 March, Assets 31 March, 31 March,
2008 2009 2008 2009
Capital 500000 500000 Stock 40000 6000
Profit and 15000 13000 Debtors 50000 60000
Loss Ac-
count
Creditors 19000 20000 Cash 40000 30000
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Bills Pay- 11000 12000 Fixed As- 415000 395000
able sets
545000 545000 545000 545000
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Solution: The solution to the given problem is as follows:
Particulars 2008 2009 Increase Decrease

Current Assets
Stock 40000 60000 20000 -
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Debtors 50000 60000 10000 -

Cash 40000 30000 - 10000
Total (A) 130000 150000
Current Liability
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Creditors 19000 20000 - 1000

Bills Payable 11000 12000 - 1000
Total (B) 30000 32000 30000 42000
Net Working Capital(A-B) 100000 118000
Net Decrease in Working 18000 18000
Capital
Total (C) 118000 118000 30000 30000
The second step in the preparation of the funds flow statement is the
calculation of operational income. Operating activities are the ones
that affect the production of goods and services; they include raw ma-
terial procurement and wage payments. The income that is derived
out of these activities is called operating income, which is calculated
using the adjusted profit and loss account. The income from non-op-
erating activities like selling the fixed assets and charging deprecia-
tion are also considered. Table 5.5 shows the general structure of the
operating profit:

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Table 5.5: The Pro forma of Operating Profit

Net profit or loss as per profit and loss A/c
Profit of current year
Less: Profit of previous year
Add: Non-operating expenses
Depreciation
Preliminary expenses written off
Goodwill written off
Loss on sale of assets/investment
Less: Non-operating income
Non-recurring income
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Total
Let us now take an example to illustrate the process of calculating the

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operating income.
Illustration 2: You are given the following information. Calculate the

operating income.
Particulars Amount (`)

Depreciation 30000
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Expense outstanding 10000

Preliminary expenses written off 30000
Discount allowed 500
Goodwill written off 50000
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Profit on sale of asset 6400

Interest received 5000
Net profit 65000

Net profit as per profit and loss account 65000
Add: Non-operating expenses
Preliminary expenses written off 30000
Discount allowed 500
Goodwill written off 50000 80500
145500
Less: Non-operating income
Profit on sale of asset 6400
Interest received 5000 11400

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Net profit 134100
Let us now look at the last step in the preparation of the funds flow
statement.
The funds flow statement is divided into two parts, namely, the sourc-
es of funds and the application of funds. The pro forma of the funds
flow statement is as follows:
Pro Forma of Funds Flow Statement

Sources of Funds Amount (`) Application of Funds Amount (`)
Issue of shares/de- Redemption of
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bentures shares/debentures
Receipt of term loans Repayment of loans
Sale of fixed assets Purchase of fixed
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asset/investments
Operating profit Operating loss
Net decrease in Net increase in work-
working capital (bal- ing capital (balancing
ancing figure) figure)
It is important to keep in mind the following points before preparing

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the funds flow statement:

The operating profit is considered as a source of fund, and the op-
erating loss is considered as an application of fund.
Both the sides of the funds flow statement should be balanced.
N
Illustration 3: Prepare a funds flow statement from the balance sheet:
Balance Sheet
Liability Year Assets Year

31 March, 31 March, 31 March, 31 March,
2001 2002 2001 2002
Share Cap- 400000 470000 Stock 50000 100000
ital
Profit & Loss 20000 30000 Debtors 45000 72000
Account
Creditors 15000 20000 Cash 50000 90000
Bills Payable 10000 12000 Fixed 200000 300000
Assets
345000 562000 345000 562000

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Funds Flow Statement
Sources of Funds Amount (`) Application of Funds Amount (`)
Issue of shares 70000 Purchase of assets 100000

Profit from operation 10000
Net decrease in work- 2000
ing capital (balancing
figure)
100000 100000
As explained earlier, the funds flow statement reflects the financial

position of any organisation. It also serves as an important function of
helping the management of an organisation in making decisions re-
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garding the investments and framing policies and plans. It also assists
in the following:
Finding out the liquidity and profitability of an organisation
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Allocating the profit in various organisational activities
Taking managerial decisions related to the distribution of dividend
and use of funds by the organisation
Finding out if there is any shortage of funds or surplus funds
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Funds flow statement is an important tool in the hands of the manage-

ment that helps in taking investment decision, but it also has certain
limitations, which are described as follows:
Non-financial transactions that include the issue of shares are not
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included in the funds flow statement.

To determine the cash position of the organisation, the cash flow state-
ment needs to be determined in addition to the funds flow statement.
Funds flow statement is created using the data from the balance
sheet and the P&L account statements, which means that any dis-
crepancy in these statements will be reflected in the funds flow
statement as well.
1. _________ is the study of the economic aspects of a project or

business.
2. The fixed costs of a project always remain the same irrespective
of the quality of the product produced. (True/False)
3. The correct estimation of the _____ and ______ costs helps in
ascertaining the economic viability of a project.
4. List two sources of finance.

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5. Define working capital.

6. Tax flow is defined as the movement of money in and out of an
organisation, business or project. (True/False)
7. In ________, the working capital amounts to the added cash
needed for any fresh machinery.
8. Which one of the following aspects affects the quantity of
working capital needed by an organisation?
a. Road infrastructure b. Project lifecycle
c. Policy of credit d. Tax policies
9. Financial analysis involves the assessment of the feasibility,
stability and profitability of a proposed business venture.
(True/False)
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Activity
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Using the Internet, find out the various types of expenses that can
affect the cost estimation of a project.
5.3 Profitability Analysis

Profitability analysis is a part of enterprise resource planning (ERP)
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that allows administrators to assess and forecast the profitability of a

proposal and to optimise the profitability of an existing project. It can
anticipate sales and profit potential as per the prevailing market, cus-
tomer age groups, geographic regions or product types. It is a module
of the ERP software that allows users to report Sales and Profit data
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(SAP). Broadly defined, the profit of a business can be calculated as

the difference between its revenues and costs.
The following types of profits are generally considered by organisa-

tions:
Gross profit: It is calculated by deducting the ‘cost of sales’ from
its ‘sales revenue’ or turnover.
Operating profit: It is calculated by subtracting or taking away
the overhead expenses from the gross profit.
Profitability analysis can help an enterprise/organisation to:

Identify the most and least profitable clients
Identify the most and least profitable products or services
Discover the sources of information that offer the most reliable
facts
Optimise responses to changing customer needs

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Evolve the product to maximise profits in the long term.

Identify and remedy the causes of decreasing profit margins.
The main purpose of the economic profitability analysis is to deter-

mine whether the investment will contribute to long-run profits of the
business. Various techniques are used for evaluating alternative in-
vestments, such as the payback period and internal rate of return.
The most common indicators of profitability in financial feasibility

analysis are as follows:
Simple Payback: Refers to the number of years it will take for the
project to recover the initial investments. The thumb rule that is
usually applied in such cases is that the payback must be < 3 years.
Return on Investment (ROI): Refers to the percentage of initial
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investment that is recovered each year.
Net Present Value (NPV): Refers to the return on investment.
For example, investing Rs 1 now will give an investment of Rs 1.10
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a year from now
(10% return on investment)
Internal Rate of Return (IRR): Means that money is worth more
now than in the future because of inflation and investment oppor-
tunity. Here, the “time value” of money depends on the rate of in-
M
flation and the rate of return on investment.
At the very beginning of the project, all project cash flows are convert-
ed to their present value, i.e., ‘now’. Future cash flows are converted to
the present value on the basis of the discount and interest rates.
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10. ERP stands for:

a. Enterprise Resource Planning
b. Electricity Replenishment Planning
c. Enterprise Research Planning
d. None of the above
11. ______ refers to the number of years it will take for a project to
recover the initial investments.
Activity
With the help of the Internet, explore how profitability analysis can
help an organisation.

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5.4 Cost and Benefit Analysis

Cost–benefit analysis, also called benefit–cost analysis, is a systematic
approach to estimate or weigh the strengths and weaknesses of alter-
natives that may be used for transactions, activities or functional re-
quirements in a business. It can be referred to as the technique that is
used to determine the best options that can be adopted and practiced
to gain benefits in labour, time and cost savings. Cost–benefit analysis
is often used by governments for the appraisal of policies initiated by
them. It helps to predict if the benefits of a policy outweigh its costs
and by how much.
We shall look at how cost–benefit analysis can be carried out through

the following example. Let us assume that you take up a new project
and are struggling to keep up with the increased workload. You there-
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fore decide to hire an assistant. Now, you will weigh the costs associ-
ated with hiring the new person against the profits/benefits. This is
called the cost–benefit analysis.
IM
First introduced by Jules Dupuit, a French engineer in the 1930s, this
concept became popular in the 1950s as a simple way of weighing a
project costs and benefits to determine whether to go ahead with a
project. As the name suggests, the cost–benefit analysis involves add-
ing up the benefits associated with the project and then comparing
these with the associated costs.
M
Cost–benefit analysis has a payback period, i.e., the time it takes for
benefits to repay costs. Many people who use cost–benefit analysis
look for payback in not less than a period of three years.
Cost–benefit analysis can be used in a variety of situations, such as

N
when you are deciding to hire new team members, evaluating a new
project or change, determining the feasibility of a purchase, etc. It is
the best tool for making quick and simple financial decisions.
Cost–benefit analysis has two purposes:

Justification/feasibility: Determines if the project is a sound in-
vestment/decision
Comparison: Provides a basis for comparing projects in terms of
the total expected cost of each option against the total expected
benefits to see whether the benefits outweigh the costs and by how
much
Cost–benefit analysis can be done by following these steps:

1. List all costs and benefits associated with a project, both
immediate and long term.
2. Assign a monetary value to the costs, i.e., include costs of
resources needed like land machinery, installation, workforce,
raw material, etc.

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3. Assign a monetary value to the benefits. This is not an easy task

as it is often difficult to estimate the costs accurately.
4. Compare costs and benefits and use this analysis to decide
the feasibility of the project and the next course of action. The
formula to compare costs and benefits is as follows:
Total cost / total revenue (or benefits) = length of time (payback
period)
12. Cost–benefit analysis is also called _______ analysis.

13. _______ is the best tool for making quick and simple financial
decisions.
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Activity
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Visit the account department of an organisation and prepare a re-
port about the method followed by them for conducting cost–ben-
efit analysis.
5.5 Assessing Tax Burdens

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Taxes contribute to the revenue of the government. The payment of

tax is a very important indicator that influences the development of a
project. This can be calculated by using various methods, as no unan-
imous assessment methodology has been prepared yet. Taxes impact
both supply and demand in the market, because buyers have to pay
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a higher price and sellers receive less for their product, if taxes are
more. Suppose the government decides that the buyer should pay
20% tax. This would mean that either the buyers will have to pay 20%
more or the sellers will have to share some of the tax burden.
How much of the tax burden each party would bear is determined by
the elasticity of the supply and demand for the product. The tax bur-
den will fall more on the buyer if the demand is inelastic or supply is
elastic but will fall more on the seller if the demand is elastic or supply
is inelastic. This means that the framework of demand and supply de-
termines the burden of tax.
The tax burden associated with projects should be carefully assessed.

Project investment decisions are greatly influenced by tax incentives,
tax benefits and tax implications.

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14. Which of the following contributes to the revenue of the

government?
a. Shares b. Taxes
c. Equities d. Mutual funds
15. The tax burden will fall more on the buyer if the demand is
inelastic or supply is elastic but will fall more on the seller if
the demand is elastic or supply is inelastic. (True/False)
Activity
Use the Internet to find more about the tax laws of India.
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Appraisal Criteria used by
5.6
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Lending Institutions
Organisations often need to take loans while starting a new business
venture. Most lending institutions prefer to see a clear operating his-
tory and want detailed information about the project before they agree
to invest in a business. Therefore, it is important to establish an operat-
ing history. At the time of applying for a loan, small businesses should
M
be able to present at least 6 to 12 months of operation details. The his-

tory must show a gradual increase in sales and customer demand.
Lending institutions generally look for three C’s: credit, capacity and
capital. However, MasterCard International lenders actually look
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for eight C’s. The other five considerations are collateral, character,
conditions, commitment and cash flow. Therefore, for loan approv-
al, small businesses need to show that the owner is a credible person
committed to the business’ success. The business needs to be strong
enough to pay the expenses and have a strong cash flow and must also
be able to withstand unfavourable economic conditions.
The business plan is essential for getting a loan and has to be sub-
mitted along with the loan application. The business plan provides a
detailed review of the business to the lender. It explains the aims and
goals of the business, the marketing strategies and operation proce-
dure. A well-researched business plan reinforces the details with sup-
porting documents, such as bank statements, accounting records, etc.
Lending institutions, whether traditional or the new venture capital-
ists, want to know if the business will be able to repay the loan while
maintaining a financially sound operation. Lenders rely on the busi-

n o t e s
ness’ scores or balance ratio for this. These ratios involve liquidity,
asset management, debt management and profitability. Out of these,
the debt management ratio is the most important according to Mas-
terCard International. This ratio is calculated by the formula, dividing
total liabilities by the total amount of capital and determining if the
company has enough equity to maintain its debts. Ratios resting at
three or below are the most acceptable.
16. Lending institutions generally look for ____C’s; however,

MasterCard International lenders look for ____C’s.
17. ______ is calculated by dividing total liabilities by the total
amount of capital.
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Activity
Collect information on different types of lending organisations and

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their conditions for giving loans.
5.7 Summary
Financial analysis is the study of all the economic aspects of a proj-
ect or business. It involves the assessment of the feasibility, stabil-
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ity and profitability of a proposed business venture.

The economic viability of any project cannot be assessed without
calculating the expenses involved in it. The total cost includes both
fixed and variable costs.
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Some areas on which organisations need to spend while starting

a new project are land and site development, construction costs,
technical expenses, preliminary expenses, plant and machinery,
preoperative expenses, etc.
Debenture capital is the capital generated from the debentures given
to people. It is in the form of documentation given by big organisa-
tions to the lender and is used as an acknowledgement of debt.
Incentives are taken with an aim to develop the undeveloped areas
of the country.
Some aspects that can affect the quantity of the working capital
needed by an organisation are business infrastructure, cycle of
construction, policy of credit, business competition, policy of divi-
dend, providing for an unforeseen event and requirement of cap-
ital.
Cash flow is defined as the movement of money in and out of an
organisation, business or project.

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Organisations often take the advantage of technological advance-

ments by replacing their machinery and tools or by evolving their
manufacturing procedure. This advancement helps organisations
to increase their rate of production, decrease costs of labour, etc.
In replacement projects, the working capital amounts to the added
cash needed for any fresh machinery.
Profitability analysis is a part of enterprise resource planning
(ERP) that allows administrators to assess and forecast the profit-
ability of a proposal and to optimise the profitability of an existing
project.
Cost–benefit analysis, also called benefit–cost analysis, is a system-
atic approach to estimate or weigh the strengths and weaknesses
of alternatives that may be used for transactions, activities or func-
tional requirements in a business.
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key words
Cost–Benefit Analysis: It is a systematic approach to estimate

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or weigh the strengths and weaknesses of alternatives that may
be used for transactions, activities or functional requirements
in a business.
Gross Profit: It is calculated by deducting the ‘cost of sales’
from its ‘sales revenue’ or turnover.
Operating Profit: It is calculated by subtracting or taking away
M
the overhead expenses from the gross profit.

Share Capital: It is the capital generated by giving shares to
people.
Term Loans: It refers to the capital taken by organisations to
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start a fresh business or to spread and restructure the present

projects.

1. Explain the need of conducting financial analysis by organisations
before starting a new project.
2. How would you make an estimate of the cost involved in a
project?
3. List the sources from where organisations can get finance for
their project.
4. Define cash flow. Write the steps to estimate cash flows.
5. Why must organisations conduct profitability analysis before
starting a new project?
6. List the steps involved in doing a cost–benefit analysis.
7. Write a note on the appraisal criteria used by lending institutions.

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Financial Analysis 1. Financial analysis
2. True
3. Fixed and variable
4. Debenture capital and fixed
capital
5. The capital needed to per-
form the everyday activities
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in an organisation is called
the working capital.
6. False
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7. Replacement projects
8. c. Policy of credit
9. True
Profitability Analysis 10. a. Enterprise Resource
Planning
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11. Simple payback

Cost and Benefit Analysis 12. Benefit-cost
13. Cost–benefit analysis
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Assessing Tax Burdens 14. b. Taxes

15. True
Appraisal Criteria Used by 16. Three and eight
Lending Institutions
17. Balance ratio

1. Financial analysis is the study of all the economic aspects of a
project or business. It involves the assessment of the feasibility,
stability and profitability of a proposed business venture. Refer
to Section 5.2 Financial Analysis.
2. The economic viability of any project cannot be assessed
without calculating the expenses involved in it. Refer to Section
5.2 Financial Analysis.
3. To estimate costs and expenditures, organisations must do a
detailed assessment of different sources available for financing
the project. Refer to Section 5.2 Financial Analysis.

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4. Cash flow is defined as the movement of money in and out of an

organisation, business or project. Refer to Section 5.2 Financial
Analysis.
5. Profitability analysis is a part of enterprise resource planning
(ERP) that allows administrators to assess and forecast the
profitability of a proposal and to optimise the profitability of an
existing project. Refer to Section 5.3 Profitability Analysis.
6. Cost–benefit analysis, also called benefit–cost analysis, is a
systematic approach to estimate or weigh the strengths and
weaknesses of alternatives that may be used for transactions,
activities or functional requirements in a business. Refer to
Section 5.4 Cost and Benefit Analysis.
7. Organisations often need to take loans while starting a new
business venture. Most lending institutions prefer to see a clear
S
operating history and want detailed information about the
project before they agree to invest in a business. Refer to Section
5.6 Appraisal Criteria used by Lending Institutions.
IM
Kim Heldman. (2011). PMP Project Management Professional
Exam Study Guide (6th ed.). New York: Wiley.
James Taylor (2007). Project Scheduling and Cost Control: Plan-
ning, Monitoring and Controlling , J. Ross Publishing.
M
Gregory T. Haugan. (2002). Project Planning and Scheduling. Man-

agement Concepts Inc.
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E-references
Econlib.org,.(2014). Benefit-Cost Analysis: The Concise Encyclo-
pedia of Economics | Library of Economics and Liberty. Retrieved
7 November 2014, from http://www.econlib.org/library/Enc/Bene-
fitCostAnalysis.html
Edward Lowe Foundation,. (2014). How to Analyze Profitability
| Edward Lowe Foundation. Retrieved 7 November 2014, from
http://edwardlowe.org/digital-library/how-to-analyze-profitability/
Sjsu.edu,. (2014). AN INTRODUCTION TO COST BENEFIT
ANALYSIS. Retrieved 7 November 2014, from http://www.sjsu.
edu/faculty/watkins/cba.htm

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Ch a
6 p t e r
Capital Budgeting Techniques

in Project Selection
CONTENTS
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6.1 Introduction
6.2 Concept of Capital Budgeting
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Activity
6.3 Time Value of Money
6.3.1 Future Value of Cash Flows
6.3.2 Present Value of Cash Flows
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Activity
6.4 Evaluation of Capital Budgeting
6.4.1 Net Present Value Method
6.4.2 Internal Rate of Return Method
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6.4.3 Payback Period Method

6.4.4 Average Rate of Return Method
Activity
6.5 Importance of Cash Flows in Project Selection
Activity
6.6 Importance of Cost of Capital in Project Selection
Activity
6.7 Risks Involved in Project Selection
6.7.1 Concept of Risk Management Plan
6.7.2 Executing Risk Management Planning
6.7.3 Participants in Risk Management Planning
6.7.4 Steps in Risk Management Planning
6.7.5 Defining the Metrics, Tools and Best Practices

CONTENTS

Activity
6.8 Methods of Assessing Risk
6.8.1 Sensitivity Analysis
6.8.2 Scenario Analysis
6.8.3 Decision Tree Analysis
6.8.4 Break-Even Analysis
6.8.5 Use of Subjective Probabilities
6.8.6 Mathematical Analysis
6.8.7 Simulation Analysis
Activity
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6.9 Summary
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Capital Budgeting Techniques in Project Selection 137
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need of Capital budgeting
A company has certain amount of money to invest in machinery,

which it can acquire on a rental basis. The company has two op-
tions of investment. It can invest its money in securities and earn
interest on the same, or it can invest money in trade as working
capital and earn normal trading profits on the same. The normal
trading profits might be more profits than the interest earnings.
However, these profits are possible when the money is used in
these alternatives, and the machine is acquired on a rental basis
to save initial outlay. What if the rentals are so high that the ad-
ditional earnings from alternate investments are not sufficient to
cover high cost of rentals? Capital budgeting techniques help to
evaluate alternatives in such complex scenarios and choose the
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alternative to maximise returns. IM
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learning objectives

>> Describe the concept and evaluation of capital budgeting
>> Explain the concept of time value of money, including the
future and present value of cash flows
>> Evaluate the concept of capital budgeting with respect to the
net present value method, internal rate of return method,
payback period method and average rate of return method
>> Evaluate the importance of cash flows and cost of capital in
project selection
>> Describe the risks involved in project selection
>> Learn the uses of subjective probabilities
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>> Describe mathematical analysis and simulation analysis to
find risks in projects
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6.1 INTRODUCTION
An organisation usually takes up many projects with various revenue
necessities and income rates. Since each project requires an invest-
ment, an organisation needs to carefully choose a project for the best
use of its investment, growth and reputation.
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After choosing a project, an organisation needs to recognise and as-

sess the risks to see if it is beneficial for the organisation or not. The
profitability of the project depends on different aspects such as varia-
tion in the business atmosphere and demand of the project.
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To assess the revenue needs and potential income of a project, an or-

ganisation can use the capital budgeting method. Capital budgeting
is a procedure to decide the real productivity of a project. It helps to
assess the dangers of the project using different methods such as sen-
sitivity assessment, decision tree, scenario analysis and break-even
analysis.
This chapter covers the theory of capital budgeting and Time Value
of Money (TVM). You will also learn about the process of determining
the future and present values of single cash flow and allowance. The
chapter also discusses various methods of capital budgeting assess-
ment, such as Net Present Value (NPV), Internal Rate of Return (IRR),
Payback Period (PB) and Average Rate of Return (ARR). You will also
learn about the significance of cash flows and cost of capital in the
selection of a project. Finally, you will learn about the risks related to
project selection and evaluation.

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6.2 Concept of Capital Budgeting

Capital budgeting is a method of planning that is used to calculate the
value of a long-term investment in a project. It involves recognising,
assessing and choosing lasting investments in factory or equipment. It
assists in calculating expenses and profits from a project. If the capital
invested in a project does not yield profits, it is of no use to the organ-
isation.
Figure 6.1 shows the different parts of capital budgeting that an or-
ganisation should consider while choosing a project:
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Growth of
Organisation
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Irreversibility Aspects
of Investment of Capital Risks
Decisions Budgeting
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Arrangements
of Funds
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Figure 6.1: Aspects of Capital Budgeting
These aspects are discussed as follows:

Growth of Organisation: An organisation should choose a project
after determining its entire profit and market share. A wrong proj-
ect can reduce the profitability of the organisation. To guarantee
continual growth and progress, an organisation should only invest
in projects that are feasible.
Risks: While choosing a project, an organisation should consider
risks such as economic recession, inflation and technology chang-
es. These risks can adversely affect the profits and obstruct the
organisation’s progress.
Arrangement of Funds: This is a vital aspect in capital budgeting.
An organisation raises capital through different means to invest on
various projects. The organisation selects a project depending on
the accessibility of funds. Without enough capital, an organisation
cannot even sustain a profitable project.

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Irreversibility of Investment Decisions: An organisation cannot

take back decisions regarding investment, as this may result in
loss of capital. It also adversely affects the reputation of the organ-
isation.
1. What is capital budgeting?

2. Capital budgeting helps to calculate short-term investments
in a project. (True/False)
3. What aspect of capital budgeting is NOT necessary for an
organisation to consider?
a. Organisation growth
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b. Organisation manpower
c. Project risks
d. Arrangement of funds
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Activity
For a project of your choice, analyse the aspects that you will con-
sider for capital budgeting in the project.
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6.3 Time Value of Money

Capital budgeting uses various methods, such as NPV and IRR, to
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calculate real expenditure and income received from different proj-

ects and evaluate the difference vis-à-vis profitability of the project. To
know the real expenditure and income of a project, it is essential to be
familiar with the concept of Time Value of Money (TVM).
TVM is based on the theory that the value of the present money is more
than that of the equal amount of money in future. In other words, the
actual worth or power to buy a particular amount of money decreases
with time. For instance, the purchasing power of `100 might change
after a year. Similarly, if various projects produce similar profits at
various time intervals, the project with the earliest return is preferred.
The value of money actually decreases with time because the avail-
able capital is used to derive profits from projects. Nevertheless, it is
not easy to immediately invest in a project because the capital is yet to
come. For instance, if there is a profit of `50,000, it can be used in po-
tentially profitable projects. However, if the project receives this sum
after two years, then the chance of investment is lost for those years.

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6.3.1 Future Value of Cash Flows
Future value of cash flows relates to the actual value of a cash flow
or a chain of cash flows in future. For example, a project generates a
profit of `1000. If this profit is invested in another project, which en-
sures a return at the rate of 5% per year, then the amount received will
be `1050 next year. Therefore, the future value of `1000 will become
`1050 after a year at the rate of 5% per annum.
Future Value of a Single Cash Flow
The future value of a single cash flow is the actual value of forthcom-
ing money in future. For instance, a project needs an investment of
`1000. The project will return a profit after one year at the rate of 5%
per annum. Then, the earning from the project after a year will be the
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future value of money invested in the project.
Therefore, money received after one year = Principal + Interest

= 1000 + (1000 × 0.05)
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= 1000 + 50 = 1050
The future value of `1000 is `1050 at the rate of 5% per annum. Sim-
ilarly, if `1050 is re-invested for the year to come, then the cash re-
ceived will be `1102.5 in the following year.
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Therefore, money received after two years = Principal + Interest

= 1050 + (1050 × 0.05)
= 1050 + 52.50 = 1102.50
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Assume P is the principal amount, I is the annual rate of interest, n is

the number of years before pay off and F the future value of the sum
invested.
Then, the formula to calculate future sum is as follows:

F=P+I
The future value after one year is:

F1 = P + P × I = P (1+I)
The future value after second year is:

F2 = F1 + F1 × I = F1 (1+I) = P (1+I) (1+I) = P (1+I) 2
After three years, the future value will be equal to:

F3 = P (1+I)3
Therefore, the future value of an amount P after nth year will be:
Fn = P (1+I)n

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Future Value of Annuity
An annuity is a fixed and regular cash flow over a period. The future
value of annuity is the real value of fixed and regular cash flows for
a given period. It helps you to estimate the future value of the entire
investment made in a project.
Let us calculate the future value of `100, which is being invested each
year at the rate 10% interest per annum for a period of three years.
Here, you cannot determine the future value of money with the formu-
la for calculating the future value of single cash flow. This is because at
the end of the initial year, the investment of `100 will give an interest
for two years. At the end of the second year, an investment of `100 will
give an interest for one year. Similarly, if `100 is invested at the end of
the third year, it will not give any interest.
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Table 6.1 shows the future value of `100 as annuity:
Table 6.1: Future Value of Annuity

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Years Amount Future Value at the End of the
Invested Third Year
First Year 100 100 (1+0.10)2= 121
Second Year 100 100 (1+0.10)= 110
Third Year 100 100 (1+0.10)0 = 100
Total 331
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According to Table 6.1, the future value of annuity of `100 is `331 at

the end of the third year. This is derived from the following formula:
F3 = A (1+I)2+A (1+I)1+ A (1+I)0 = A [(1+I)2 + (1+I)1 + (1+I)0]
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Therefore, the equation to calculate the future value of annuity is as

follows:
Fn = A [(1+I)n -1]/I
Here,
F is the future value of annuity
A is the annuity amount
I is the annual rate of interest
n is the number of intervals
Here, [(1+I)n -1]/I is called the Compound Value Factor of an Annuity

(CVFA).
6.3.2 Present Value of Cash Flows
Present value of cash flows is the existing value of the future cash flow
over a period at a particular rate of return. The current value of cash
flow is always less than the future value of cash flow. In other words,

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an amount of money received today will always have more value than
the same amount in future. For example, a project is expected to yield
`50,000 after three years. In this case, the actual worth of 50000 re-
ceived after three years would be less than its worth today. Therefore,
it is essential to determine the existing value of a project’s returns to
determine the real gains of the project.
A project may yield profits at different periods. In these situations, you

can calculate the current value of the total profits from the project by
determining the total current value of all annual returns. Let us deter-
mine how to evaluate the current value of a single cash flow and annuity.
Present Value of a Single Cash Flow
The present value of a single cash flow relates to the existing value
of money to be received in the future. On the other hand, the future
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value of a single cash flow is the future value of money available at
present. In the last section, you determined that for the current value
of `1000, the future value `1050 is generated with the interest rate of
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5% per annum at the end of the initial year and `1152.5 is generated at
the end of the second year.
To calculate the current value of a single cash flow you can use the for-
mula for calculating the future value of a single cash flow as follows:
Fn = P + P X I - P (1+I)n
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Hence, the formula for assessing the present value of a single cash
flow is:
Present Value (P) = F/ (1+I)
Similarly, the present value of a single cash flow after n number of
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years would be:

P = Fn[(1+I)-n]
Present Value of Annuity
The present value of annuity relates to the current value of all cash
flows received or expected in future at equal intervals. The current
value of annuity can be calculated by using the present value of single
cash flow of each year. For instance, a project is expected to generate
a profit of `100 at the end of each year for the next three years at the
interest rate of 10% per annum. After three years, the current value of
`100 would be:
100/(1+0.10)3 = 75.13
Likewise, the current values of `100 after two years and 1 year are 82.64
and 90.91, respectively. Therefore, the cumulative current value is:
90.91 + 82.64 + 75.13 = 248.68.

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Table 6.2 shows this calculation:
Table 6.2: Present Value of Annuity

Years Amount Received Present Value
Third Year 100 100/ (1+0.10)3= 75.13
Second Year 100 100/ (1+0.10)2= 82.64
First Year 100 100/ (1+0.10) = 90.91
Total 248.68
Therefore, you can say that Present Value (P) = A/ (1+I) + A/ (1+I)2
+A/ (1+I)3+…. +A/ (1+I)n
= A [1/ (1+I) + 1/ (1+I)2 +1/(1+I)3 +1/(1+I)n]
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4. According to the TVM theory, what would be the value of `500

after a year?
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a. It will remain the same.
b. It will increase.
c. It will decrease.
d. There is no relation between the value of money and time.
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5. What is the equation to calculate the future value of an amount

P after nth year?
a. Fn = P [(1+I)n -1]/I
b. Fn = P + P (1+I)n
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c. Fn = P - P (1+I)n
d. Fn = P (1+I)n
6. _________is the permanent and continuous flow of cash for a
given period.
a. Future value of annuity
b. Future value of a single cash flow
c. Present value of annuity
d. Present value of a single cash flow
7. For the annuity of `100 invested, the future value at the end
of the first, second and third year will be 150, 120 and 110,
respectively. What would be the future value of the annuity?
a. 30
b. 1980000
c. 390
d. 163.6

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Activity
You want to make an investment of `1 lakh in a project in an organ-

isation. Calculate the future value of a single cash flow and future
value of annuity at the rate of 10% per annum for three years.
6.4 Evaluation of Capital Budgeting

Capital budgeting is a decision-making process used to calculate the
profitability of long-term projects. There are various methods of capi-
tal budgeting. These methods take the time value of capital for calcu-
lating the real profitability of projects and therefore, help in choosing
the most lucrative projects.
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Figure 6.2 shows the most common capital budgeting methods:
Capital Budgeting
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Methods
Net Present Internal Rate Accounting Rate

Payback Period
Value (NPV) of Return (IRR) of Return (ARR)
(PB) Method
Method Method Method
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Figure 6.2: Different Methods of Capital Budgeting
Let us discuss these methods of capital budgeting in detail.
6.4.1 Net Present Value Method

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The NPV method is widely used to assess the profitability of a project.

NPV is the variation between the current cash inflows and outflows in
a given project. NPV can be calculated as:
NPV = C1/(1+r) + C2/(1+r)2 + C3/(1+r)3 +…..+ Cn/(1+r)n – I0
n
Ct
NPV
= ∑ (I + γ )
t −1
t
− I0
Where:
Ct = Net cash received at the end of year t
Io= Initial investment outlay
r = Discount rate/the required minimum rate of return on invest-
ment in a project
n = Time duration of the project (in years)

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Figure 6.3 shows the steps involved in calculating the NPV of a project:
Forecasting Cash Flows
Estimating the Required Rate of

Return
Calculating the Present Value of

Cash Flows
Finding out NPV
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Figure 6.3: NPV Method
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These steps of calculating NPV are discussed as follows:
1. Forecasting Cash Flows: In this step, you calculate the cash
inflows and outflows in a particular period of the project. The
estimated cash flows will assist you in calculating the actual
profitability of the project.
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2. Estimating Required Rate of Return: In this step, you calculate

the required rate of return of a project at which the current cash
flow value is estimated. The opportunity capital cost is usually
assumed as the required rate of return.
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3. Calculating the Present Value of Cash Flows: In this step, you

determine the current value of cash inflows and outflows by
using a discount rate.
4. Finding out NPV: In this step, you verify the NPV of the project
by subtracting the current cash outflows value from the current
cash inflows value. If the NPV is positive (NPV>O), then the
project should be accepted, and if it is negative (NPV<O), then it
should be discarded.
Table 6.3 shows the rule of thumb for accepting or rejecting a project
according to the NPV technique:
Table 6.3: Rule of Selecting a Project in

the NPV Method
Accept NPV>0
Reject NPV<0
May Accept or Reject NPV=0

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Some of the advantages of the NPV technique are as follows:

Accurate Profitability Measurement: NPV gives accurate prof-
itability measures by considering all cash flows that happen dur-
ing the lifecycle of a project. This method also considers the TVM
factor while ascertaining the profitability of a project. The exact
measurement of the project profitability will help you to maximise
the assets of shareholders.
Value-Additivity: According to the principle of value-additivity,
the current value of several cash flows is the sum of the current
value of single cash flows. For instance, you can determine the cur-
rent value of an annuity by using its direct formula or by calculat-
ing the current value of every independent cash flow and adding
those current values. This makes things easier for calculating the
current values of imbalanced cash flows.
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In conclusion, the NPV method is a result-oriented technique for cap-
ital budgeting and helps to select a project efficiently. However, it also
has a major disadvantage that it is based on predicting cash flows oc-
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curring throughout the project lifecycle. In real life, it is not easy to
predict such cash flows.
6.4.2 Internal Rate of Return Method
The IRR method is a time-based method used to assess the capital

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investment decisions and choose potentially profitable projects. The

internal profit rate is the discount rate that makes the NPVs of all cash
flows equal to nil. In other words, IRR stands for the rate of interest
at which the NPVs of all expenses made on a project (cash outflow)
equals to the NPVs of all revenue earned out of the project (cash in-
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flow).
For example, an organisation is planning a new project. The current

cost of the project is `2,00,000, and the income expected from the proj-
ect is:
`12,000 at the end of the first year
`10,000 at the end of the second year
`8,000 at the end of the third year
Let us assume that the discount rate r will make NPV of the project
equal to zero.
Therefore, 12000/ (1+r) +10000/ (1+r)2 +8000/ (1+r)3 – 200000 =0
Here, r = IRR of the project
You can calculate the IRR of the project by solving the equation to de-
termine r. If the IRR is more than the capital expenditure, the project

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will be taken into consideration. If the IRR is below capital expendi-

ture, it is not accepted. The IRR method represents the profitability
of a project as a percentage, which can be easily compared with the
capital expense.
Some advantages of the IRR method are as follows:

It gives exact dimensions of the profitability of a project by con-
sidering all cash inflows and outflows created during the tenure of
the project.
It considers the TVM factor, which helps to ascertain the accurate
profitability of the project.
There are also some disadvantages of IRR, as follows:

Different Rates of Returns: This method may determine multiple
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rates of returns for which the NPVs of cash flows would result in
nil. In such situations, it is not easy to choose a specific rate from
multiple rates.
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Value-Additivity: In contrast to NPV, the IRR system does not con-
sider value-additivity. Therefore, it becomes difficult to determine
the current values of irregular cash flows with the IRR method.
6.4.3 Payback Period Method
The Payback Period (PB) method is a traditional method to assess

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investment in a project. The payback period refers to the time con-

sumed to retrieve the earlier expense of the project.
The fundamental theory of the PB method is that if the initial expense

of a project is earned quickly, then the project is considered to be prof-
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itable. This method grades projects according to the time taken for
recovering the investment (length of the payback period). The proj-
ects that take less time to recover initial costs are graded higher than
the projects that take more time for payback. The payback period is
usually expressed in years and can be calculated using the following
formula:
Payback Period = Investment required for the project/Net annual re-

turn or cash inflow
For example, the starting expense of a project is `1,20,000 and the re-
turn anticipated is 15,000 each year for a period of 15 years. The pay-
back period of the project comes to 120000/15000 = 8 years. Hence,
you can recover the initial investment of the project, i.e., `1,20,000 in
eight years.
Some of the advantages of the PB method are as follows:

This method is a simple, objective and uncomplicated method.
It saves time and expense.

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This method can also help in calculating the liquidity of a proj-

ect, as it shows the period in which the initial cost of a project is
recovered.
Thus, this method makes it easy for managers to select a potentially

profitable project. However, a drawback of this method is that it does
not consider the TVM factor and therefore, cannot measure the exact
profitability of a project.
6.4.4 Average Rate of Return Method
The Average Rate of Return (ARR) method is also called the Account-
ing Rate of Return or Return on Investment (ROI) method. It is a tra-
ditional method of assessing the investment done on a project. This
method is considerably different from other methods of choosing a
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project because it deals with the accounting gains of a project instead
of the cash flows. The ARR method does not consider the time period,
which is used to calculate the rate of return of cash flow. The mathe-
matical formula for calculating ARR is as follows:
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ARR = (Average Income/Average Investment) * 100
Here, the average income is defined as Earnings Before Interest and

after Taxes (EBIT). EBIT relates to the total gain from a project before
the payment of interest on capital and taxes.
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The average investment is calculated as follows:
Average Investment= (book value at the beginning of the project +

book value at the end of the project life)/2
For example, an organisation takes a project that needs an investment

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of `60,000. The project will give Earnings Before Depreciation, Inter-

est and Taxes (EBDIT) of `15000, 18000, 21000, 24000 and 30000 per
year, respectively, for the next five years. Assume that the deprecia-
tion is based on a straight line and rate of interest is 40%. Table 6.4
depicts the estimation of ARR of the project:
Table 6.4: Calculation of ARR

First Second Third Fourth Fifth Average
Year Year Year Year Year
EBDIT 15000 18000 21000 24000 30000 108000/5=21600
Depreciation 12000 12000 12000 12000 12000 12000
EBIT 3000 6000 9000 12000 18000 9600
Taxes at 40% 1200 2400 3600 4800 7200 3840
[EBIT(=I-T)] 1800 3600 5400 7200 10800 5760
Book value of
investment
Beginning 60000 48000 36000 24000 12000

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First Second Third Fourth Fifth Average

Year Year Year Year Year
Ending 48000 36000 24000 12000 0
Average 54000 42000 30000 18000 6000 30000
Hence, the ARR = (5760/30000) ×100 = 19.2%
You can grade various projects based on their ARR. The project with
the highest ARR is graded as the highest and the one with the least
ARR is graded as the lowest.
The ARR method can be used to do accounting of data. Hence, there

is no need to calculate the single cash flow. The ARR method consid-
ers the accounting profit rather than cash flows while evaluating the
profitability of a project. This also involves items where cash is not
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required. Hence, it is not considered right to accept or discard a proj-
ect based on accounting profit. Also, the method does not consider the
TVM factor. In this situation, it is not possible to show the actual value
of a project by calculating the productivity.
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8. The variation between the current cash inflows and outflows

present in a current project is called:
a. TVM b. NPV
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c. IRR d. ARR

9. Based on derived NPV values, which project is likely to be the
most profitable and should be chosen?
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a. Project A, NPV = 1 b. Project B, NPV = 0

c. Project C, NPV = -1 d. Project D, NPV = -10
10. In which method is it most difficult to show the actual value of
a project by calculating the productivity?
a. NPV method b. IRR method
c. ARR method d. PB method
Activity
For a project of your choice, evaluate the best method to assess cap-
ital budgeting. Elaborate on the reasons for choosing a method.
Importance of Cash Flows in

6.5
Project Selection
Cash flow is the most significant feature in project administration, as
lack of sufficient cash can hinder the development of the project. This

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relates to the cash that rotates within the organisation during the pro-
cess. It is used to evaluate various projects for assessing the profitabil-
ity and choosing the right project for investment.
An organisation should carefully predict the required cash flows to en-

sure the continuity and closure of a project successfully. For instance,
a project manager estimates `5,00,000 to be the total cash outflow. If
the exact outflow of cash comes to be much more than the probable
amount, then it may result in loss and failure of the project.
Figure 6.4 shows the three major components of cash flow of a standard
project:
Initial Investment
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Operating Cash Flow
Terminal Cash Flow

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Figure 6.4: Different Parts of Cash Flow of a Conventional Project
These components cab be explained as follow:

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Initial Investment: This relates to the amount used in the initial

stages of a project. A major project requires a large amount in the
beginning. The initial capital involves various cash expenses, such
as buying machinery and purchasing land.
Operating Cash Flow: This relates to the cash inflow produced
from running a project. It is also called Net Cash Flow (NCF). It is
calculated by the following formula:
Operating Cash Flow = Cash Receipts - Cash Payments
Terminal Cash Flow: It relates to the cash inflow produced after
completing a project. For instance, an organisation can sell ma-
chinery and land that has been used in a project after it is over and
gain some money out of it. Selling these assets and earning from
them is called terminal cash inflow.
11. Operating cash flow = _________________ - _________________

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Activity
For a project of your choice, evaluate the different parts of cash

flow. Outline the problems faced to ensure cash flow during each
stage of the project.
Importance of Cost of Capital in

6.6
Project Selection
The cost of capital has an important role to play in the management of
a project, as it allows an organisation to conclude the project on time.
An organisation invests in a project, which can generate sufficient
profit in return of investment. In other words, the profit of a project
must be more than the cost of revenue invested in it. Therefore, an
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organisation chooses projects based on the rate of profit, which should
be more than the cost of capital.
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The cost of capital is also used as the reduced rate for calculating the
NPV, which helps in choosing a project. While choosing a project, an
organisation evaluates between the IRR of the project and the cost of
capital. If the IRR is more than the cost of capital, then the project is
accepted.
An organisation collects its cost of capital from various sources, such

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as outstanding amount, joint ventures and credit. However, there is a

price attached to every source of money. For instance, to avail credit
from a bank, an organisation needs to pay an interest to the bank. Sim-
ilarly, an organisation needs to pay a dividend to its equity investors.
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The cost of capital from each source is known as the specific cost of
capital. For instance, if revenue has been collected from debts and eq-
uity, then that cost is known as the specific cost of capital. The specific
costs of various sources are put together owing to their total capital
weight. The cumulative costs are known as Weighted Average Cost of
Capital (WACC). Therefore:
WACC = Aggregate of all specific costs of capital according to their
weight
For example, an organisation has raised a capital of `5,00,000 from

debt and equity. The capital raised from the debt is `2,00,000 at the
interest rate of 5% per annum and `3,00,000 from the equity at the rate
of 10% per annum. Therefore, the WACC of the total capital would be:
(200000/500000)*5 + (300000/500000)*10 = 2 + 6 = 8% per annum
The formula for calculating WACC would be:

WACC = [(D/ (E+D)]kd + [E/ (E+D)]ke

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Where:
D = Amount of capital raised from debt
E = Amount of capital raised from equity
kd = Cost of debt
ke = Cost of equity
12. The cost of capital of every source is known as_______.

13. What is WACC?
Activity
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For a project of your choice, identify the specific costs of capital and
calculate the WACC.
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6.7 Risks Involved in Project Selection
Irrespective of how accurately you predict the operations of a project,
there exists a possibility that the project may diverge from the predic-
tion operation. This divergence of the economic operation of a project
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from the predicted operation is called a risk involved in project selec-

tion. There can be various types of risks involved in project selection,
such as shortage in requirements, unbalanced flow of cash and high
price rise. For example, the requirement of a product depends on the
financial atmosphere. If there is sudden financial growth, the prod-
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uct requirement may go high, and during economic decline, it can go

down. Therefore, an organisation can earn more revenue or face a
major loss depending on the market atmosphere. This implies that
risks involved in project selection are responsible for probable risks
affecting the delivery of the project.
Figure 6.5 shows some common types of project risks:
Scope Risk
Cost Risk
Project Risks
Schedule Risk
Resource Risk
Performance Risk
Figure 6.5: Types of Project Risks

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Let us discuss each risk in detail:

Scope Risk: This risk is related to the tasks that need to be exe-
cuted. Such risks influence all the facets of a project, especially the
expenses, resources, agenda and value of the project. A solid scope
is the basis of success for a project. If the scope is not properly de-
fined, then the project is likely to fail.
Cost Risk: The expenses of a project increase with time. If the
scope and schedule of a project are miscalculated, then the project
productivity and feasibility suffer. Projects that extend over many
years are more vulnerable, as the future expense of the project,
which is calculated in the initial stages, may increase substantially
due to price rise and decrease the buying power. To prevent this
risk, organisations repeatedly monitor and control their large proj-
ects. A considerable financial support comes from debts and high
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interest. If prices go up, the balanced debt increases, pressurising
the business profits.
Schedule Risk: This risk happens as activities may take time be-
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yond expectation. Slippage in schedule by and large increases the
prices and also holds up/lessens the profits as anticipated. This
type of risk is critical when various groups are doing the same
project and dependent on each other.
Resource Risk: The most common and vital resources invested
in a project are people. If a project has unskilled, untrained and
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ineffective staff, then it is likely to fail. A project is also in jeopardy

if resources like revenue, equipment and raw materials are not
readily available.
Performance Risk: This is a risk that incurs when a project’s re-
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sults are not consistent with the particulars of the project. Even if
a project finishes on time and gives the complete work, it is unsuc-
cessful if a deliverable is not as expected. Performance does not
depend only on the technical specification or measurable param-
eters. Customers’ satisfaction, experience and insight also matter.
Let us consider an example to understand the types of risks. A leading

construction company in India called Trimiti Developers has won a
contract to build an ‘A’ level divider road in a city. According to the
initial estimates, Trimiti will complete work in 18 months at the cost
of `10 crores. However, they failed to include the time it would take for
the construction company to acquire the land from the farmers on the
side of the road. Two months after the project started, the government
gave permission to Trimiti to acquire land from the farmers.

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However, it was easier said than done. Trimiti had no experience in

the field of bulk land attainment. The construction project was de-
layed as the company got embroiled in long-winding negotiations with
the farmers, who were asking for a higher cost than the market to sell
their farms. Consequently, the project was delayed by 4 months due
to the land attainment exercise. During that period, the rates of steel
and cement shot up by 15%, thereby, impacting the cost of the project.
To compensate for the delayed time, Trimiti calculated that it had to

work in three shifts as well as overtime. However, it could not arrange
workers who could work in three shifts. So, it decided to make half of
the road available, while the other half was being constructed. Despite
these extra means, it could not arrange workers for the whole project
site. It had to carry on work in various stages.
Finally, it took 27 months to complete the work, which was 11 months
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more than the initial estimated time, at the cost of `16 crores, which
was `6 crores more than the initial estimated cost.
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6.7.1 Concept of Risk Management Plan
There should be a plan to manage risks involved in a project. Such

a risk management plan helps to avoid and/or mitigate project risks.
The purpose of a risk management plan is to determine the method,
strategy and actions to identify reduce, and remove the potential risks
in the project. The primary objectives of a risk management plan are
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as follows:
To identify risks in a project
To help in finishing the quantitative and qualitative evaluation of
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a project
To analyse planning for responding to risks
To monitor risks
To assess the life of a project with continued activities related to
risk management
The level of risk management planning varies from project to project.

For instance, a non-complicated project with less effort involves low
level of planning as compared to a complicated, urgent project. If you
under-plan a risk management plan, then it can result in overstating
of the risk. On the other hand, if you inadequately plan for risks, then
it can result in the project failure. Figure 6.6 shows the relation be-
tween project priority and level of risk planning:

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Figure 6.6: Relationship between Project Priority and Risk Planning
According to Figure 6.6, the level of risk planning increases with the
growing priority of a project.
Risk management planning should consider the following character-
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istics:
Methodology: Refers to the process of risk management and how
to take care of the ensuing changes.
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Roles and Responsibilities: Refers to the ownership of risk man-
agement. Although the manager is responsible for the entire risk
management process, the actual owners vary from one activity to
another. Each responsibility should be adequately explained and
supervised.
Budgeting: Refers to the budget for the project activities. It is not
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enough to just calculate the possibility of a budget. Risk manage-

ment should also consider the procedure for safeguarding any ex-
tra budget.
Scheduling: Refers to a detailed timeline; it defines which activi-
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ties will be done when.

Risk Analysis Scoring: Refers to a branch of planning that indi-
cates which risk has more weight and therefore, needs a prompt
action. Risk management planning depends on the scoring of risks.
Threshold: Refers to the reaction of a risk. Thresholds can be
fixed before a risk occurs so that the response to the risk can be
launched on schedule and not after the risk has occurred and
caused a damage.
Reporting Formats: Refer to risks related to communication. The
content and/or occurrence of reporting formats may vary among
different stakeholders. Their expectations should be recorded as
part of risk management planning.
Tracking/Monitoring: Refers to a document that tracks or moni-
tors the ongoing activities of the project.

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6.7.2 Executing Risk Management Planning
Before implementing a risk management plan, it is important to for-

mulate a team for risk management. Each member of the team should
be assigned specific roles and responsibilities. In many organisations,
these roles are predefined to inspire risk management planning,
implementation of relevant decisions and participation of project
members.
A project manager must know his/her strength and sovereignty re-

garding the project. For instance, he/she prepares a risk management
plan and identifies the appropriate responses to the project risks out-
lined in the plan.
It is also important to identify the key stakeholders of the project. Al-

though the project manager is the leader, the stakeholders examine
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his activities and performance. This is because the project manag-
er executes the project on behalf of sponsors and key stakeholders.
Therefore, he/she is required to work with the limitations of the or-
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ganisational structure and authorisation of stakeholders.
6.7.3 Participants in Risk Management Planning
Risk management planning starts at the initial stage of a project. First,

a context is established, which fixes the infrastructure of the risk man-
agement plan. Then, people are enrolled to participate in risk man-
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agement planning. It is important to enroll appropriate participants

in this planning to ensure the success of the project.
As an example, consider the Tata Nano project in Unit 1 and the con-
troversy linked with it. In 2006, Tata Motors declared that it would
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manufacture Nano car in Singur, West Bengal.
The company started talks regarding land acquirement with the state
government. Soon, there was a controversy regarding forceful ac-
quirement of land of the farmers for constructing a new factory. Tata
Motors did not expect that the local farmers would be one of the stake-
holders. This controversy turned into a political battlefield. Various
political parties targeted the Nano project by either supporting or op-
posing the plant. Hence, the acquirement of the land and setting up of
the factory were delayed.
Now the question arises: What was the main reason of this contro-
versy? Tata Motors management in fact did not acknowledge the local
farmers, who were suffering due to the construction of the factory,
since they were the important stakeholders.

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There are two types of stakeholders:

Positive stakeholders, who profit from the project or inspire positively
Negative stakeholders, who are affected by the project or inspire

negatively
Normally, the stakeholders who are positive are included in the risk
management planning and their interests or risks alone are selected.
However, the Nano project proved costly for the negative stakehold-
ers. The impact of this case was so much that Tata Motors closed the
Nano project in West Bengal and moved it to Gujarat. Actually, still
after 8 years, the consequence of the incident can be felt, as the matter
regarding land allotment is still in the course.
Let us see and consider what the management could have exclusively
done. Assume that the planning is underway, and the manager needs
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to recognise the members. The stakeholder register document regis-
ters the members in a document that has all the information regard-
ing the stakeholders. The project identifies the positive and negative
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stakeholders. It is important to identify negative stakeholders because
they can augment the risk greatly, just as the farmers in the Nano
case. Until all the stakeholders are recognised, one cannot envisage
the influence they have and the risks involved.
However, a question arises whether that is a need to employ all the

stakeholders in the risk management planning. Simply, the answer
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is, ‘No’. There is no need for all stakeholders to participate. In many

cases, this is not viable. And even if it had been possible, it would have
been quite unruly. For instance, they all possess different nature and
their purpose of involvement is also different. Some of them require
more income along with high risk, while some demand moderate in-
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come with no risk involved. Then, there may be some stakeholders who
would want to participate in the project. In this situation, if all stake-
holders are allowed to participate in this process, then joint decision
cannot be taken. Therefore, only few are included during planning.
The project manager must make sure that the stakeholders are rec-
ognised accurately and their intentions and purpose are signified.
This helps him/her to make decisions regarding the roles and respon-
sibilities of stakeholders. These roles and responsibilities are used for
recognising groups and persons who would participate in the leader-
ship and be a part of every activity classified in the plan. In some cas-
es, the team not belonging to the project may possess more practical,
impartial method of recognising the risk, effect and risk management
in general, as compared to the real team.
6.7.4 Steps in Risk Management Planning
Risk management planning has different steps than the risk man-
agement process. The steps in planning help in determining and

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reorganising the risk management process. Figure 6.7 shows the risk
management planning process:
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Figure 6.7: Risk Management Planning Process
The steps taken in the risk management planning process are as

follows:
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1. The Organisation’s Strategic Objectives: In this step, the

project manager describes and understands the strategies of the
organisation and how they are associated with the project. This
enables him/her to establish the context of risk management,
which aims to avoid any risk to the project. After understanding
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the organisation’s strategic objectives, the project manager aims

to complete the project successfully and manage the risks linked
with the project expenses. A part of this planning is to identify
a core team for risk management and define their roles and
responsibilities. On the basis of the strategic goal and the budget
of the project as a whole, the manager sets a lump sum amount
for managing the project. The amount can be based on the rule
of thumb (specific proportion of the entire budget), past data
(contingency budget set aside for historical projects of similar
type) or a standard of industry (standardising the expenditures).
2. Risk Assessment: In this step, the project manager calculates
and assesses a risk. He/she evaluates the risk assessment
requirements, equipment, budget, resources and governance
model. Risk assessment can be quantitative or quantitative, and
resources should be available for either type. For quantitative
risk assessment, the project manager requires expensive
software and system equipment. For qualitative risk assessment,

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the project manager needs to hire subject matter advisors and

experts. The risk management team collects inputs from the
concerned people and prepares high-level expense and schedule
estimates for the risk assessment stage.
3. Risk Reporting: Risk reporting is a complementary step with
regular reporting of the project status. In this step, the risk
management team prepares a report of threats and opportunities.
They prepare more than one format to report the risk level and
then send these templates to the beneficiaries for their approval.
After they have accepted the reports, the reports are finalised
and filed in the risk management plan. The risk management
plan also includes the ownership and accountability information
of the risk reports. The plan also documents the procedure of
spontaneous reporting and communication. It includes situations
and circumstances where communication regarding risk is
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needed, as well as channels/modes of communication. Finally,
the plan may include an escalation matrix, which is prepared
and distributed within the project team to make them aware
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about the escalation hierarchy in case a risk happens and the
response is not enough. On the basis of this risk reporting step,
the risk management team evaluates whether a risk is acute and
needs a plan for alleviation.
4. Risk Treatment: It is hard to express how to respond to or treat
risks. Therefore, they should be planned during the initial stage
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of the project itself. Risk treatment depends on the incidents

reported. Still, a risk management plan can include a generic
guideline of risk treatment. For instance, if risk treatment
involves ‘add more manpower to speed up work’, then the plan
can include corresponding actions for the project manager to
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remove the risk.

5. Monitoring: This is a significant stage of risk management. When
all is going well, then there are fewer risks, however, they need to
be closely monitored. The risk management plan should include
the controls and checks, and balances used in the monitoring
stage. Actually, risk monitoring and controlling work in tandem
with risk reporting. In risk reporting, the manager reports
potential risks and their status. If these risks are monitored
thoroughly, it becomes easy to report them.
Modifications and Audit: These stages finish the feedback cycle and
continuous improvement of the risk management process. The risk
management plan should explain the situations where the process
would be modified and how. An important part of the risk manage-
ment process is audit, which can be internal and external. An inter-
nal audit is a good practice within an organisation that offers a third

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party’s view on the risk management process. An external audit is a

mandatory exercise from the compliance perspective or as a customer
requirement. The risk management plan should clearly outline the
requirements and frequency for external and internal audits.
6.7.5 Defining the Metrics, Tools and Best

Practices
The steps in the previous section comprise the risk planning process.
However, there is one step that covers the entire risk plan. This step
is about defining the metrics, tools and best practices of risk manage-
ment planning.
Defining the Metrics
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Assume that you want to define metrics in the qualitative risk assess-
ment step. To do so, you can use the risk probability and impact ma-
trix, which is shown in Figure 6.8:
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Figure 6.8: Risk Probability and Impact Matrix

Courtesy: http://stevestedman.com/2012/03/risk-assessment-matrix-for-sql-server-upgrades/
Probability
High (H): Greater than <70%> probability of occurrence
Medium (M): Between <30%> and <70%> probability of occur-
rence
Low (L): Below <30%> probability of occurrence

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Impact
High (H): Risk that has the potential to greatly impact the project
cost, schedule or performance
Medium (M): Risk that has the potential to slightly impact the
project cost, schedule or performance
Low (L): Risk that has the least impact on the project cost, sched-
ule or performance
Defining the Tools
Similarly, you should define and list the equipment required during
the risk management process in the planning phase. This will help you
to easily choose and use the most appropriate tool to mitigate risks.
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Defining the Systems
In this phase, you also report the best systems appropriate for the
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project. They are like the points of reference or the first steps when-
ever a risk happens.
Key Inputs in Risk Planning
Let us summarise the key inputs used in risk planning:

Project Charter: It provides a high-level objective and scope of the
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project.
Organisation’s Risk Management Policies: These are predefined
policies and methods that were prepared by some organisations
for risk analysis and response. These policies are then customised
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according to the needs of the project.

Defined Roles and Responsibilities: They refer to distinct roles
and responsibilities along with their stages of authority that help
in successful risk planning of projects.
Stakeholder Risk Tolerances: They help to identify appropriate
responses to different risk levels.
Risk Management Plan Template: It is a formal template of a risk
management plan. An organisation should fill all the sections of
this template.
Work Breakdown Structure (WBS): It is the smallest unit of mea-
surement of work that helps to achieve a good level of granularity
in risk planning.

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14. Which risk in project management depends on the skills and

training of manpower?
a. Scope risk
b. Resource risk
c. Schedule risk
d. Cost risk
15. Which stage in risk management planning identifies threats
and opportunities in a project?
a. Organisation’s strategic objectives
b. Risk assessment
c. Risk reporting
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d. Risk treatment IM
Activity
Using the Internet, identify the various risks involved in construc-

tion projects.
6.8 Methods of Assessing Risk

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There are limits to which you can evaluate a risk. To evaluate a risk,
you can use various methods, as shown in Figure 6.9:
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Sensitivity Analysis
Scenario Analysis
Methods of Assessing Risk
Decision Tree Analysis
Break-Even Analysis
Use of Subjective Probabilities
Mathematical Analysis
Simulation Analysis
Figure 6.9: Methods of Assessing Risk of a Project

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6.8.1 Sensitivity Analysis
Sensitivity analysis is used to predict the results of a decision if the real

performance differs from the expected performance. In this analysis,
you estimate how the dependent variable (i.e. cash flow) responds to
the changes in any of the independent variables (i.e. sales and market
share).
There are three steps of sensitivity analysis, which are listed as follow:
1. Identify all variables that impact the NPV or IRR of the project.
2. Set up an empirical relationship between independent and
dependent variables.
3. Analyse the effect of the change in the variables.
Sensitivity analysis enables you to calculate cash flow in the following
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three conditions:
Worst or Pessimistic Conditions: These are the most unsuitable
financial conditions for the project.
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Normal Conditions: These are the most feasible financial condi-
tions for the project.
Optimistic Conditions: These are the most suitable financial con-
ditions for the project.
Consider an example to understand this concept. An organisation is

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planning for two projects. It has identified the variables that influence
the NPV of the project. Table 6.5 shows these variables:
Table 6.5: Variables that Impact the

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NPV of Projects
Particulars Project A Project B
Initial Cash Outlays 200000 300000
Cash Inflow Estimates
Most Optimistic 50000 80000
Expected or Most Likely 40000 60000
Most Pessimistic 20000 40000
Required Rate of Return 0.1 0.1
Economic Life 10 years 10 years
Table 6.6 shows the NPV of Project A:
Table 6.6: Calculation of NPV of Project A

Expected Cash Inflows Present Value NPV
Most Likely 245782 45782
Most Pessimistic 122891 -77109

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Table 6.7 shows the NPV of Project B:
Table 6.7: Calculation of NPV of Project B

Expected Cash Inflows Present Value NPV
Most Likely 368674 68674
Most Pessimistic 245782 -54218
Tables 6.6 and 6.7 show that Project B incurred less amount of loss
than Project A. Also, Project B gained more than Project A. Therefore,
the organisation should select Project B.
A major disadvantage of sensitivity analysis is that it considers all as-

pects of a project to be inter-dependent. Therefore, if any characteris-
tic of the project is disrupted, the entire prediction goes wrong.
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6.8.2 Scenario Analysis
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Scenario analysis is used to forecast future risks probable in a project
and their impacts. This method analyses various possible scenarios
and their results. For this purpose, it uses sophisticated computer pro-
grammes.
Scenario analysis is a widespread method and more useful than sensi-

tivity analysis. It provides a more comprehensive insight about a proj-
M
ect than sensitivity analysis.
However, there are some drawbacks to this method, which are dis-
cussed as follows:
Complex Process: Scenario analysis is a complicated process that
N
involves difficult calculations for the NPV of a project. Therefore,

this method involves considerable cost and time.
Difficulty in Assessing the Probability: Scenario analysis com-
plicates the process of calculating different outcomes of risks. At
time, the predicted outcomes may go wrong in real life.
6.8.3 Decision Tree Analysis
Decision tree analysis is an efficient method to evaluate risks associ-

ated with a project. A decision tree represents different possible de-
cisions and their likely outcomes in a tree-like diagram. The decision
tree method considers all probable outcomes, and therefore, helps in
the decision-making process.
For example, a company called X&Y Manufacturers has to assess two

projects: Project A, which needs an initial investment of `25,000 and
Project B, which needs an investment of `32,000,. According to the
estimates:

n o t e s
Project A has 35% possibility of giving a return of `46,000 in the

next five years and 65% possibility of giving a return of `42,000 in
the same period.
Project B has 20% possibility of giving a return of `55,000 in the
next five years and 80% possibility of giving a return of `50,000 in
the same period.
Figure 6.10 displays the decision tree to represent this scenario about
the projects:
Return of `46000
Probability 0.35
Project A
Initial Investment
S
of `25000
Return of `42000
Probability 0.65
X&Y
IMManufacturers
Return of `55000
Probability 0.2
Project B
Initial Investment
of `32000
Return of `50000
Probability 0.8
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Figure 6.10: Example of Decision Tree
From Figure 6.10, the NPV is calculated as follows:

N
NPV of Project A will be (46000 × 0.35) + (42000 × 0.65) - 25000

= (16100 + 27300 - 25000) =18400
NPV of Project B will be (55000 × .2) + (50000 ×.8) - 32000
= 19000
This indicates that the organisation benefits more from Project B.
Hence, Project B is recommended.
The advantages of the decision tree analysis are as follows:

Detail Insight: This method gives a comprehensive insight of all
plausible results linked with a project.
Objective in Nature: This method enables you to evaluate various
alternative decisions.
Some disadvantages of the decision tree analysis are as follows:

Difficulty in a Large Number of Decisions: It is difficult to draw
a decision tree if the project is of long duration and the possible
outcomes are numerous.

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Difficultyin Interdependent Decisions: It becomes a time-con-

suming and complicated process if the alternative decisions are
inter dependent.
6.8.4 Break-Even Analysis
Break-even analysis is a widely used technique in project manage-

ment. A situation of no-profit and no-loss in a project is called a break-
even. In break-even analysis, all expenses incurred in a project are
split into the following two categories:
Fixed Costs: Refer to the expenses sustained in the beginning of
the project. These costs are fixed and do not depend on the stages
of production or operation of the project. Examples of fixed costs
include price of equipment and lease.
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Variable Costs: Refer to the expenses that change according to the
production volume. Examples of variable costs are wages and raw
materials.
IM
The sum of fixed and variable costs is called total costs.
The total costs are compared to the total income or revenue of the
project. In a break-even scenario, the total costs are the same as the
total income from the project. Therefore, a project has achieved the
break-even point when it does not have any profit or loss, as shown in
Figure 6.11:
M
N
Figure 6.11: Break-Even Analysis
In Figure 6.11, the total cost is the same as the total income at point P.
Therefore, the project achieves the break-even at point P.
6.8.5 Use of Subjective Probabilities
Subjective probabilities include no strict computations and only re-

flect a subject’s judgment and past experience. Subjective probabil-

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ities vary from individual to individual and include a high degree of

personal bias. An example of a subjective probability can be if you ask
Indian cricket fans before the World Cup about the chances of India
winning the trophy. Although there is not any mathematical testimony
behind the answer, the fans might still answer in a definite percentage
value, such as India has a 75% chance of winning the World Cup.
6.8.6 Mathematical Analysis
Mathematical analysis includes the theories of integration, limits,

differentiation, measurement, analytic functions and infinite series.
These hypotheses are typically studied in the perspective of real and
complex numbers and functions.
6.8.7 Simulation Analysis
S
A simulation contains hundreds or thousands of trials. Each trial is a
test where arithmetical values are provided for contribution variables
to evaluate a model. This evaluation helps to calculate numerical values
IM
for concerned products and collect these values for later investigation.
16. ______________refer to the expenses that change according to

the production volume.
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17. Which risk evaluation method enables you to calculate the

cash flow in the worst, normal and optimistic conditions?
a. Sensitivity analysis
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b. Scenario analysis
c. Decision tree analysis
d. Break-even analysis
Activity
For a project of your choice, evaluate the probable risks and choose
a suitable plan to manage them.
6.9 Summary
Capital budgeting is the method of planning that is used to calcu-
late the value of long-term investment in a project.
An organisation should consider the following aspects of capital
budgeting while choosing a project:
Growth of organisation

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Risks
Arrangement of funds
Irreversibility of investment decisions
Capital budgeting uses various methods, such as NPV and IRR
methods, to calculate real expenditure and income received from
different projects and see the difference with regard to the profit-
ability of the project.
TVM is based on the theory that the actual worth of present money
will decrease with time.
The future value of cash flows relates to the actual value of a single
cash flow or annuity in future. The present value of cash flows is
the existing value of the future cash flow over a period at a partic-
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ular rate of return.
The most common capital budgeting methods are:
NPV Method
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IRR Method
PB Method
ARR Method
Cash flow is the most significant feature in project administration,
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as lack of sufficient cash can hinder the development of the proj-

ect.
The three main divisions of cash flow in a conventional project are:
Initial Investment
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Operating Cash Flow

Terminal Cash Flow
The cost of capital of every different source is known as specific
cost of capital.
A project can only be beneficial if the rate of profit is more than the
cost of capital. Hence, projects should be chosen on the basis of the
rate of profit, which should be more than the cost of capital.
Risks are responsible for probable risks that have an effect on the
delivery of a project.
Some common types of risks are:
Scope risk
Cost risk
Schedule risk

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Resource risk
Performance risk
The purpose of a risk management plan is to determine the meth-
od, strategy and actions to identify, reduce and remove the poten-
tial risks in the project.
Risk management planning should consider the following charac-
teristics in a project:
Methodology
Roles and responsibilities

Budgeting
Scheduling
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Risk analysis scoring
Threshold
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Reporting formats
Tracking/Monitoring
There are two types of stakeholders in a project: positive and neg-

ative. The project manager must identify the appropriate stake-
holders to make decisions on the project.
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Risk management planning process the following steps:

1. The organisation’s strategic objectives
2. Risk assessment
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3. Risk reporting
4. Risk treatment
5. Monitoring
6. Modifications and audit
The step to define the metric, tools and best practices of risk man-
agement covers the entire risk management planning process.
There are four common methods for assessing risk:
Sensitivity analysis
Scenario analysis
Decision tree analysis
Break-even analysis

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key words
Liquidity Crisis: Refers to lack of funds to execute short-term

procedures
Wealth Maximisation: Refers to the maximum earnings of the
investment made by shareholders
Share: Refers to the smallest division of possession in an
organisation
Capital Expenditures: Refers to the costs incurred to get long-
term resources
Cash Inflow: Refers to the total revenue attained during a par-
ticular period
Cash Outflow: Refers to the total payment of money during a
S
particular period
Debt: Refers to the total amount lent to a person or an organisa-
tion for lending out capital
IM
Equity: Refers to the revenue received through the selling of
stocks
EBDIT: Refers to the total profit gained before removing de-
preciation, interest and taxes
Book Value: Refers to the worth of the benefits shown in the
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balance sheet
Salvage Value: Refers to the calculated amount, which can be
produced through the selling of an asset after it is used
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Depreciation on Straight Line: Refers to a method used to es-

timate reduction, provided the value depreciation is the same
each year

1. Explain the concept of capital budgeting.
2. What do you mean by the present value of a single cash flow and
the present value of annuity? Explain.
3. What are the different methods of capital budgeting?
4. Explain the importance of cash flows in project selection.
5. Explain the importance of cost of capital in project selection.
6. Explain the concept and types of risks involved in project
selection.
7. What are the four common methods for assessing risk?

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Concept of Capital 1. Capital budgeting is a method of
Budgeting planning that is used to calculate
the value of a long-term invest-
ment in a project.
2. False
3. b. Organisation manpower
Time Value of Money 4. c. It will decrease.
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5. d. Fn = P (1+i)n
6. a. Future value of annuity
7. c. 390
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Evaluation of Capital 8. b. NPV
Budgeting
9. a. Project A, NPV = 1
10. c. ARR method
Importance of Cash Flows 11. Cash receipts – Cash payments
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in Project Selection
Importance of Cost of Cap- 12. Specific cost of capital
ital in Project Selection
13. Aggregate of all specific costs of
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capital according to their weight

Risks Involved in Project 14. b. Resource risk
Selection
15. c. Risk reporting
Methods of Assessing Risk 16. Variable Costs
17. a. Sensitivity analysis

1. Capital budgeting is a method of planning that is used to calculate
the value of a long-term investment in a project. Refer to Section
6.2 Concept of Capital Budgeting.
2. The present value of a single cash flow relates to the existing
value of money to be received in the future. The present value of
annuity relates to the current value of all cash flows received or
expected in future at equal intervals. Refer to Section 6.3 Time
Value of Money.

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3. There are various methods of capital budgeting. These methods

take the time value of capital for calculating the real profitability
of projects and therefore, help in choosing the most lucrative
projects. They include NPV, IRR, ARR and PB methods. Refer to
Section 6.4 Evaluation of Capital Budgeting.
4. Cash flow is the most significant feature in project administration,
as lack of sufficient cash can hinder the development of the
project. An organisation should carefully predict the required
cash flows to ensure the continuity and closure of a project
successfully. Refer to Section 6.5 Importance of Cash Flows in
Project Selection.
5. An organisation chooses projects based on the rate of profit,
which should be more than the cost of capital. Refer to Section
6.6 Importance of Cost of Capital in Project Selection.
S
6. Divergence of the economic operation of a project from the
predicted operation is called a risk. Refer to Section 6.7 Risks
Involved in Project Selection.
IM
7. The four common methods for assessing risk are sensitivity
analysis, scenario analysis, decision tree analysis and break
-even analysis. Refer to Section 6.8 Methods of Assessing Risk.

M
Suggested Readings
N

Gregory T. Haugan. (2002). Project Planning and Scheduling. Man-
agement Concepts Inc.
E-REFERENCES
CapitalBudgeting. Retrieved from http://accountingexplained.
com/managerial/capital-budgeting/.
Capital Budgeting Techniques. Retrieved from http://www.
cliffsnotes.com/more-subjects/accounting/accounting-princi-
ples-ii/capital-budgeting/capital-budgeting-techniques.

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M
IM
S
Ch a
7 p t e r
NATURE OF PROJECT DECISIONS

AND PROJECT PLANNING
CONTENTS
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7.1 Introduction
7.2 Project Decisions
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Activity
7.3 Concept of Project Planning
7.3.1 Steps in Project Planning
7.3.2 Project Planning Tools
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Activity
7.4 Project Planning Estimation
7.4.1 Purpose Of Estimation
7.4.2 Essentials Of Estimation
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7.4.3 Estimation Tools

7.4.4 Estimation Approaches
Activity
7.5 Project Management Life Cycle
Activity
7.6 Summary

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PROJECT DECISION MAKING AND PLANNING

AT CUSTOM WOODWORKING COMPANY
A small and medium sized enterprise (SME), Custom Woodworking

Company deals in furniture and cabinet making. The head office of
the company is located in British Columbia, Canada. The company
also has a spacious plant. The company is popular among people
as Woody’s. Woody’s started its cabinet making and furniture man-
ufacturing business in 1954. The company quickly became popular
for its sophisticated designs and constructed furniture. It used im-
ported and quality woods for all its products ranging from kitchen
and bathroom cabinets to furniture for retailers and wholesalers.
In 1989, there was a small boom in the field of construction in south
western BC. The company decided to expand its manufacturing
business due to free trade opportunities. There were complaints
S
from the vice president of production about inadequate manufac-
turing space that was hampering production efficiency. He want-
ed to move to a new location having automated control systems
and modern facilities. However, the chairman and management
IM
did not consider the request made by production head. The man-
agement was worried about costs incurred on buying and selling
of properties, interruption of production, and relocation of their
existing resources and equipment. However, a meeting of direc-
tors and key personnel was called to resolve the issue.
After the meeting, it was anonymously concluded that the compa-
ny would stay on its existing property. It was also decided that the
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production capacity would be increased by adding equivalent to

25% of the existing floor area. Air conditioning and dust free paint
and finishing shops were installed. Semi-automatic woodworking
production train and updated and new software and hardware
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were also used. A project initiated with the name of Woody 2000
with an estimate of around $17 million and 18 months deadline
was set for complete renovation, up gradation, and meeting the
production capacity.
The head of the administration took over the project to meet the
deadlines and immediately invited Expert Industrial Developers
(EIDs). It was considered that the experience of EIDs, and knowl-
edge on industrial estate would result in lower project cost. A
monthly cash flow chart was also prepared to maintain the ac-
counting of the budged. A fixed price quotation of the project was
submitted by EIDs which was $20 million and an 18 month sched-
ule, but the project cost was in excess than it was decided by the
Woody’s management. After constant negotiations, an hourly rate
was decided to pay to EID for all its resources including direct
wages, salaries, resources, engineering, construction, and pro-
curement. Since Woody’s administration could monitor the hour-
ly work of EID on a daily basis, the administration head found it
reasonable to go with the option to keep the cost of the project
low. Therefore, he persuaded the management for the hourly rate
proposal and it led to a cost-effective project.

NATURE OF PROJECT DECISIONS AND PROJECT PLANNING 177
n o t e s
learning objectives

>> Explain different types of project decisions
>> Discuss the concept of project planning
>> Explain the concept of project planning estimation
>> State the importance of the project management life cycle
7.1 INTRODUCTION
Tom Peter quoted “the more time you spend on planning, the less time
you will need to spend on implementation.” Project planning is one
of the most vital elements of project management. The effectiveness
S
of project planning decides the success or failure of a project. Thus,
any inaccuracy at the planning stage may lead to customers’ dissat-
isfaction, which, in turn, can cause failure of the project. In the mod-
ern business environment, organisations need to plan their projects
IM
to gain a competitive edge in the market. The project planning pro-
cess initiates with the development of a project plan, which defines
the scope and goals of a project and resources required to complete it.
Moreover, it enables an organisation to complete a project within the
stipulated time and specified budget.
M
The next important step of project planning is accurate estimation.

Project planning estimation is a method of projecting time, cost, and
resources required to complete a project. It serves as the standard to
compare the actual and planned performance of the project, identify
loopholes, and rectify them, which result in the successful completion
N
of a project. Planning estimation is performed by using various tools

and techniques. Three-point estimation and base and contingency es-
timation are the two most commonly used estimation methods.
In this chapter, you will study about project planning. Further, the
chapter explains the steps involved in the project planning process in
detail. The chapter further emphasises the need of project planning
estimation. Toward the end, the chapter discusses the project man-
agement life cycle.
7.2 PROJECT DECISIONS

Any task in an organisation needs to be done in a structured way. It
requires multiple activities such as strategy, planning, resource al-
location, scheduling, monitoring, and controlling. A collection of all
these activities, performed within the allotted time, is known as a proj-
ect and the decisions related to each activity are termed as project
decisions.

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A project manager needs to make various decisions regarding a proj-

ect. These decisions may be related to project activities, number of
people to be involved in a project, technology used, and so on. All proj-
ect related decisions require careful thought and consideration as any
wrong decision may lead to the failure of the project. Decision mak-
ing is a cognitive process that involves selecting the most appropriate
course of action among all available alternatives. It aims at identifying
the problem and finding out the solution to that problem.
Effective decision making ensures that a project is executed in an or-

ganised manner. However, project decisions differ across organisa-
tions depending on their requirements. Some important project deci-
sions are explained as follows:
Project Identification: It is one of the major decisions taken for
any project. An organisation needs to select the right project at the
S
right time. For this, the organisation needs to analyse various al-
ternatives and examine whether it has sufficient resources to meet
the desired quality standards.
IM
Idea Generation and Promoter Selection: It involves creating
maximum ideas from the available options, so that the final deci-
sion can be taken. When there are more ideas, there is a need of
better analysis and consideration of problems from different pros-
pects. After generating ideas, an organisation needs to select the
promoter for the project. A promoter is a person who encourages
M
people to invest into a project. An investment banker, an under-

writer, or a stock promoter may, completely or partially, execute
the task of a promoter.
Opportunity and Feasibility Studies: This is another important
project decision made by an organisation. Before selecting any
N
project, an organisation needs to analyse opportunities associat-

ed with a particular project. After that, the organisation needs to
check the viability of the project in terms of the following:
Accessibility of land and site
Availability of water, power, transport, communication facili-
ties.
Accessibility of servicing amenities, such as machine shop,
electric repair shop, etc.
Laws to be adhered for the project
Availability of the required workforce
Approachability of the required technology

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Project selection: After making different decisions, the final de-

cision of project selection is made by an organisation. The project
that best meets the requirements is selected.
1. Define the concept of project decision.

2. ________________is a cognitive process that involves selecting
the most appropriate course of action among all available
alternatives.
3. Project decisions differ across organisations depending on
their requirements. (True/False)
4. A _______________is a person who encourages people to invest
into a project.
S
5. Before selecting any project, an organisation needs to analyse
opportunities associated with a particular project. (True/False)
IM
Activity
Find information on various decisions taken by some renowned

real estate organisations for different projects.
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7.3 CONCEPT OF PROJECT PLANNING

In your everyday life, you have to plan out tasks the way you want
them to perform. For instance, you make a plan for studying for exams
according to the subjects and the time each subject takes to prepare.
N
Similarly, a working person makes a monthly budget allocation plan

to stay away from any financial crises. A plan is made in almost every
field as it enables individuals to attain their goals in the right manner.
The field of project management is also not untouched by planning. In
this section, let us study about project planning in detail.
A project is taken up by an organisation for a long term. To get the de-

sired results, a project plan needs to be formulated by organisations.
A project plan is a route map to execute project activities from initia-
tion to completion of a project. It enables an organisation to determine
what needs to be done, when it needs to be done, how it is to be done,
and by whom it needs to be done. Project planning is a systematic pro-
cess of developing a project plan that states the objectives and scope of
the project, resources required, budget, and so on.

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Good planning leads to successful completion of a project as it reduces

the number of errors and failures that may occur in a project. How-
ever, the effectiveness of planning depends on its elements. Figure 7.1
lists some vital elements of planning:
Figure 7.1: Elements of Project Planning
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These elements are discussed as follows:
Project Scope: It states the main purpose of selecting a specific
project, its legality, and significance.
IM
Project Team: It represents a group of individuals to whom the
tasks of completing a project is delegated. These individuals are
responsible for performing project activities as per the set project
standards. Project team members are given training from time to
time with an aim to improve their skills and abilities.
Project Objectives: They provide a detailed description of the de-
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sired results of a project. Project objectives also include mission

and value of the project and information about the general goals,
such as profitability and competitive position of the project.
Project Schedule: It is a roster that states the allocation of tasks
N
and resources to team members so that a project can be completed

within the stipulated time. The allocation should be done in an
organised manner.
Project Resources: These are the means available to an organisa-
tion for the completion of a project. These resources can be phys-
ical or financial. For the project to be completed successfully, it is
essential that resources should be used optimally.
When consistent planning of the project is missing, project delays can

happen. This may lead to huge financial losses for an organisation.
7.3.1 STEPS IN PROJECT PLANNING
Project planning is not a subjective procedure and includes a series of

steps. Appropriate implementation of each step is vital for completing
a project successfully.
Figure 7.2 shows the steps involved in project planning:

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Figure 7.2: Steps of Project Planning
These steps are discussed as follows:

1. Establishing Goals and Objectives: This is the first step in
planning wherein the desired output is determined and stated.
When the goals and objectives are set, the organisation must
S
ensure that due importance is given to shareholders’ requirements
and desires.
2. Recognising Project Deliverables: This step involves preparing
a list of outcomes to be delivered to customers within the specified
IM
time period.
3. Preparing a Project Schedule: This step involves formulating
the agenda of activities to be performed for completing a project.
This helps an organisation to collect information on resources
and total time required for completing project activities; thereby
attaining the desired goal.
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4. Preparing Supportive Plans: This relates to the last step of

planning, where the organisation makes an attempt to work out
certain plans in order to sustain the project objectives. These
plans can include risk management plan, communication plan,
N
human resource plan, etc.
7.3.2 PROJECT PLANNING TOOLS
To ensure the effectiveness of project planning, project managers

make use of different tools and methods. These tools and techniques
not only help managers in developing an efficient plan but also en-
able them to improvise the current procedures of the organisation.
Figure 7.3 shows some of the important tools of project planning:
Figure 7.3: Project Planning Tools

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These tools are explained as follows:

Force Field Analysis: This project planning tool was created by a
famous psychologist, Kurt Lewin. Force field analysis is performed
to evaluate the positive and negative forces associated with a proj-
ect. In other words, force field analysis involves recognising and
ascertaining the different aspects of a project. For instance, an or-
ganisation wishes to start its factory upgrade project. The positive
forces associated with this project can be high volume of output,
low maintenance expense, customer satisfaction, etc., while the
negative ones that may not support this upgradation can be high
cost of installation, unwillingness of employees to use new ma-
chines, and so on.
Cash Flow Forecast: It is a tool that helps in calculating the cash
inflow (capital) and cash outflow (expenditure) of a project over a
period of time. Cash flow forecast helps in administering project
S
expenditures; thereby preventing the situations of over budgets
and ensuring the economic productivity and liquidity of projects.
Plus-Minus-Interesting: It is a tool used for recognising the pos-
IM
itive and negative effects of a course of action; thereby helping
managers to decide whether to select that action. For instance, if
the result of positive forces is more than the negative ones, project
managers can continue with a particular course of action.
Cost/Benefit Analysis: A project manager can use this tool to com-
pare expenses linked with the implementation of a project and the
M
profit anticipated therein. This helps project managers to deter-

mine the productivity of a project.

N
6. A project plan is a _________ to execute project activities from

initiation to completion of a project.
7. Project team represents a group of individuals to whom the
tasks of completing a project is delegated. (True/False)
8. Which tool helps in calculating the cash inflow (capital) and
cash outflow (expenditure) of a project over a period of time?
9. Force field analysis was created by a famous psychologist,
___________.
10. _________ tool is used to compare expenses linked with the
implementation of a project and the profit anticipated therein.
Activity
Apart from the project planning tools discussed in the chapter,

find information on some advanced planning tools that are used by
modern organisations.

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7.4 PROJECT PLANNING ESTIMATION

Project planning estimation is the most important element for a proj-
ect to be successful. Estimation is a process of anticipating cost, time,
and resources required for a project. When the estimation is precise,
it means that the activities of the project are going on smoothly, which
leads to successful project completion. For instance, the precise esti-
mation of time needed for the completion of a project helps the organ-
isation to prevent project delays.
In an organisation, individuals from different departments and back-

grounds are selected to perform project planning estimation. They per-
form estimation by consulting industry experts; comparing the present
project activities with the similar projects completed in the past; and
breaking the project activities into smaller tasks or work packages.
S
The following are some commonly used methods of performing proj-
ect planning estimation:
Task breakdown
IM
Delphi method
Task examination
Results documentation
Historical data examination
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Parametric estimating
Structured planning
Educated assumption
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Dependencies identification
7.4.1 PURPOSE OF ESTIMATION
The contemporary market is characterised by tough competition

among different business organisations. In order to be ahead, each
organisation is making every effort to use time judiciously. This leads
organisations to skip the estimation process. Although this may let the
organisation to save time and expenditure in the beginning, this can
prove to be one of the major causes of project failure. The following
points explain the purpose of estimation:
Estimation helps in obtaining resources needed for project deliv-
erables.
It helps in keeping track of the project’s development.
It assures the execution of followers who have a part in the accom-
plishment of a project.
It evaluates time and money required to complete a project.

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7.4.2 ESSENTIALS OF ESTIMATION
From the discussion so far, it can be said that estimation is a crucial

aspect of a project. Any inaccuracy at the estimation level can lead to
a project failure. Thus, it is of utmost importance for organisations to
consider certain essential factors while estimating. Some of these fac-
tors are explained as follows:
Contingencies: While estimating, various natural and man-made
emergencies should be considered. These emergencies can be
earthquake, fire, drought, cyclones, spillage, and various other ac-
cidents. To handle these contingencies, separate funds should be
maintained.
Participation of a Project Team: During estimation, there should
be active participation of project team members. This is because
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members are the ones who closely work in a project and are aware
of funds required for different project activities.
Risk Assessment: A project manager must pay attention to dif-
IM
ferent risk factors like machinery breakdown, scarcity of raw ma-
terial, etc. which happen during the implementation of a project.
This is because these risks may have adverse effects on the project.
Independence: During estimation, a project manager should en-
sure that each task of a project is independent of the other tasks.
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7.4.3 ESTIMATION TOOLS
Project managers use a number of estimation tools based on the na-

ture and needs of a project. For example, some tools are utilised partic-
ularly for estimating the duration of a project. In the same way, some
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tools are used exclusively for estimating project cost. The following
are some commonly used estimation tools:
Nominal Group Technique (NGT): This is a technique used for
estimating the time duration of a project. In this technique, proj-
ect team members are asked to specify individual task durations.
The estimated task durations given my each member are listed in
a tabular form and the average shortest range of task duration is
evaluated.
Expert Advice: This tool is used for estimating the time duration
of a task given by consultants, sellers, or other technical experts.
Expert Opinion: This tool is utilised for estimating the cost of the
project based on the expertise and understanding of an expert
concerning the type of project given.
Estimating Equations: This tool is used for estimating the cost of
the project based on mathematical models. Through this method,
a link is made between the input and output of the project.

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Decomposition: Through this tool, the cost of a project is esti-

mated by dividing the whole project in different small tasks. The
organisation is able to estimate the cost concerning each small
task, which helps the organisation to estimate the total cost linked
with the whole project.
Three-Point Estimation: This is an estimation method that in-
cludes the utilisation of normal and distribution models. Three-
point estimation is considered to be the most popular and fa-
voured method of estimation. The following are the three kinds of
estimates used for calculation:
a= best case estimate, also known as Optimistic (O)
m= most likely estimate, also known as Most Likely (M)
b= worst case estimate, also known as Pessimistic (P)
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In this kind of estimation, the unpredictability and improbability
stands for Standard Deviation (SD) and the weighted average by E.
The following formulae are used to find out the value of E and SD:
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E = [a + (4m) + b] / 6
SD = (b - a)/6
For preparing the estimates of a project using the three-point estima-

tion method, the manager needs to do the following:
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Plan WBS.
Assess E and SD for each activity of the project.
EstablishingE for the whole project. For calculating E, the follow-
ing formula must be used:
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E (Project Work) = Σ E (Task)

AscertainSD for the whole project. For calculating SD, the follow-
ing formula must be used:
SD (Project Work) = √Σ SD (Task)
After the values of E and SD have been calculated, the manager of the
project must change the estimates into a confidence level using the
following rules:
Confidence Level in E value is approximately 50%
Confidence Level in E value + SD is approximately 70%
Confidence Level in E value + 2 * SD is approximately 95%
Confidence Level in E value + 3 * SD is approximately 99.5%

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note
Remember that WBS helps an organisation in representing com-

plicated tasks and activities in uncomplicated and effortless way
by breaking the complicated tasks into distinctive and controllable
activities.
Base and Contingency Estimation: This method of estimation is

said to be the substitute of three-point estimation. It is fitting for
times when the information for estimation is limited. This tech-
nique is less methodical as compared to the three-point estimation
method and does not generally provide confidence levels.
The base and contingency technique consists of two elements- base

and contingency. Base relates to the time limit expected by the project
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according to the plan; while contingency relates to the trust shown
after taking into consideration all the risks linked with the base. Con-
tingency is expressed as the percentage of base.
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Through the separating of base and contingencies of a project, a man-
ager is able to make estimation of the project in particular. A base
figure can be attained if the risks linked with the concerned task are
overlooked. Alternatively, contingencies can be calculated by working
out risk assessment of a similar task. The contingency level of a task is
10% to 20%. Nevertheless, the contingency level can go up to 50% or
more for an unsafe project.
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7.4.4 ESTIMATION APPROACHES
Different organisations use different approaches for estimation. The

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following are two types of approaches used for estimation:

Bottom-Up Approach: This relates to the method based on WBS.
This approach is also called definite estimate or micro estimate. In
this approach, different sub-work packages linked with the project
are recognised. Subsequently; every sub-work package is estimat-
ed and combined to create a higher level of WBS. For instance, a
group of people may want to make use of the bottom-up approach
for estimating and creating a fresh product. In such a situation,
this group of people prepares a list of activities to be performed to
create the needed product. Later these activities are divided into
different groups. Later, these groups are further divided into top
level groups. For example, this group may decide in which cate-
gory of product design they would put the colour, size, etc. of the
product. However, the main drawback of the bottom-up approach
is that it is time consuming.
Top-Down Approach: This is another approach of estimation. In
this approach, the estimation is done by correlating the same type
of projects undertaken in the past. This kind of approach is also
called budget estimate, or macro approach of estimation.

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The estimation in this approach is done based on the judgement and

experience of senior and junior level managers. In this kind of ap-
proach, the whole project is divided into different sub-activities. Later,
these activities are estimated and accumulated for the estimation of
the whole project. An organisation tries to divide a task into very
small tasks.
11. ______________is a process of anticipating cost, time, and

resources required for a project.
12. What does NGT stand for?
13. Three-point estimation is a tool wherein the cost of a project
is estimated by dividing the whole project into different small
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tasks. (True/False) IM
Activity
Hold a discussion with the project manager of an organisation of

your choice. Discuss the factors that need to be considered in proj-
ect planning estimation.
7.5 PROJECT MANAGEMENT LIFE CYCLE

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Project management life cycle is a systematic process of organising

and streamlining project activities. According to PMI, “project man-
agement life cycle is the framework around which all project man-
agement activities are structured”. The term project management life
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cycle is confused with project life cycle. However, there is a difference

between the two. The project life cycle may differ from project to proj-
ect; whereas, project management life cycle remains the same for all
projects. There are different phases in the project management life
cycle, which are explained as follows:
1. Analysis and Evaluation Phase: This is the first and foremost
step of the project management life cycle. Analysis involves
determining the essential requirements of a project; viability of
the project; alternatives of attaining the project goal; and so on.
On the other hand, evaluation involves estimating the project’s
worth in terms of expected profit, cost, and risk involved.
2. Marketing Phase: In this phase, a project proposal is prepared
by the project management team. After that, a document is
created, which is termed as Marketing Requirements Document
(MRD) by the marketing or business group or representatives of
customers and users.

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3. Design Phase: This phase involves describing the functions and

operations of a project. The requirements identified in approved
MRD act as an input for the design phase. A set of one or more
design elements is prepared for each requirement.
4. Inspection, Testing, and Delivery Phase: This phase involves
monitoring and controlling the progress of the project. It also
ensures the successful implementation of the project. The
inspection, testing, and delivery phase provides a measure to
ensure that the project deliverables meet the stakeholders’
expectations. If the project deliverables do not meet the expected
and set standards, corrective measures are taken.
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14. Project management life cycle is a systematic process of
organising and streamlining ___________.
15. In the marketing phase of the project management life cycle,
a ________is prepared by the project management team.
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Activity
Find information on the project life cycle of different projects un-

dertaken by a software development organisation.
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7.6 SUMMARY
A project plan is a route map to execute project activities from ini-
tiation to completion of a project. Project planning is a systematic
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process of developing a project plan that states the objectives and

scope of the project, resources required, budget, and so on.
Project planning involves various steps, namely establishing goals
and objectives, recognising project deliverables, preparing a proj-
ect schedule, and preparing supportive plans. Different project
planning tools involve force- field analysis, cash flow forecast,
plus-minus-interesting, and cost/benefit analysis.
Project planning estimation is a process of anticipating cost,
time, and resources required for a project. When the estimation
is precise, it means that the activities of the project are going on
smoothly, which leads to successful project completion.
Different estimation tools include NGT, expert advice, expert opin-
ion, estimating equations, decomposition, and three-point estima-
tion. There are two estimation approaches, namely bottom-up ap-
proach and top-down approach.

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Project management life cycle is a systematic process of organising

and streamlining project activities. The term project management
life cycle is confused with project life cycle. The project life cycle
may differ from project to project; whereas, project management
life cycle remains the same for all projects.
key words
Delphi Method: It is method used to make forecasts based on

the results of questionnaires received from industry experts.
Standard Deviation: It is a statistical method of measuring the
degree of variation from the mean.
Project Management Life Cycle: It is an organised process of
structuring project activities.
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Marketing: It is a process of conveying product value to existing
and prospective customers, with an aim to generate product sale.
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1. What is the importance of effective decision making?
2. What do understand by project identification?
3. Write a short note on idea generation.
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4. List different project planning tools.

5. What are the important factors to be considered while estimating
a project?
6. What is the project management life cycle?
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7. Write a short note on the analysis and evaluation phase of the

project management life cycle.

Project Decisions 1. Project decisions can be de-
fined as decisions related to
multiple activities of a proj-
ect.
2. Decision making
3. True
4. Promoter

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5. True
Concept of Project Plan- 6. Route map
ning
7. True
8. Plus-minus-interesting
9. Kurt Lewin
10. Cost/benefit analysis
Project Planning Estima- 11. Estimation
tion
12. Nominal Group Technique
13. False
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Project Management Life 14. Project activities
Cycle
15. Project proposal
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1. Effective decision making ensures that a project is executed in
an organised manner. Refer to Section 7.2 Project Decisions.
2. An organisation needs to identify the right project by analysing
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various alternatives and examining the availability of the

required resources. Refer to Section 7.2 Project Decisions.
3. Idea generation involves taking out the possible ideas from the
available options, so that the final decision can be taken. Refer to
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Section 7.2 Project Decisions.

4. The different project planning tools may involve force- field
analysis, cash flow forecast, plus-minus-interesting, and cost/
benefit analysis. Refer to Section 7.3 Concept of Project
Planning.
5. Various factors that need to be considered while estimating
include contingencies, participation of the project team, risk
assessment, and independence. Refer to Section 7.4 Project
Planning Estimation.
6. Project management life cycle is a systematic process of
organising and streamlining project activities. Refer to Section
7.5 Project Management Life Cycle.
7. The analysis involves determining the essential requirements of
a project, while evaluation is all about estimating the project’s
worth in terms of expected profit, cost, and risk involved. Refer
to Section 7.5 Project Management Life Cycle.

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SUGGESTED READINGS
Kerzner, H. (2001). Project management. New York: John Wiley.
Maylor, H. (1996). Project management. London: Pitman.
Mehta, R. (2007). Project management. Jaipur: Aavishkar Publishers.
E-REFERENCES
Esi-intl.co.uk,.
(2014). Project Opportunity Management. Retrieved
7 November 2014, from http://www.esi-intl.co.uk/horizons/publica-
tion/2011/201106_oppman.asp?horp=null
Mindtools.com,. (2014). The Planning Cycle: A Planning Process for
S
Medium-Sized Projects. Retrieved 7 November 2014, from http://
www.mindtools.com/pages/article/newPPM_05.htm
Projectmanagementguru.com,. (2014). Project Management Guru
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Estimating Tools and Techniques. Retrieved 7 November 2014, from
http://www.projectmanagementguru.com/estimating.html
See.ed.ac.uk,. (2014). Project Planning. Retrieved 7 November 2014,
from http://www.see.ed.ac.uk/~gerard/Management/art8.html
Techopedia.com,. (2014). What is Project Planning? - Definition
M
from Techopedia. Retrieved 7 November 2014, from http://www.te-

chopedia.com/definition/14005/project-planning
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Ch a
8 p t e r
MONITORING AND CONTROLLING A PROJECT
CONTENTS
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8.1 Introduction
8.2 Planning-Monitoring-Controlling Cycle
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Activity
8.3 Project Monitoring
8.3.1 Designing of Monitoring System
8.3.2 Data Collection and Analysis
8.3.3 Reporting and its Types
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8.3.4 Earned Value Analysis

Activity
8.4 Project Controlling
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8.4.1 Purpose of Controlling

8.4.2 Types of Control
8.4.3 Designing a Control System
8.4.4 Types of Control Systems
8.4.5 Tools for Control
Activity
8.5 Management Control System
8.5.1 Identifying Key Performance Areas
8.5.2 Recognising Strategic Control Points
Activity
8.6 Summary

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FAILURE OF PROJECT CONTROLLING
Vinay was a key stakeholder of the New Financing System Proj-

ect of Heysang Enterprises. The existing accounting system of the
company resides on a mainframe, and some of the programs used
to process data are more than 15 years old. His company decides
to hire a contract software services firm to install a thin-client,
browser-based version of the accounting system so that the main-
frame programs could be retired. He assigned a senior program-
mer to act as the project manager on behalf of the company.
After a few days after the starting of the project, Vinay was a little
worried because some of the key project team members came to
him confidentially to inform him of the progress of the project. Af-
ter further investigation, he discovered that the project manager
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changed the database from SQL to Oracle midway and did not in-
form anyone except the project team. However, the project scope
stated specifically that project development required a SQL data-
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base. The change in database products changed the project scope.
This change caused schedule delays because the project team

members had told him that they need to be trained to use the new
database development tools before they can proceed. Addition-
ally, many of the programs had already been written to interface
with SQL, not Oracle, and were needed to be modified. To add
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insult to injury, the database switch impacted the project budget

in two ways. First, purchasing the Oracle database involved sub-
stantially more money than purchasing the SQL database, and
it required the purchase of new development tools for the pro-
gramming team. Second, several members of the programming
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staff had to attend multiple training sessions on the new database

product to fully integrate the programs and system. Training was
currently running at US$ 2,200 per session per person.
As Vinay was a key stakeholder, he decided to bring this informa-

tion out into the open at the next project status meeting. Addition-
ally, he planned to meet the project sponsor and the procurement
department to determine what alternatives were there. Moreover,
he requested the contracting firm to realign the project in order
to meet original contractual requirements. However, he was con-
cerned about the fact that he is the single project manager who
gave the orders to change the database. Although such control
measures improved the performance of the project, it incurred
huge cost for the company. The company would not have borne
such huge costs if controlling had been done at every stage of the
project.

MONITORING AND CONTROLLING A PROJECT 195
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learning objectives

>> Explain the planning-monitoring-controlling cycle
>> Discuss project monitoring
>> Describe the project controlling process
>> State the importance of the management control system
8.1 INTRODUCTION
Project controlling and monitoring are important aspects of the proj-
ect management process. Monitoring is a process of determining the
actual performance of a project against the planned performance. The
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chief idea is to enhance the performance of a project by evaluating
possible risks and recognising the root cause of problems that may
take place during the lifecycle of the project.
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On the other hand, project controlling is an activity that utilises the in-
formation from the monitoring level to take corrective actions against
gaps in project performance. Project control can be of three types,
namely feed-forward, concurrent and feedback control. A controlling
system must be adaptable, cost-effective, exact, simple, and result
oriented. The tools used for controlling are financial control, quality
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control, marketing control, budgetary control, and human resource

control.
In this chapter, you will study about the planning-monitoring-con-

trolling cycle and its various levels. Also, the designing of the moni-
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toring system is explained in detail in the chapter. The chapter also

describes the procedure of data collection and analysis. You will also
study about project controlling in the chapter. At the end, the chapter
explains the management control system.
PLANNING-MONITORING-
8.2
CONTROLLING CYCLE
In project management, the planning-monitoring-controlling pro-
cess plays an important role in the success of a project. The process
is all about ensuring that the approved project is performed within
its scope, time, and budget. Moreover, it supervises that all tasks and
metrics necessary to undertake a project are in place.
In addition, the planning, monitoring, and controlling process in-

volves comparing the desired performance of a project with its actual
performance and taking corrective actions in case of gaps. Thus, this
process is performed continuously throughout the life of the project
and is called the planning-monitoring-controlling (PMC) cycle. The
PMC cycle is a closed-loop process that aims at minimising errors in

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a project and managing risks. It involves five stages, which are listed
in Figure 8.1:
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Figure 8.1: The PMC Cycle
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All the five stages of the PMC cycle are closely related to each other.
Any mistake at any stage may lead to ineffectiveness of other stages,
which ultimately results in the failure of the planning-monitoring-con-
trolling process. For example, if a plan is not put into practice correct-
ly, it would be difficult to assess the actual performance of a project.
The first four stages of the PMC cycle are together called plan-do-
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check-act cycle. Let us now discuss these five stages in detail:

1. Planning (Plan): A plan is produced to determine the sequence
of activities performed in a project in order to assess their
performance. Also, it decides what has to be done ahead.
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2. Executing (Do): At this stage, the project plan is put into action
in order to attain the fixed goals and objectives.
3. Monitoring (Check): This stage involves overseeing the
performance of a project by comparing the actual performance
with the desired one. It also recognises the ambiguity in the
performance of the project.
4. Controlling (Act): This stage involves taking remedial measures
against the loopholes identified at the monitoring stage so that
continuous good performance of the project can be ensured.
5. Closing: This stage includes concluding the activities of the
project after the project has achieved its defined goals and
objectives.
There have been a number of scholars who did a remarkable work in

the field of project management. There have been many such schol-
ars, also called “Quality Gurus”. They gave valuable concept and ap-
proach to quality as it applies to business and that has an immense
and lasting impact on the organisation.

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Two of them are discussed below:

W Edwards Deming: Was an American scholar. He advocated that
the management has a great responsibility at an individual and
at organisation level. According to him, the management was re-
sponsible for 94% of quality problems. He gave a 14-point plan in
his book Out of the Crisis which can be applied to any kind of or-
ganisation belonging to the public, private or service sector. The
points as mentioned in his book are as follows:
1. Create constancy of purpose toward improvement of product
and service, with the aim to become competitive and to stay in
business, and to provide jobs.
2. Adopt the new philosophy. We are in a new economic age. West-
ern management must awaken to the challenge, must learn
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their responsibilities, and take on leadership for change.
3. Cease dependence on inspection to achieve quality. Eliminate
the need for inspection on a mass basis by building quality into
the product in the first place.
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4. End the practice of awarding business on the basis of price tag.
Instead, minimise total cost. Move toward a single supplier for
any one item, on a long-term relationship of loyalty and trust.
5. Improve constantly and forever the system of production and
service, to improve quality and productivity, and thus constant-
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ly decrease costs.
6. Institute training on the job.
7. Institute leadership (see Point 12 and Ch. 8). The aim of super-
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vision should be to help people and machines and gadgets to

do a better job. Supervision of management is in need of over-
haul, as well as supervision of production workers.
8. Drive out fear, so that everyone may work effectively for the
company (see Ch. 3).
9. Break down barriers between departments. People in research,
design, sales, and production must work as a team, to foresee
problems of production and in use that may be encountered
with the product or service.
10. Eliminate slogans, exhortations, and targets for the work force
asking for zero defects and new levels of productivity. Such ex-
hortations only create adversarial relationships, as the bulk of
the causes of low quality and low productivity belong to the
system and thus lie beyond the power of the work force.
Some points related to this are as follows:
99 Eliminate work standards (quotas) on the factory floor.
Substitute leadership.

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99 Eliminate management by objective. Eliminate manage-

ment by numbers, numerical goals. Substitute leadership.
11. Remove barriers that rob the hourly worker of his right to
pride of workmanship. The responsibility of supervisors must
be changed from sheer numbers to quality.
12. Remove barriers that rob people in management and in engi-
neering of their right to pride of workmanship. This means, in-
ter alia, abolishment of the annual or merit rating and of man-
agement by objective (see Ch. 3).
13. Institute a vigorous program of education and self-improve-
ment.
14. Put everybody in the company to work to accomplish the trans-
formation. The transformation is everybody’s job.
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According to him the organisations which followed these 14 prin-
ciples of management wished to stay in business. He also gave a
very popular approach to problem solving called the PDCA cycle,
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which is an acronym for Plan, Do, Check and Act. Originally it
was developed by Dr Shewhart. PDCA can be briefly explained as
follow:
Plan: It is the work that is required to be done.
Do: Implement the plan of action for getting the work done.
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Check: Check whether the plan of action works or not.

Act: Make any corrections required to improve the situation.
Dr Kaoru Ishikawa: Was a Japanese scholar who gave the pio-
neering concept of total quality, implementation of quality control
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throughout the organisation, human side of quality. He also gave

the famous fishbone diagram or the Ishikawa diagram and the sev-
en basic tools of quality, as follows:
1. Pareto analysis: Identify the major problems.
2. Cause and effect diagram: Find what causes the problem.
3. Stratification: How data is made up.
4. Check sheet: A form for collecting and analysing the data.
5. Histograms: A graph for that shows frequency distributions.
6. Scatter diagram: Graphs created with two parameters to es-
tablish the relation between the two.
7. Process control charts: These charts are used to identify how
a process changes over a period of time.

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A cause and effect diagram is shown in Figure 8. 2:
Figure 8.2: Cause and Effect Diagram
1. The PMC cycle is a __________ process that aims at minimising

errors in a project and managing risks.
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2. The first four stages of the PMC cycle are together called the
plan-determine-check-analyse cycle. (True/False)
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Activity
Suppose you are a project manager in a construction company. You

have been given the responsibility of conducting the planning-mon-
itoring-controlling process for a flyover construction project. What
steps would you take to perform the process? Also, list the aspects
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that you would look for during the process.
8.3 PROJECT MONITORING

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Monitoring is a systematic effort of collecting, recording, and re-

porting the required information regarding project activities. It is a
quantitative and qualitative procedure of assessing the performance
of project activities. The main objectives of monitoring project activ-
ities are to evaluate the risks pertaining to a project and identify the
problems that affect the performance of the project. These problems
can be failure to fulfil project scope, delay in project completion, over
expenses, etc.
The monitoring function is performed throughout the lifecycle of a

project. Effective monitoring leads to efficient execution where all in-
terconnected changes are noted down and reported to the top man-
agement of the organisation. There are five indicators defined for
monitoring a project. These indicators are used by denoting the level
at which project activities have been completed.

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The four monitoring indicators are explained as follows:

Input Indicators: These indicators represent the resources used
for conducting a project. The inputs may be economic (money),
non-economic (men), and technical (machines).
Output Indicators: These indicators signify the income generated
after conducting a project. The output can be in the form of final
products, cash, and kind.
Outcome Indicators: These indicators show the result of the proj-
ect regarding the goals achieved and the amount of products pro-
duced. The results help in ascertaining the rate of success.
Impact Indicators: These indicators reflect the effects of the proj-
ect on the growth and performance of the organisation. Impact
indicators assess the changes, working conditions, infrastructure
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of the organisation due to the result of the project.
8.3.1 DESIGNING OF MONITORING SYSTEM

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A project monitoring system is a framework of activities to be per-
formed under the monitoring process. The main aim of designing a
project monitoring system is to spot the loopholes at all the levels of
project management starting from project planning to project exe-
cution. The system is designed to mainly identify the project perfor-
mance, cost, and time. Figure 8.3 depicts the steps involved in design-
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ing a project monitoring system:

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Figure 8.3: Process of Designing a Monitoring System

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These steps are explained as follows:

1. Identifying Key Factors: This involves ascertaining the key
factors to be monitored. There are three key factors, namely
project performance, cost and time. The success and failure of a
project is decided through these factors.
2. Collecting and Analysing Data: This step includes accumulating
data the key factors (performance, cost, and time). The data can
be collected from various sources, like discussions with project
teams and project managers; previous records, project plans,
mission and vision statements, competitors’ profiles, etc. After
the collection, data is analysed to extract meaningful information.
A detailed explanation on data collection and analysis is given in
the subsequent section.
3. Preparing Reports Based on Data: This step involves creating
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a report on the project’s performance using the information
extracted in the previous step. The report mentions the
project model, relative performance, statistical evaluation, and
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suggestions for improvement, if needed. Report preparation is
explained in detail in the subsequent section.
4. Determining the Flow of Information: This step involves
ascertaining information to be entered into the monitoring
system. A project manager needs to be careful while selecting
information as any inaccuracy at this step can lead to the failure
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of project performance assessment.
8.3.2 DATA COLLECTION AND ANALYSIS
The monitoring process cannot be performed without accurate and

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timely information about the cost, budget, and time of a project. Thus,
data collection requires thoughtful consideration and supervision, or
else, the real problem would not be identified. In the monitoring pro-
cess, the collected data can be as follows:
Frequency Counts: This data represents different project events
and their impact on the progress of the project. These events can
be the number of times error occurs within the entire project du-
ration; the number of times the computer program is hit by a vi-
rus; and various other events. These events are recorded and ex-
pressed as time or percentage of standard.
Raw Numbers: This data provides details of various components
like cost and time spent on performing project activities. In addi-
tion, it involves details, such as project deadlines and resources
used. The numbers are expressed in ratios to measure the esti-
mated and actual units.

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Subjective Numeric Rating: It represents the subjective nature

of activities which differ from one project to the other. However,
the difference between raw and subjective numbers is their nature
of symbolising. The quality of product activities and the skills of
individuals involved in the project are measured using subjective
rating.
Indicators: As discussed earlier, indicators provide information
on the performance of a project. Data on indicators helps a proj-
ect manager in evaluating activities that are qualitative in nature.
Project incorporation and adjustment with changes indicate the
quality of a project team. Thus, indicators assist in evaluating the
project performance and quality.
The data is collected in the raw form that cannot help in monitoring a
project. Therefore, a thorough analysis of data should be performed in
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order to interpret the data and extract the relevant information.
8.3.3 REPORTING AND ITS TYPES

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Reporting is a systematic presentation of information needed for mon-
itoring. A report has information related to the progress, cost, and time
of a project. It can be used by any level of management. For instance,
the lower management uses a project report to obtain information re-
garding individual work activities; the middle level management uses
it to allocate work to the lower level staff in accordance with their
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abilities; and the top management uses it for ascertaining the current
progress of the project. The following are the benefits of reporting:
A report creates an understanding across various departments.
It provides information on the progress of project activities so that
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they can be coordinated well.

It assists in recognising problems in the project.
A report spots the possibility of delay in the project.
It provides a better insight into the project performance to the top
management.
There can be different reports prepared depending on the nature of

the project. The following are three main types of reports:
Routine Report: This records the progress of a project. These
reports are prepared at regular intervals and shared at all lev-
els of management. A routine report involves information on
general topics like members involved in a project, raw materials
required, etc.
Exception Report: This report records any crucial decision of the
project. The members of the team share this exception report. An

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exception report comprises information on the adoption of a new

strategy, structural changes, etc.
Special Analysis Report: This report is prepared for a clarification
of any special challenge in the project; for example the technical or
financial failure of a project. This report consists of particulars of
the challenge and suggestions to deal with it.
Exhibit
Project Status Report Template
The following is an example of a report prepared to show the prog-

ress of a project:
S
IM
M
N
Source: MS Office Guru (2013). Project Status Report Template. Retrieved from: http://
www.msofficeguru.org/status-report.html

n o t e s
8.3.4 EARNED VALUE ANALYSIS
Earned Value Analysis (EVA) is a technique that measures the perfor-

mance of a project by comparing the planned and actual expenditures
and integrating the scope of the project and required resources into a
set of measurements.
According to Englert and Associates, Inc, EVA is “A method for mea-

suring project performance. It compares the amount of work that was
planned with what was actually accomplished to determine if cost and
schedule performance is as planned.” EVA is also called performance
measurement, management by objectives, budgeting cost of task per-
formed and cost schedule and control system. This method is called
earned value as it relates the anticipated performance with the esti-
mated cost and time. Thus, it helps in examining the performance of a
project early in the life cycle of a project.
S
The EVA method manipulates three types of financial data of a proj-
ect. Each data represents the cost baseline for the project and analy-
IM
ses the project from different perspectives. These three types of finan-
cial data is as follows:
Planned Value (PV): These are planned project expenditures
starting from project initiation to the current stage of the project.
PV is determined by summing up all the estimates of project tasks
and the required time based on the project schedule.
M
Actual Cost (AC): It represents the current expenditures of a proj-

ect. AC is calculated by adding all costs incurred on project activi-
ties completed at the current moment of time.
Earned Value (EV): It is the actual progress of the project. In other
N
words, it is a percentage of the total financial goal achieved in re-

ality at one fixed time. EV is also called the Budgeted Cost of Work
Performed (BCWP). The formula for calculating EV is as follows:
EV= Percentage of work completed × total budget
For instance, a project is considered for installing 700 computers for

10 days. In six and half days, 455 computers have been installed. This
shows that 65% work (455/700) has been completed at 65% of total
time allotted. If the planned value or the budgeted cost is ` 3, 00, 000,
the EV at 65% would be ` 1, 95, 000 (0.65 x 3, 00, 000).
Now, if the real cost of time taken for 65% of completion is more than
the EV which is calculated at 65%, there is a difference that needs
rectification. To put simply, the project is said to be in line as 65% of
work completed has taken 65% of the time within constrain of 65% of
the budget.

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3. The monitoring function is performed throughout the ________

of a project.
4. Which of the following indicators shows the result of a project
regarding the goals achieved and the amount of products
produced?
a. Input indicators b. Output indicators
c. Outcome indicators d. Impact indicators
5. Preparing reports based on data is the _________ step of
designing a monitoring system.
6. The monitoring process cannot be performed without accurate
and timely information regarding cost, budget, and time of a
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project. (True/False)
7. Which report records any crucial decision of a project?
IM
Activity
Using various sources like the Internet, business magazines, news-

papers, etc., find out reports prepared for the following projects of
some renowned companies:
M
Road construction projects

Retail store set up projects
Township development projects
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Telecommunication projects
After finding reports for the above projects, find out the type and ef-
fectiveness of reports. Also, find how these reports helped different
organisations that prepared those reports.
8.4 PROJECT CONTROLLING

Project controlling is the act stage of the planning-monitoring-con-
trolling cycle or the plan-do-check-act cycle. It is all about correcting
projects gaps identified at the monitoring level. Apart from this, proj-
ect controlling involves establishing standards for the performance of
a project. Let us understand the concept of project controlling with
the help of an example. For example, a manufacturing division pro-
duces 900 bulbs in a month. However, the set target was the product
of 1200 bulbs.

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The shortage of 300 bulbs is attributed to excess of labour and raw ma-
terials costs. Labour costs can be reduced by eliminating excess staff
and raw material costs can be controlled by ensuring optimal utilisa-
tion and surplus purchasing. Such remedial measures used for man-
aging the costs of labour and raw materials come under controlling.
Controlling helps project managers in the following ways:

It ascertains whether the real performance complies with the set
standards of performance.
It rectifies deviations in the performance of the project.
It allots and schedules resources to achieve the goal.
It assists in monitoring the activities of the project and perfor-
mance of the team.
S
8.4.1 PURPOSE OF CONTROLLING
Most project managers, while controlling projects, get engrossed in the

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measurement and evaluation of their current situation. They are more
focused on evaluating their immediate position and the distance their
projects have covered so far. However, controlling a project is not a sim-
ple task as it involves a number of complex, interconnected activities.
The foremost mission of every project is to deliver what was promised.

Thus, the controlling process aims at minimising gaps between the
M
actual performance of a project with its desired performance. Main-

taining a proper control of a project requires a project manager to
consider the following three parameters:
What is the actual status of the project against the desired one?
N
What lies ahead that can affect the project?

Where is the project going to end up against what was promised?
8.4.2 TYPES OF CONTROL
As studied earlier, controlling is an important function as it helps to

identify errors in a project and take corrective actions so that devia-
tions in performance can be reduced. However, different controls are
performed for different types of projects. There are three types of con-
trols, which are explained as follows:
Feed Forward Control: It is a beginning and precautionary con-
trol that is performed before any major change takes place in the
project output. Feed forward control is generally conducted to
take remedial measures against the poor performance of a project
caused due to inputs, such as raw material, labour, and machines.
The measures in this control can be surplus purchasing of raw ma-
terials, elimination of excess staff, defining new job skills, preven-
tive maintenance of machines, etc.

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Concurrent Control: It is performed when project activities are

going on. It monitors on-going activities and ensures that they
are performed in compliance with the established standards. The
main aim of concurrent control is to ensure that project activities
generate the anticipated outcome.
Feedback Control: This type of control is performed after a project
is completed. Feedback control is performed when feed forward
and concurrent control are not possible to be performed or are too
expensive. However, the main disadvantage of this control is that it
gives information at the end when losses are almost suffered.
8.4.3 DESIGNING A CONTROL SYSTEM
Like a monitoring system, a framework should also be set for the con-
trolling process called a control system. The efficiency of the control-
S
ling process relies on the effectiveness of the controlling system. The
system helps project managers in the following ways:
Itallows managers to deal with uncertainties by suggesting cor-
IM
rective actions beforehand.
Itassists in managing discrepancies like project imperfections,
cash overflowing, or increase in employees’ income.
Itspots opportunities when the real performance of a project can
go beyond its anticipated performance.
M
Itaugments coordination of different activities and assists in han-

dling complicated situations.
It enables managers to delegate authority of making decisions to a
project team while being in complete control.
N
Like a monitoring system, a controlling system should be effective as

it is directly related to the performance of a project. The following are
the essential features of a controlling system:
Flexibility: The controlling system must be able to adapt to uncer-
tain changes.
Cost Effectiveness: It should not be too costly as it results in an
increase in the total expenditure of a project.
Usefulness: The system should aim at the output and competence.
Accuracy: The system should be designed using accurate informa-

tion so that the exact performance of a project can be determined.
The project can lead to failure if the controlling system is not ac-
curate.
Simplicity: It should be easy to use as a complicated system can
result in complexities.

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Thus, it is of paramount importance for a project manager to be care-

ful while designing a control system.
8.4.4 TYPES OF CONTROL SYSTEMS
From the discussion so far, it can be said that the controlling func-
tion is performed at every level of management right from top to the
bottom. Based on the organisational hierarchy, control systems are
grouped into three types, which are shown in Figure 8.4:
S
IM
Figure 8.4: Types of Control Systems
These systems are explained as follows:

Strategic Control System: This control system is used by the top
management of an organisation to check the viability of projects
and ensure project strategies are adapted correctly.
M
Tactical Control System: This system is used by middle level man-

agers to check the periodic outcomes of projects and take remedial
actions if needed. In addition, the tactical system also helps middle
management in preparing reports for different projects by provid-
N
ing adequate project-related information.

Operational Control System: This system is used by lower man-
agement to ensure that project activities are performed as per the
set project schedule. In case of deviations, the system helps lower
level managers to take the required actions.
8.4.5 TOOLS FOR CONTROL
To perform effective control, different tools and techniques are used

by project managers. These tools provide the right information at the
right time required for performing control to managers. These tech-
niques not only enable managers to check and regulate continuing
changes, but also provide feedback on devising better control tools for
the future.

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Some of the commonly used tools are listed in Figure 8.5:
Figure 8.5: Different Control Tools
S
These tools are explained as follows:
Financial Control: This control tool is used for taking measures
against the monetary performance of a project. This tool makes
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use of information drawn from financial statements (income state-
ment, balance sheet, and cash flow statement); financial audits
(that check compliance with accounting methods, policies, and
rules); and ratio analysis (financial statement analysis performed
for determining the financial performance of an organisation in
various key aspects.)
M
Budgetary Control: This tool is used for comparing the real capi-
tal and expenditure with budgeted capital and expenditure. In this
method, the budget of the previous year is used as foundation for
removing excess cost. Budgetary control provides a clear view to
N
the management on what needs to be done to lessen the depletion

of resources. However, it involves high level of unpredictability as
budgets are always prepared much later.
Quality Control: This tool allows managers to analyse the level of
quality maintained in production. It is important to use this con-
trol in order to produce quality products cost effectively. This tool
can also be used for quality inspection, quality assurance, and total
quality management.
Marketing Control: It is a control method that enables managers
to check the progress of marketing goals like customer satisfac-
tion, balance between demand and supply, faster delivery process,
and so on. Marketing control includes continuous research, test-
ing, and market statistics.
Human Resource Control: This control checks the performance
of employees. Human resource control makes used of performance
reviews, corrective programs, training and development, counsel-
ling and mentoring, and so on.

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The success and failure of the project relies on the performance of

human resource. Thus, a project manager should strive to improve
the skills and abilities of project team members.
Technology Control: This control enables project managers to en-
sure that information systems are functioning properly. As infor-
mation is a crucial aspect of any project, the non-functioning of
information system may lead to the failure of the project.
8. Project controlling is the ________ stage of the planning-

monitoring-controlling cycle or the plan-do-check-act cycle.
9. Controlling ascertains whether the desired performance
complies with the set standards of performance. (True/False)
S
10. Which control is performed after a project is completed?
11. The tactical control system is used by the top management of
an organisation. (True/False)
IM
12. ___________ control enables project managers to ensure that
information systems are functioning properly.
13. Budgetary control is used for comparing the real capital and
expenditure with budgeted capital and expenditure. (True/False)
M
Activity
Find information on the controlling process of construction proj-

ects undertaken by Gammon India.
N
8.5 MANAGEMENT CONTROL SYSTEM

Management Control System (MCS) is a system that collects and uti-
lises information for assessing the performance of different organisa-
tional resources used for a project. These resources can be human,
physical or financial. According to Horngren et al., “Management con-
trol system is an integrated technique for collecting and using informa-
tion to motivate employee behaviour and to evaluate performance.”
MCS uses various techniques to measure the performance of resourc-

es against certain project targets; thereby ensuring operational effec-
tiveness. The system allows project managers to ensure whether proj-
ect objectives are aligned with overall organisational objectives. Apart
from this, it enables managers to communicate project objectives and
provide feedback to project teams. Different organisations have differ-
ent requirements; thus, MCS differs across organisations. However,
every organisation needs to perform two important activities before
designing its MCS.

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These activities are, identifying key performance areas and recognis-

ing strategic control points. Let us discuss these two activities in detail
in the next sections.
8.5.1 IDENTIFYING KEY PERFORMANCE AREAS
Key performance areas are the aspects on which the entire success of
a project is dependent. Thus, these areas are required to be controlled
properly for a project to be successful. Some of these key performance
areas are as follows:
Market performance of an organisation
Turnover and earnings per employee
Innovation and adaptation abilities of the organisation
S
Total payroll costs
Staff turnover
Investment in competence development
IM
Frequency of accidents
8.5.2 RECOGNISING STRATEGIC CONTROL POINTS
Strategic control points refer to those activities that are significant for
attaining the strategic objectives of a project. Once these points are
M
recognised, controlling becomes easier for project managers. Some of

these strategic control points are as follows:
Vision and direction of a project
Long-term performance of the project
N
Future course of action

Earnings of the project, etc.
14. According to ___________, “Management control system is an

integrated technique for collecting and using information to
motivate employee behaviour and to evaluate performance.”
Activity
Meet the project manager of a costruction project and hold a dis-

cussion on the importance of MCS as a system to collect and utilise
information for assessing the performance of different organisa-
tional resources.

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8.6 SUMMARY
In project management, the planning-monitoring-controlling pro-
cess involves making sure that the approved project is performed
within its scope, time, and budget.
The PMC cycle involves five stages, which are planning, executing,
monitoring, controlling, and closing.
Monitoring is a systematic effort of collecting, recording, and re-
porting the required information regarding project activities. The
four monitoring indicators are input indicators, output indicators,
outcome indicators, and impact indicators.
A project monitoring system is a framework of activities to be per-
formed under the monitoring process. The steps involved in de-
signing a monitoring system involves identifying key factors, col-
lecting and analysing data, preparing reports based on data, and
S
determining the flow of information.
Project controlling is the act stage of the planning-monitoring-con-
trolling cycle or the plan-do-check-act cycle.
IM
Different controls are performed for different types of projects.
There are three main types of controls, namely feed forward con-
trol, concurrent control, and feedback control.
An effective control system is characterised by flexibility, cost ef-
fectiveness, usefulness, accuracy, and simplicity. There are three
types of control system, which are strategic control system, tactical
M
control system, and operational control system.

MCS is a system that gathers and utilises information for assessing
the performance of different organisational resources used for a
project.
N
Every organisation needs to perform two important activities be-

fore designing its MCS, which are identifying key performance
areas (Market performance of an organisation, turnover and earn-
ings per employee, etc.) and recognising strategic control points
(like vision and direction of a project, long-term performance of
the project, etc.)
key words
Performance Appraisal: A process of assessing the perfor-

mance of employees in terms of quality, quantity, cost, and time
corresponding.
Total Quality Management: It is a process of ensuring total
quality in all organisational processes.
Auditing: This refers to the process of checking records or fi-
nancial accounts to determine their accuracy.
Budget: It is prepared for keeping a record of the expenditures
incurred on project activities planned over a set period of time
in advance.

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1. Explain the five stages of the PMC cycle.
2. Explain different types of data collected for designing a project
monitoring system.
3. What are the advantages of preparing reports?
4. Write a short note on project controlling.
5. Explain the three types of control.
6. What are key performance areas?
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Planning-Monitoring-Con- 1. Closed-loop
trolling Cycle
2. False
Project Monitoring 3. Lifecycle
4. c. Outcome indicators
M
5. Third
6. True
7. Exception report
N
Project Controlling 8. Act

9. False
10. Feedback control
11. False
12. Technology
13. True
Management Control 14. Horngren et al.
System

1. The five stages of the PMC cycle are planning, executing,
monitoring, controlling, and closing. Refer to Section
8.2 Planning-Monitoring-Controlling Cycle.
2. The different types of data collected for monitoring system
design are frequency counts, raw numbers, subjective numeric
rating, and indicators. Refer to Section 8.3 Project Monitoring.

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3. A report creates an understanding across various departments,

provides information on the progress of project activities so that
they can be coordinated well, etc. Refer to Section 8.3 Project
Monitoring.
4. Project controlling involves correcting projects gaps identified
at the monitoring level and establishing standards for the
performance of a project. Refer to Section 8.4 Project
Controlling.
5. The three types of control are feed forward control, concurrent
control, and feedback control. Refer to Section 8.4 Project
Controlling.
6. Key performance areas are the aspects on which the entire success
of a project is dependent. Refer to Section 8.5 Management
Control System.
S
IM
SUGGESTED READINGS
M
Alberto De Marco. (2011). Project Management for Facility Con-

structions. Springer Science & Business Media.
E-REFERENCES
N
Pmtips.net. Project Management tips. http://pmtips.net/project-

control/
Villanovau.com/. Monitoring and Controlling Process Groups. http://
www.villanovau.com/resources/project-management/pmbok-mon-
itoring-controlling-process-group/#.VFndm_mUfqs
Brighthubpm.com. The Monitoring & Controlling Process
Group: A Definition. http://www.brighthubpm.com/project-plan-
ning/1675-looking-at-project-monitor-and-control/
Projectcontrolsonline.com/. Project Controls: What is it and why is
it important?. http://projectcontrolsonline.com/Home/Definition-
andImportanceofProjectControls.aspx
Theprojectmanagementsteps.com. Monitoring & Controlling.
http://www.theprojectmanagementsteps.com/project-manage-
ment-steps/monitoring-controlling

Ch a
9 p t e r
Project Scheduling
CONTENTS
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9.1 Introduction
9.2 Concept of Project Scheduling
9.2.1
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Developing a Project Network
9.2.2 Project Time Management
Activity
9.3 Estimating Time
Activity
M
9.4 Project Network Analysis

9.4.1 CPM Model
9.4.2 PERT Model
Activity
N
9.5 Gantt Chart

Activity
9.6 Concept of Resource Scheduling
Activity
9.7 Process of Resource Scheduling
9.7.1 Resource Loading
9.7.2 Resource Levelling
9.7.3 Resource Allocation
Activity
9.8 Project Progress Report
Activity
9.9 Summary

n o t e s
Creating a Website for Amnesty

Technical University (ATU)
Amnesty Technical University (ATU) has hired a contract agency

to create its new registration website. The website will allow stu-
dents in good academic standing to register for classes over the
Internet. Jeff has been appointed as the project manager for ATU.
He will be working with Antara Mei of Websites International to
complete this project. Antara has given Jeff an activity list and
asked for time estimates that he can plug into the project plan.
Jeff’s first stop is Shawn Hade’s desk. He is the expert on the

mainframe registration system and will be writing the inter-
face programs to accept registration data from the new website.
Shawn will also create the data that the Internet program will use
S
to verify a student’s academic standing. Shawn has created other
programs just like this one in the past. His expertise and judg-
ment are very reliable.
IM
Jeff’s next stop is Rebi Middleton, the new team leader of the test-
ing group. She has been with ATU for only a month. As she has
no experience in working with ATU data and staff members, she
tells Jeff that she will get back to him within a week with the esti-
mates of the testing activities. She plans to go through the project
binders of some similar projects and base her estimates against
M
the historical information on similar projects. She will run the es-
timates by her lead tester before giving them to Jeff.
Jeff has asked both his resources to provide him with three-point
estimates. Shawn’s estimates are an example of using expert judg-
N
ment as a tool to derive activity duration estimates. The estimates

expected from Rebi will be derived using historical information
and expert judgment because she is going to involve her lead
tester to verify the estimates.

Project Scheduling 217
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learning objectives

>> Explain the concept of project scheduling
>> Define the importance of estimating time
>> Discuss the methods of project network analysis
>> Discuss the Gantt chart
>> Define the concept of resource scheduling
>> Explain the process of resource scheduling
>> Prepare a project progress report
9.1 INTRODUCTION
S
In the previous chapter, we discussed various aspects that are taken
into consideration while monitoring and controlling the different ac-
tivities of a project. In this chapter, we move forward and look at proj-
IM
ect scheduling, which is another important aspect of a project.
Imagine you have to start a long road trip to an unfamiliar destination

without a map or navigation software/system. You are sure you have
to make some turns here and there, but you have no idea when or
where or how long it will take to get there. Eventually, you may arrive,
but there is always the risk of your getting lost and feeling annoyed
M
during the trip.
Driving without having any idea of how you are going to get there is
similar to working on a project without a schedule. No matter the size
or scope of your project, the schedule is a key part of project man-
N
agement. The schedule tells you when each activity is supposed to be

done, what has already been done and the sequence in which things
need to be completed.
As there are some uncertainties involved, the schedule is reviewed

regularly. Revisions are often done while the project is in progress.
It continues to develop as the project moves forward. The schedule
essentially transforms the project from a vision to a time-based plan.
This project schedule is considered to be a tool that specifies what task

needs to be performed, which resources of the organisation will perform
the work and the time frames in which that work needs to be performed.
In this chapter, we discuss various aspects of project scheduling in

detail. The chapter begins by discussing the concept of project sched-
uling. It then explains the various methods used in estimating the time
taken to complete a project. The chapter also explains project network
analysis as well as the CPM model, the PERT model, and the Gantt
chart. In addition to this, the chapter discusses the concept and pro-
cess of resource scheduling. Towards the end, the chapter explains the
utility of the project progress report.

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9.2 Concept of Project Scheduling

A project contains various activities. Yet, in the implementation stage
of a project, all these activities cannot be on track concurrently from
the start of the project. So, various activities need to be classified in a
proper sequence. Project scheduling entails establishing a logical se-
quence for the various activities of a project and optimising the com-
plete period of the project. The process of project scheduling com-
mences with the formulation of a project schedule, which mentions
the sequence of activities that should be followed all through the im-
plementation phase of the project. The project schedule acts as an
essential function in the successful completion of different project ac-
tivities. For instance, any inaccuracy in the project schedule can lead
to consumption of resources and time, which may prove disastrous
for the project. As a result, a project manager must be extremely vigi-
S
lant while formulating the project schedule. Two important factors of
a project schedule are developing a project network, and estimating
the time for the entire project activity. These two factors are explained
IM
in the forthcoming sections of this chapter.
A simple project can be administered as a series of activities. A project

schedule generally provides the following details of each task:
Initiation and completion of the project
Time period of each task in the project
M
Data regarding dependent and independent tasks

A graph or Gantt chart that shows the dates of the tasks as bars
over a period of time
N
A well-made, accurate project schedule plays an essential part in the

successful completion of a project. However, to attain the required ob-
jectives, a project schedule must contain definite features. Some of
these features are as follows:
Periodic updating of the schedule. The period could be daily,
weekly or monthly.
Equal value of the Estimate at Completion (EAC) and the baseline.
Proper distribution of invested efforts among team members.
Some important applications of a project schedule are as follows:

A project schedule helps in researching the project plan. This
entails a series of tasks and dependencies among the tasks, date
ranges of all the tasks and a graphical visualisation of the time
frames of every activity on the Gantt chart.
Resource scheduling facilitates assignment of tasks as per the
available resources. This enables the team to know the tasks that
have been planned for the members and when they are due. Re-

n o t e s
source levelling permits the project manager to make sure that

adequate and proper resources are provided at desirable levels
across different tasks and other projects.
A project schedule is used as a source for assigning the timelines
of different project activities to stakeholders and team members of
the project. The graphical nature of the Gantt chart makes it sim-
ple to comprehend the current project tasks.
A project schedule requires to be restructured on a regular basis.
The updating is to be performed all through the project cycle. The
current project status is compared against the baseline snapshot
to facilitate the project manager to follow the project’s progress.
Task dependencies permit the project manager to analyse the im-
pact of delays in one task on the remainder planned tasks. The
project schedule permits visibility of this impact.
S
9.2.1 Developing a Project Network
IM
A project network can be described as a visual representation of var-
ious individual activities of the project in a logical manner by using
nodes and arrows. It helps in scheduling and sequencing various indi-
vidual activities and administering the total time required for finish-
ing the project. It even enables an organisation to analyse the relation-
ships among different project activities. Based on the character of the
activity to be done, network diagrams can be complicated or simple to
M
build and organise. The following is a description of the various types

of activities in a network diagram:
Left to Right Flow: Signifies the chronological flow of activities.
Usually the flow of a network diagram is left to right. That is, the
N
network diagram commences from the left side and progresses to-
wards the right.
Distinct Coding of Activities: Indicates the exclusive identifica-
tion of every activity by relating the activity with a letter, number,
or code. The related letter, number or code is used to refer the
specific activity in the diagram. For instance, various activities can
be expressed as activity A, B, C or activity 1, 2, 3 in the network
diagram.
Preceding and Succeeding Activities: Indicate the predecessor
and successor activities of an activity. There must be a preceding
and successor activity for every activity. No activity can have the
same predecessor and successor. Every preceding activity must be
finished prior to initiating the next activity. Thus, it is relevant to
set up a logical sequence of various activities in a project.
Table 9.1 displays the coding and logical sequence of different ac-
tivities in a construction project:

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Table 9.1: Activities in the XYZ Construction

Project
Activity Code Activity Name Predecessor
A Constructing the base of ------
the building
B Constructing the frame- A
work
C Plastering the walls B
D Installing electrical C
wiring
E Installing plumbing C
F Decorating the interior D, E
G Completing the exterior C
S
Arrows (→): Refer to activities in a network diagram. A single ar-
row shows only one specific activity. The description and duration
of the activity is mentioned along the arrow. The arrows used in
the network diagram are also called arcs. These arrows show the
IM
logical precedence of tasks; thus, the length and breadth of an ar-
row have no significance in the diagram. The arrow tail indicates
the initial point of an event and the arrow head, the completion
point. Two arrows can be interconnected in a network diagram.
The use of an arrow is shown in Figure 9.1:
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Figure 9.1: Arrows in a Network Diagram

Usage of Nodes ( ): Indicates the start or finish of an activity.
Nodes are also called events. Every node is characterised by a
number. Every succeeding event is given a higher number than
the one preceding it. All arrows in a network diagram begin from
a node and finish at another node. There is just one initial and one
terminal node in a network.
The use of nodes is shown in Figure 9.2:
Figure 9.2: Nodes in a Project Network

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Merge Event: Refers to the node showing the completion of more

than one activity. A merge event is shown in Figure 9.3:
Figure 9.3: Completion of Activities in a Merge Event

Burst Event: Signifies the node that shows the starting point of
more than one activity. A burst event is shown in Figure 9.4:
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Figure 9.4: Initiation of Activities Represented by a Burst Event
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Dummy Activity: Denotes an imaginary activity that consumes
no time or resources. It is used in the network diagram to show
a dependency relationship or connectivity between two or more
activities. A dummy activity is shown by a dotted arrow. Figure 9.5
shows a dummy activity:
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Figure 9.5: Network Diagram with a Dummy Activity
The project network of XYZ Construction is shown in the Figure 9.6:
Figure 9.6: Network of a Construction Project
In a project network environment, many network diagrams may show

activities and their relationship with each other by using a method
called Activity-On-Node (AON) or the Precedence Diagramming
Method (PDM). Alternatively, in older project network diagrams,
project activities and their inter-relationships were shown using the

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Activity-On-Arrows (AOA) method, also called Arrow Diagramming

Method (ADM). We discuss PDM and ADM network diagrams in the
following sections.
Precedence Diagramming Method (PDM)
Precedence Diagramming Method (PDM) is one of the most popular

and frequently used approaches for scheduling activities of a project
visually. In PDM, many project activities are positioned within boxes,
termed as nodes. The boxes are linked by arrows. In PDM, the re-
lationships and interdependencies of work packages are shown with
the help of arrows. A simple network diagram using PDM is shown in
Figure 9.7:
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Figure 9.7: Network Diagram Using PDM

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Note that the relationships shown by the activities in a PDM can be of

four types, as shown in Figure 9.8:
Figure 9.8: Relationships between Activities in a PDM
The different types of activities shown in Figure 9.8 can be explained

as follows:

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Finish-to-Start: This is one of the most common relationships of

PDM. Here, task A is required to be finished before the beginning
of task B. For instance, while constructing a shed, the foundation
must be constructed before starting the framing.
Start-to-Start: In this type of relationship, task A must be started
prior to task B. In such a relationship, both the activities can
happen simultaneously. For instance, you may regard a scenario
wherein a group of painters are painting a house. In this task, task
A could be to scrape the house, while task B could be to prime the
house. In this situation, it is crucial for the workers to commence
scrapping the house before beginning the priming. However, it is
not necessary to finish the scrapping of the complete house before
beginning the priming process.
Finish-to-Finish: In this relationship, task A is finished before
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the completion of task B. Preferably, though not necessarily, both
task A and task B should be finished simultaneously. For instance,
suppose two people and are working together to set up fresh tele-
phone cables in a building by the end of Thursday. Task A is to pull
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the cable to each office while task B is to link those cables to wall
jacks, and to link the telephones. So, in order to finish activity B,
it is crucial to finish task A finished. Furthermore, both activities
must be finished almost at the same time, that is, by Thursday, so
as to make the phones of the building functional.
Start-to-Finish: This relationship is rare and infrequent in PDM.
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These relationships can be commonly seen in construction and

manufacturing processes. It is also called Just-In-Time (JIT) sched-
uling. In this type of relationships, it may require task A to be com-
pleted for initiating task B. For instance, let’s take the construction
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of a stationary store. Irrespective of the status of the construction

process, it is difficult for the store owner to give an accurate date
for the completion of the construction process. Until and unless
the construction of the stationary store is finished, the store owner
is unlikely to obtain goods for his/her store. In this condition, the
procurement of goods by the store owner depends on the comple-
tion of the construction process.
Arrow Diagramming Method (ADM)
Arrow Diagramming Method (ADM) is another method that is used to

sequence many activities linked with a project. In this method, the ac-
tivities of a project are shown with the help of arrows, and are linked
to nodes. Note that only finish-to-start relationships are used in this
kind of method. In a few cases, the relationship between two activities
is shown with the help of dummy activities. As explained earlier, a
dummy activity is an activity that is shown with dashed arrows be-
tween two nodes. An ADM network diagram is shown in Figure 9.9:

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Figure 9.9: Network Diagram Using ADM
9.2.2 Project Time Management
A project is generally undertaken by an organisation to obtain certain

aims and objectives. Conversely, a project will not fetch the desired
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outcome till all the project activities are finished within the given time
frame. Therefore, to ensure that all the activities linked with a project
are finished on time, it is relevant that the concerned organisation
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gives ample thought on how it intends to the manage time of different
project activities. Project time management considers the processes
that ensure the timely completion of a project. It is important to break
up the various steps involved in project management, as shown in
Figure 9.10:
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Figure 9.10: Steps of Project Time Management

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These steps can be explained as follows:

Activity Definition: Refers to the act of understanding and ex-
plaining the project activities necessary to be implemented to ob-
tain the desired results. In this phase, every requirement is bro-
ken down into high-level tasks, which are then broken down into
activities and put in the Work Breakdown Structure (WBS) form.
Activity definition concentrates on recognising and documenting
the planned work by decomposing the WBS into a number of com-
ponents, referred to as planned activities. The general practice
is to describe these activities to a point no smaller than one full
working day, i.e., eight working hours, and no longer than 10 full
working days or two weeks. This enables enhanced administration
of the activities. Conflict(s) among activities should be determined
as soon as possible.
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Activity Sequencing: This includes creating a series in which the
activities will be performed, keeping in mind the interdependen-
cies of the activities. Activity sequencing concentrates on iden-
tifying relationships, which may consist of interdependencies in
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terms of time or resource, among the scheduled activities.
Resource Estimation: Implies estimating the time period nec-
essary to execute individual activities or tasks. In this phase, the
resources and time to be allocated to each activity are calculated
after considering the complexity of the activities. Resource esti-
mating concentrates on finding the necessary resources, their
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quantities, and the duration for which they will be required. Re-
sources comprise people, equipment, material, etc. The person
who has in-depth knowledge of the project work generally pro-
vides the estimates.
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Estimation of Effort and Duration: Duration is the total number

of work periods necessary to finish a scheduled activity. This is
articulated in terms of work days or work weeks. The time essen-
tial for finishing every activity is deliberated upon. The estimates
require being as exact as possible. Typically, the WBS is used for
analysing the time duration. In this step, the critical path of the
project must also be identified.
Schedule Development: Refers to the framing of the schedule for
the project based on the duration and series of an activity. Sched-
ule development focuses on finding the scheduled activity’s start
and finish dates. The series of tasks, their duration, resource re-
quirements, etc., are relevant aspects in developing the project
schedule. Software like Microsoft Project is used in developing a
dependable and accurate project schedule. In this step, a Gantt
chart is prepared to track activities and milestones visually.
Schedule Control: Refers to controlling of the amendments made
in the project schedule. This entails updating the project schedule

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frequently to integrate changes in the schedule. To facilitate en-

hanced control, the project schedule should describe the following:
A direct relationship with the WBS
Main events and dates
Series of work
Interrelationship between tasks
Task constraints
Resources necessary to finish each schedule activity
Project time management requires keeping track of the time spent by

those involved in a project. This process involves recording the time
depleted on tasks by using timesheets. The project time management
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process enables the manager to understand the type of tasks being
performed, when they are to be performed and the time required for
their completion. The tracker records the actual time v/s the planned
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time. Project time management depends on the different inputs that
contribute to the project schedule. These inputs are:
Historical information
Restrictions or constraints on the project, such as deadlines and
quality parameters
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Assumptions related to resource availability, weather, etc.

Decision-making capability, which manipulates project decisions

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1. In a project network environment, many network diagrams

may show activities and their relationship with each other
by using a method called Activity-On-Node (AON) or the
Precedence Diagramming Method (PDM) (True/False).
2. What is Precedence Diagramming Method (PDM) used for?
Activity
Visit the project manager of a service-based organisation and ask

him to share one of his project schedules. Study the schedule and
prepare a similar one by providing details of a fictitious project.
9.3 Estimating Time

Exact estimation of time is an important skill in project management
and plays a vital role in the completion of the project. Estimation of
time permits an organisation to find the duration of the project, which

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in turn, assists in the preparation of an effective project schedule by

an organisation. For time estimation to be accurate and reliable, it
should involve the following steps:
Understanding the Requirement: In this first step of time estima-
tion, an organisation should try to recognise the work to be per-
formed in the project. This can be done with the help of work break-
down structures, gap analysis and business requirement analysis.
Sequencing: Here, an organisation should make a sequence of all
the activities that are required to be executed in the project.
Decide Participants: In this step, an organisation decides the req-
uisite participants in the project.
Estimate: This is the concluding step of time estimation where,
rather than estimating the time for the full project, the organisa-
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tion must concentrate on estimating the time necessary to finish
each of the project activities. Furthermore, the organisation must
make sure that it takes all the necessary assumptions, information
sources and constraints into consideration while framing the time
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for the project.
Throughout time estimation, the organisation should assign an esti-

mated time for each activity of the project. In a project, time is esti-
mated on the basis of the normal working approach of the organisa-
tion. There are a various approaches for estimating time. Some of the
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main ones are shown in Figure 9.11:

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Figure 9.11: Methods of Time Estimation
These approaches can be explained as follows:

Experience from Previous Projects: Refers to an approach where
the time taken in past projects is considered for estimating the
time for the current project. In case an organisation undertakes a
project that is similar to a past project, it expects the activities to
take almost the equal amount of time to finish as the past project.
However, the approach is not very dependable as the duration of
past projects is not comparable to the current project given the
ever-changing business environment.
Expert Opinion: Involves taking the time estimation as suggested
by experts for the conclusion of a specific activity or the entire

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project. Time estimation using expert opinion is considered to be

very important and is taken seriously by an organisation.
Use of Mathematical Derivation: Refers to one of the most objec-
tive approaches of estimating time. In this approach, probability
distribution is used to estimate three different values of time:
Optimistic Time (t0): Refers to the minimum time in which
an activity can be finished under the most favourable circum-
stances
Most Likely Time (tm): Refers to the time period in which an
activity has most chances of completing
Pessimistic Time (tp): Refers to the time in which an activity is
likely to finish under the most adverse conditions
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After determining the three estimates of time, the expected time of com-
pletion of each activity is determined by using the following formula:
Te = (t0 + 4tm +tp)/6

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Where,
te = Expected Time
t0 = Optimistic Time
tm = Most Likely Time
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tp = Pessimistic Time
Let us consider the example of a construction project. The estimated

optimistic, most likely, and the pessimistic time durations of the activ-
ities of the project are displayed in Table 9.2:
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Table 9.2: Estimated Time of Activities in a Con-

struction Project
Activities Codes Optim- Most Pessim-
istic (t0) Likely (tm) istic (tp)
Constructing the base of A 3 5 5
the building
Constructing the frame- B 12 14 15
work
Plastering the walls C 4 5 6
Installing electrical wiring D 1 1.5 2
Installing plumbing E 1 1.5 3
Decorating the interior F 2 3 4
Completing the exterior G 3 5 8

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One can compute the expected time (te) of every activity by using the
formula given above.
The computation of expected time (te) is shown in Table 9.3:
Table 9.3: Expected Time of Project Activities

Most Likely (tm)
(te)) =(t0 +4tm +

Pessimistic (tp)
Expected time
Optimistic (t0)
Codes
tp)/6
Activities
Construct- A 3 5 7 5
ing the
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base of the
building
Construct- B 12 15 18 15
ing the
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framework
Plastering C 4 5.5 10 6
the walls
Installing D .5 2 3.5 2
electrical
wiring
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Installing E 1 1.5 5 2
plumbing
Decorating F 2 3 4 3
the interior
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Completing G 2 5 8 5
the exterior
The expected activity time of every activity is written along the arrow
representing the activity in a network diagram. The expected time of
the activities is shown in the form of a network diagram in Figure 9.12:
Figure 9.12: Expression of Time in a Network Diagram

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3. Which of the following is the first step in estimating the time

of a project?
a. Sequencing
b. Estimate
c. Decide participants
d. Understanding the requirement
4. ________ refers to the minimum time in which an activity can
be finished under the most favourable circumstances.
5. What is pessimistic time?
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Activity
Visit a nearby construction company and meet the project manager

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responsible for civil works. Prepare a template based on the table
mentioned in this section and fill it in consultation with the manag-
er. Then calculate the expected time accordingly and get it verified
by him.
9.4 Project Network Analysis

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As explained in the preceding unit, the different individual activities

of a project or their terminal elements are shown in a logical sequence
in a project network or network diagram. A project network is shown
in Figure 9.13:
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Figure 9.13: A Project Network
You are by now aware that network analysis is the study of the nature
and structure of relationships within a network. Moreover, networks
consist of activities represented with the help of nodes and arrows.

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There are three methods of developing network diagrams. They are:

Top Down: Starting with wide categories, you work your way
down, breaking up the activities into their basic elements and
mapping every element’s relationship with other elements.
Over Time: Here, you map the relationships as they expand, over
a period of time.
Opportunistically: In this method, you document the present re-
lationships.
In a project network, the key tasks are set as per their relationships
with other tasks or activities. A network diagram helps the project
team and stakeholders to understand relationships between dif-
ferent activities. A network diagram also helps in administering a
project by:
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Providing an obvious prioritisation of tasks
Allowing you to know when to start some activities before the
completion of other existing activities that currently going on,
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thereby speeding up the schedule.
Offering a central point for a discussion on the various activi-
ties of the project
Offering a comprehensible perceptive to all team members and
stakeholders on what requires to be done, when, and why
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Facilitatingthe project manager to calculate start and end

dates, apportioning resources and personnel, and analysing
scheduling choices
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There are several ways to generate a graphical representation of a

project network diagram. For example, a project network diagram
can be created by using the left-to-right progression of activities. In
this type of a diagram, the initial point is displayed on the left side,
while the ending point is depicted on the right side. In addition to
the use of the left-to-right progression, you can also organise a proj-
ect network diagram by formulating a chart of activities, roughly in
sequential order, with verbal notes about the dependencies.
A project network diagram is frequently used by project managers
to compute the ES (Early Start), EF (Early Finish), LS (Late Start),
and LF (Late Finish) dates as well as the critical path, of a project.
The ES is the initial time for a project while the EF is the earliest
date at which a project can finish.
The LS is the later date at which a project or project step can start
without causing a delay, while the LF is the latest date at which a
project or project step can finish without causing a delay.
As discussed previously, a project network diagram represents
project activities and their relationships in a logical sequence.

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The conclusion of tasks in a certain progression is termed as de-

pendency. Dependencies are the outcomes of constraints present
within the tasks. According to Wysocki, inter-task constraints can
be categorised into four groups or types:
Technical Constraints: Such constraints show the basic rela-
tionship that exists between the tasks of a project. In this type of
constraint, a task cannot be started until another task is finished.
Technical constraints demand that the tasks be completed in a
particular sequence. The tasks connected by a technical constraint
generally create a critical path of the project.
Management Constraints: In this type of constraint, management
anticipates some amendments or decisions, thus holding off a pro-
cess. Management constraints are reversible in nature and can be
amended by the management.
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Inter-Project Constraints: These constraints are more or less
identical to technical constraints. These constraints allow the
tasks of one project to be finished only if the outcome of the second
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project is accessible.
Date Constraints: There are three types of date constraints:
The first type of constraint does not allow a task to end before
a particular date.
The second type of constraint does not allow a task to end be-
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fore later that a particular date.

In the third type of constraint, a task must end on the particu-
lar date.
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Date constraints limit the elasticity of a project schedule. All these

constraints have a major effect on the progress of a project. Tech-
nical and inter-project constraints impact the sequence of tasks,
whereas date constraints are used to set the timeline of the tasks.
Management constraints require careful planning from the proj-
ect manager. The project manager should have a contingency plan
in place in case the management decides to keep a certain process
on hold or reschedule it.
During the designing of a project network, the designers invari-
ably commit mistakes.
Some common mistakes can be explained as follows:
Looping: Also called a looping error, looping refers to an error in
which the designer creates continuous iterations of steps in a net-
work diagram. A loop can be formed in a network diagram in case
an activity is being represented as going back in line. Figure 9.14
shows a network diagram containing a looping error:

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Figure 9.14: Network Diagram with a Looping Error

Dangling: It is a type of error in which an activity is disconnected
from the project network before the completion of all the activities
in the network diagram. Figure 9.15 displays a project network di-
agram with dangling error:
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Figure 9.15: Network Diagram with a Dangling Error

Redundancy: It is a type of error in which the network designer
needlessly inserts a dummy activity in the network diagram. Fig-
ure 9.16 shows a project network diagram having the error of re-
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dundancy:
Figure 9.16: Network Diagram with a Redundancy Error
To avoid these errors, the person creating the network diagram should
follow certain rules. These rules can be listed as follows:

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Arrows that cross each other should be ignored.

Straight arrows should be used.
Unless and until all the previous activities are finished, no event
should take place.
No event can occur more than one time
An activity that succeeds an event can be initiated only after that
event ends.
Arrows should be used from left to right. However, vertical and
standing arrows should also be used if necessary.
Dummies should be used only in case they are absolutely necessary.
A network diagram should consist of one entry point and one ter-
minal point.
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Exhibit
Difference between AON and AOA Networks

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The major differences between AON and AOA networks are listed
in the following table:
AON Network AOA Network

Does not require dummy activities Uses dummy activities
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Is simple to draw and comprehend Is more difficult to comprehend

than the AON network
Exhibits four kinds of relation- Exhibits only one kind of relation-
ships—finish-to-start, start-to- ship, that is, the finish-to-start
start, finish-to-finish, and start-to- relationship
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finish
Allows overlap representation Generally does not allow overlap
representation
An activity can start even if its An activity can start only after the
predecessors have not finished completion of all its predecessors
9.4.1 CPM Model
Critical Path Method (CPM) is one of the most widely used models of
project scheduling. This model was developed by Morgan R. Walker of
Du-Pont in 1957 to solve maintenance problems in chemical factories.
The model was also used in the Manhattan project. Nowadays, CPM is
used in all types of projects, including construction, software develop-
ment, research, product development, engineering, plant operation,
and maintenance.

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The CPM model or technique schedules a project by:

Identifying the activities in the project
Determining the dependency and sequence of the activities
Developing the network diagram
Estimating the duration of an activity
Computing the earliest and latest start times of the activities
Computing the earliest and latest finish times of the activities
Determining the float of the activities
Identifying the critical path
The most vital feature of the CPM model is that it helps in prioritising
project activities by sorting out the critical activities from non-critical
ones. Critical path analysis helps a project in the following areas:
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Estimating the complete duration of the project
Establishing a logical sequence of the project activities
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Keeping track of the progress of the project
Identifying potential delays
Recognising the probability of fast-tracking the project
Preparing contingency plans
Undertaking cost benefit analysis
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Undertaking risk-reduction measures
The CPM model uses four steps, which are computation of the forward
pass, computation of the backward pass, determination of the critical path,
and computation of floats. Let us understand these steps with the help of
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the example of a project, the details of which are shown in Table 9.4:
Table 9.4: Activities of a Project

Activity Duration Immediate Prede-
cessors
A 4 -
B 9 -
C 10 -
D 5 A
E 8 B
F 12 B
G 6 B
H 8 C
I 4 E, D
J 7 F, H
K 8 I, G

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The project network of the project is shown in Figure 9.17:
Figure 9.17: Project Network
Let us now discuss the steps involved in CPM in detail.
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Forward Pass Calculation
Forward pass calculation includes determining the Earliest Start (ES)

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and Earliest Finish (EF) times of every activity. ES refers the earli-
est time when an activity can be planned while EF refers the earliest
time in which an activity can be finished. The approach is known as
forward pass as the computation is initiated from the first node and
ends at the terminal node of the project network. The first event of the
project is assigned a value of 0 (zero), and each of the activities start-
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ing from the first node is considered to start at time 0. The EF time
of each activity is computed by augmenting the time duration of the
activity to its ES time. Every succeeding activity requires to be initi-
ated as soon as the predecessor activities are completed. Thus, the ES
time of an activity would be similar to the largest value of the EF time
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of the preceding activities. The ES and EF times of any activity are

displayed within brackets on the top of the arrow that represents the
activity. The ES and EF times of the activities of the previous example
are shown in Figure 9.18:
Figure 9.18: Calculation of ES and EF
As displayed in Figure 9.18, the ES time of all the initial activities (A,
B, C) is equal to zero. One can compute the EF time of A, B and C by

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adding the respective duration of the activities to the ES time of the

activities. So, the EF of the activities will be 4, 9, and 10, respectively.
The ES and EF time of the subsequent activities can be computed in
the similar fashion.
Backward Pass Calculation
Backward pass calculation is opposite to the forward pass computa-

tion. This approach is used to determine the Latest Start (LS) and the
Latest Finish (LF) time of an activity. LS refers to the latest time at
which an activity can be initiated. Alternatively, LF refers to the latest
time an activity must complete. In this approach, the terminal or last
event of the network is assigned the latest time and the LS and LF of
each activity of the project is computed by rolling backward. This is
the reason the approach is known as backward pass calculation. The
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terminal event is assigned the largest value of the EF time of the ac-
tivities integration at the terminal event. The LS and LF times of the
activities of the previous example are shown in Figure 9.19:
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Figure 9.19: Calculation of LS and LF
In Figure 9.19, you can see that J and K are the terminal activities of
the project. The EF time of J and K is 28 and 29, respectively. Thus,
we have assigned the value 29 (as it is larger of the two values) to the
terminal event of the project. The LF time of activities J and K is 29.
The LF time of an activity can be computed by subtracting the dura-
tion of the activity from the LS time of the successive activity. The LF
time of an activity is equivalent to the smallest value of the LS of all
its successors.
Determination of the Critical Path
After computing the earliest and latest start and finish times of each
activity in the network, one can compute the least time necessary for
finishing the project. A path in the network implies an ongoing se-
quence of events that starts from the initial node, travels through the
network, and ends at the terminal node. There can be numerous paths

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in a network. The length of a path is the summation of the duration of

all the activities in the path. The longest of all the paths is used to find
out the total duration of the project. This path is known as the critical
path of the project. There may be several critical paths in a network.
Let us reflect on the previous example. The various paths in the net-
work are shown in Table 9.5:
Table 9.5: Determination of the Critical Path

Path Activities in the Path Length
1-3-5-7-8 B, E, I, K 29
1-2-5-7-8 A, D, I, K 21
1-3-6-8 B, F, J 28
1-3-7-8 B, G, K 23
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1-4-6-8 C, H, J 25
In Table 9.5, you can see that the first path (1-3-5-7-8) is the longest
of all the paths. Thus, the first path is the critical path of the project.
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The activities on the critical path of the project are known as critical
activities, as any delay in completion of these activities would impact
the complete project. In this example, B, E, I and K are the critical
activities. All other activities are non-critical. The critical activities are
shown in Figure 9.20:
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Figure 9.20: Critical Path and Critical Activities
Calculation of Floats
Floats refer to the flexibility of scheduling an activity. Alternatively,

we can define a float as the free time at hand for an activity, which can
be used without delaying the project. In backward pass and forward
pass computations, it was observed that a critical activity in the net-
work has the same ES and LS times. The critical activities in a project
network demonstrate no flexibility in scheduling as any delay in the
critical activities would delay the overall project. Yet, the non-critical

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activities in the network may benefit from a certain amount of flexibil-

ity as some of the activities may have diverse ES and LS times. Some
non-critical activities can be delayed without impacting the duration
of the project. So, while controlling the duration of the project, it is im-
portant to know the amount of flexibility that exists in scheduling the
non-critical activities in the network. This flexibility is known as the
float or slack of the activity. There are generally four types of floats.
They are:
Total Float: Implies the time an activity can be delayed without
any impact on the total duration of the project. Total time is the
present free time in the activity. The free time can be utilised be-
fore, during or after the completion of the activity. Total float is
similar to the difference between the amount of time present for
the completion of the activity and the required time for the com-
pletion of the activity. The following formula can be used for com-
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puting the total float of an activity:
Total float of an activity = LF–EF = LS-ES
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The total float of the activity H of the previous example would be
LF-EF = 22-18=4
The total float of all other activities in the network can be com-
puted in the similar way. The total floats of all the critical activities
are zero as the LF and EF of a critical activity are similar. In case
the delay in an activity is less than or equal to the total float of the
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activity, then the total duration of the project has no impact. Thus,
in case the total delay in any activity exceeds the amount of total
float of the activity, the entire project gets delayed.
Interfering Float: Refers to the part of the total float of an activ-
N
ity that leads to the reduction in the total float of the succeeding
activities. The total float of different activities may not be present
independent of one another. So, in case the float time of any activ-
ity in the network is used, it limits the float time of the successors.
For instance, the total float of an activity C is 14-10=4, and the total
float of the succeeding activity H, is 4. Currently, if activity C is de-
layed by two days, it would finish at the end of the 12th day rather
than the 10th day. In such a situation, the total float of H would be
22-20 =2. Thus, the total float of H is reduced by two days. It can
be observed that using the total float of C interferes with the total
float of H. An interfering float is the difference between the LF of
an activity and the ES of the succeeding activity, or zero, which-
ever is larger. Thus, the interfering float of activity C is 14-10 =4.
Free Float: Refers to the part of the total float that can be used
without limiting the total floats of the successors. Free float is the
consumable float of an activity. If the delay of an activity is equal
to or less than its free float, the floats of the succeeding activities
are not affected.

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The free float of an activity can be computed by using the follow-

ing formula:
Free Float = ES of the immediate successor – EF of the activity
The free float of activity G = ES of activity K – EF of activity G =
21-15 =6
Independent Float: Refers to the part of the float time of an ac-
tivity that can be used without impacting the initial and terminal
events of the network. Independent float is the amount of float
time that can be used when the LF of the preceding activities and
the ES of the succeeding activities are not impacted. Independent
float can be computed by using the following formula:
Independent float = ES of successor-LF of predecessor-Duration
of the activity
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The value of the independent float may be negative. In such a situ-
ation, the value of the independent float is known to be zero. For in-
stance, the independent float of activity H = ES of activity I – LF of
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activity C – Duration of activity H = 21– 14-8 = -1. Thus, the indepen-
dent float of activity H would be known to be zero.
Now, let’s take an example to understand the concept of float better.
Example 1: A project constitutes nine tasks, that is, A, B, C, D, E, F,
G, H and I. The precedence relationships among these tasks are as
follows:
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A < D; A < E; B < F; D < F; C < G; C < H; F < I; G < I

Using the above information, illustrate a network diagram, and find
out the least time necessary to finish the project. The times necessary
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for each task are as follows:
Tasks: A B C D E F G H I
Time: 16 20 16 20 32 34 36 28 18
Also, find out the critical path of the project.

Solution: The project network diagram from the above information is
Figure 9.21: Network Diagram of the Project

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In the network diagram shown in Figure 9.21, we can see that activ-
ities A, B and C have no predecessors. Thus, each of these activities
starts from the initial node. In the same way, activities E, H and I have
no successors; thus, they merge at the project’s end node. To find out
the least completion time of the project, let us suppose that event 1
happens at zero time. Now, the earliest finish time (E) and latest finish
time (L) of each event can be computed as follows:
E1= 0
E2 =E1+t12= 0 + 16 = 16
E3 = E1 + t13 = 0 + 16 = 16
E4 = Max. [0 + 20, 16 + 20] = 36
E5 = Max. [36 + 34, 16 + 36] = 70
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E6 = Max. [16 + 32, 70 + 18, 16 + 28] = 88
In the same way,

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L6=E6= 88
L5 =L6- = 88 - 18 = 70
L4 = L5- = 70 - 34 = 36
L3 = Min. [88 – 28, 70 - 36] = 34
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L2= Min. [88 - 32, 36 - 20] = 16

L1 = Min. [16 – 16, 34 - 16, 36 - 20] = 0
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Now, let us find out the critical path.
The various paths and their durations are shown in Table 9.6:
Table 9.6: Path and Duration of

Project Activities
Path Duration (Days)
1-2-6 48
1-2-4-5-6 88
1-4-5-6 72
1-3-5-6 70
1-3-6 44
After observing table 9.6, we can see that path 1-2-4-5-6 takes the
longest time, that is, 88 days. Thus, the critical path of the project
activities is 1-2-4-5-6, and is displayed by double lines, as shown in
Figure 9.22:

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Figure 9.22: Critical Path of the Project
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Fast Tracking
Fast tracking is a time-saving technique that is used to lessen the du-

ration of a project. The fast-tracking technique focusses on conducting
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various activities concurrently. In this technique, the original sched-
ule is rearranged and rescheduled so that various project activities
can be conducted in parallel.
Fast tracking of a project reduces the number of tasks in a schedule,

which results in reducing the frequency of revisions necessary in a
project. While executing fast-tracking, an organisation should try to
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recognise the longest duration tasks on the critical path. The longer
is the duration of a task, the greater will be the potential for reduction
in the timeline.
Though fast tracking limits the duration of a project, it includes cer-

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tain risks. In a project, fast tracking may have an unfavourable impact

on the timeline, quality and scope of the project. In this scenario, an
organisation will have to consider the following options:
Overrunning of the project time
Compromising on the quality of the project
Changing the scope of the project
A variety of activities run side by side in a fast track project. Conse-

quently, it is comparatively more difficult to manage a fast track proj-
ect when a normal project. Moreover, fast tracking can include risks
that could result in enhanced costs. For instance, suppose you are de-
signing and building a software application. You want to fast track the
activities by starting the preparation of the modules before the design

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is finalised. In case there are amendments to be made in the design

before it is finalised, it may require some rework on the modules that
have already been constructed.
While fast tracking a project, you should ensure that it has gone
through the following stages:
Understanding Needs and Capabilities: In this stage, an organi-
sation tries to understand the reasons for fast tracking the project.
The organisation also considers whether it has the capability or
expertise to manage the project when it is on fast track.
Analysing the Schedule of the Project: At this stage, the current
schedule of the project is evaluated to identify the soft-dependent,
hard-dependent, and simultaneous tasks.
Determining Opportunities for Fast-Tracking the Project: At
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this stage, an organisation requires to cut down the duration of
the tasks by rescheduling them. Here, the organisation should try
to get rid of the dependent tasks in the project by breaking the
soft-dependent tasks into sub-sets.
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Recognising Fast Track Alternatives: After rescheduling the
project, the organisation considers the various options available
to it for fast tracking the project. These options are outsourcing
the project, changing the scope of the project, imparting additional
hours, adding additional resources, etc.
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Making Informed Decisions: In this case, various fast track op-

tions of the previous stage are analysed. During the analysis, an
organisation generally considers issues like anticipated cost and
advantages of the options.
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Consensus: After analysing the fast track options, the organisation

seeks the consent of the concerned stakeholders for making the
final decision.
Tracking the Progress and Problems of the Project: This is the fi-
nal stage of the fast track process. After deciding on the fast track,
the schedule of the project will progress at a faster speed. Thus, in
order to ensure the success of the project, it is important that the
organisation continually monitors the progress of the project.
Crashing
In order to reduce the duration of a project, organisations often allo-

cate additional resources to the project task. This technique of assign-
ing additional resources to reduce the project duration is termed as
crashing. According to BusinessDictionary.com, schedule crashing is

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“Reducing the completion time of a project by sharply increasing man-

power and/or other expenses.”
In schedule crashing, aspects such as number of labourers, hours nec-

essary to finish a task, and calendar time required to accomplish a
task, are linked to each other by a mathematical formula. For example,
in case a person require 5 days to finish a 40-hour task (40 hours/one
person * 8 hours/day=5 days), then, according to schedule crashing,
the same task will be finished in a single day in case it is performed by
8 people (40 hours/5 people*8 hours/day=1day).
Note that though schedule crashing helps in lessening the duration

of the project, it includes certain risks. For instance, factors like de-
pendency of project tasks, increased costs, and safety risks may make
schedule crashing impractical. In order to find out the viability of
crashing, a project manager should focus on the following factors:
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Position of the Task: The project manager should find out whether
the task is in the critical path or not. If it is, it will impact the dura-
tion and delivery of the project, and vice versa.
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Duration of the Task: The duration of the tasks also plays a vital
role in the success of schedule crashing. Crashing is more likely to
be effective in long tasks. In short tasks that do not replicate in the
project, crashing will not have any significant impact.
Availability of Appropriate Resources: In order to ensure success
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in crashing, the project manager should have the appropriate re-

sources available for the project.
Completion Stage: The timing of executing crashing plays a vital
role in the success or failure of the crashing process. Frequently,
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people resort to crashing when the project is near its completion

stage, and when it is apparent that the project will not meet its
desired objectives. However, a project manager should preferably
execute crashing when the project is less than half-finished.
In case the project manager thinks that crashing the project schedule
is not the best solution for the project, he/she may consider the follow-
ing:
Increasing the Working Hours: The project manager may ask the
team members to put in extra hours for a short duration.
Increasing Efficiency: Introducing new timesaving tools may in-
crease the productivity of the team 10% to 50%.
Accepting the Schedule: In some cases, the result of a delayed de-
livery may be more satisfactory than crashing the schedule.

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Exhibit
Time-Cost Trade-Offs in Crashing
As discussed earlier, crashing is a technique for shortening the

schedule of a project by deploying additional resources such as uti-
lising overtime, hiring additional temporary resources, using spe-
cial equipment and machinery, etc. the time-cost trade-off in crash-
ing specially focuses on finding out the extent to which each project
activity should be crashed so that the anticipated project duration
gets curtailed to the desired value.
The data required to determine the portion that should be crashed

from each activity is provided in the time-cost graph of the activity.
A typical time-cost graph is displayed in the following figure:
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In the figure, you will notice that there are two key points, that is,
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Crash and Normal. The normal point indicates the cost and time
incurred by an activity when it is being conducted under normal
conditions. Alternatively, the crash point refers to the cost and time
consumed by the activity when it is fully crashed.
In most applications, when an activity crashes partially, it is as-

sumed that the combination of cost and time of that activity will lie
on the line segment between the normal point and crash point. For
instance, in case an activity crashes at the half portion, the cost and
time combination of the activity will be in the middle of the normal
and crash points. In the outcome of this simplified approximation,
the data necessary to estimate time and cost of an activity gets re-
duced to only two conditions, that is, normal point and crash point.

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Exhibit
Difference between Fast Tracking and Crashing

Fast Tracking: Fast tracking is a technique that tries to reduce
the duration of a project schedule by conducting various activ-
ities simultaneously. Fast tracking has minimal impact on the
cost of the project. Thus, because the activities that were orig-
inally scheduled to be performed in a sequence are now per-
formed in parallel, fast tracking increases the risks linked with
the project.
Crashing: Crashing refers to a technique that tries to reduce
project duration by employing additional resources in the criti-
cal path of the project. Crashing focuses on studying the trade-
offs between the cost and the schedule of the project.
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Monte Carlo Analysis
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The Monte Carlo analysis is a problem-solving technique that is used
to represent the probability of a certain result by running a number of
trial runs (called simulations) and using random variables. This tech-
nique was introduced by John von Neumann, Stanislaw Ulam, and
Nicholas Metropolis while they were working on the atomic bomb in
the 1940s. These scientists named this technique after the city in Mo-
naco, which is famous for its casinos and games of chance.
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The Monte Carlo analysis is very important in the area of project

management as it is used to estimate the total cost and schedule of
a project. Furthermore, this kind of study helps a project manager in
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recognising many uncertainties and confusions linked to the project

schedule.
Let us try to understand the Monte Carlo analysis with the help of an
example. Suppose a project manager wants to estimate the duration
of a project in three scenarios, that is, the most likely scenario, the best
case scenario, and the worst case scenario. For each of these three
estimates, the project manager provides a probability of occurrence.
The project includes the following three tasks:
First task: There is 70% probability that the first task will be fin-
ished in three days. Additionally, there is 20% probability that the
task will be completed in four days. Again, the probability of fin-
ishing the task in two days is 10%.
Second task: There is 20% probability that the task will be fin-
ished within five days. Also, the probability of finishing the task in
six or eight days is 60% and 20%, respectively.
Third task: There is 15% probability that the third and the final
task will be finished in five days. The probability of finishing the
task in four or three days is 80% and 50%, respectively.

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The project manager uses the Monte Carlo analysis to perform a se-
quence of simulations on the probabilities of the project. This kind of
simulation is performed many times (perhaps 1000 times or more), and
for each simulation, an end date is recorded by the project manager.
After the completion of the Monte Carlo analysis, the project manager
is left with a number of project completion dates. These completion
dates represent a probability curve that helps the manager to find the
expected completion date and the probability of attaining them. For
example, the project manager can obtain a date that he has 90% prob-
ability of attaining at a specific date.
In the above example, there were just three tasks. On the other hand,
in real life, such a project may consist of a large number of tasks. The
Monte Carlo analysis helps a project manager to study the costs these
tasks.
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The following are some probability distributions or curves that are
frequently used in the Monte Carlo analysis:
The Normal or Bell Curve: In this type of probability curve, the
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values that show in the middle of the curve have the highest prob-
ability of occurrence. Such curves are very useful for indicating
inflation rates and energy prices.
The Lognormal Curve: In this type of curve, the values are skewed.
This type of probability distribution is generally used in the real
estate industry or the oil industry.
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The Uniform Curve: In this type of curve, all the cases appearing
in the curve have similar chances of occurring. This kind of prob-
ability distribution is commonly used to determine manufacturing
costs and future sales revenues of a fresh product.
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The Triangular Curve: In this type of curve, the minimum, max-

imum, or most likely values are entered by the project manager.
This kind of curve is triangular in shape, and shows value of the
most likely alternative. This kind of curve is generally used to
demonstrate the level of inventory.
The steps involved in the Monte Carlo simulation are as follows:

1. Recognising the activities having uncertain duration and finding
a range of values for the duration of each activity
2. Choosing the probability distribution for each activity or group
of activities
3. Computing the mean and standard of the activities, if necessary
4. Entering the network relationships between activities
5. Initiating computer simulation
6. Finding the duration of each activity in the schedule, irrespective
of its location on the critical path

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7. Computing the critical path, project duration, and other schedule

data
8. Repeating the above process until a certain level of exactness or
certain predefined number of cycles is reached
9. Generating the output reports
Now that we have understood the steps, let us explain the application
of the Monte Carlo technique in different areas:
Physical Science: Refers to an area in which the Monte Carlo anal-
ysis has proved to be very efficient. The Monte Carlo analysis is
used in computational physics, physical chemistry, and molecular
modelling. Apart from this, it is even used for designing detectors
and analysing their behaviour.
Finance: Refers to another field where the Monte Carlo analysis
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has been widely used for evaluating investments in projects and
studying financial derivatives. In these scenarios, stochastic or
probabilistic simulation models are used.
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Telecommunications: Refers to a field where the Monte Carlo
analysis is used to set up an effective wireless network and assess
the performance of the network. In case the desired performance
is not achieved, the network design is moved through the optimi-
sation process.
Games: The Monte Carlo analysis is used for creating games that
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use artificial intelligence. The analysis is not considered to be ef-

fective for creating other types of games as it is tactically weak.
The benefits of the Monte Carlo analysis are as follows:

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Probabilistic results: The outcomes display what can occur, along

with the possibility of each result.
Graphical results: Various results and their chances of occurrence
can be depicted by graphs, which facilitate simple communication
to the stakeholders.
Sensitivity analysis: It is simple to view which inputs have the
biggest effect on the bottom-line.
Scenario analysis: It is possible to view which combination of val-
ues of various inputs have what impact in various scenarios.
Correlation of input: It is possible to model interdependent rela-
tionships between input variables.
9.4.2 PERT Model
Project Evaluation and Review Technique (PERT) is a model for

scheduling and studying various activities involved in a project. PERT
was developed in 1957 by the US Navy for planning and scheduling
the Polaris Nuclear Submarine project. It is used in projects where

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the time for finishing the project is given priority over the cost of the
project. Also, the drawbacks of the CPM model are addressed by the
PERT model. CPM model uses a single time estimate for each individ-
ual activity in the network. A single time estimate is computed from
three initial time estimates (optimistic, most likely and pessimistic) of
each activity. Thus, CPM does not answer the variability in project du-
ration due to alteration in the duration of any activity. The variability
of the project duration is addressed by the PERT model.
In the PERT model, variance or standard deviation is used for mea-

suring variability of the project duration. The average squared differ-
ence of a set of numbers from their arithmetic average is called the
variance of a set of numbers. For instance, let’s consider a set of num-
bers 1, 2, and 3. The arithmetic average of the numbers is (1+2+3)/3
= 2. The differences of the numbers from their arithmetic average are
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-1, 0, and 1, respectively. Thus, the variance of the numbers would be
√ (1+0+1)/3 = √ (2/3). The following steps are followed for computing
the standard deviation of the duration of the critical path in a network:
Computing
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the standard deviation of the duration of each critical
activity
Computing the standard deviation of the total duration of the crit-
ical path
The following formula is used in computing the standard deviation of

each activity:
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σ = (tp – t0 )/6
Where, σ = Standard Deviation
tp= Pessimistic Time
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Variance is computed by squaring the standard deviation. The proba-

bility distribution of various critical activities is considered to be inde-
pendent. Thus, the sum of the variance of the critical activities would
be the variance of the duration of the critical path. If the critical activ-
ities of a project are 1,2,…..k, then,
Te= te1 + te2 + te3 +……+te4
Where, Te = Expected project duration

tek= Expected duration of the critical activity k
And, VT or s2T = s21+ s22+ s23+ ..........+ s2k
Where, VT = Variance in the project length

s2k= Variance in the critical activity k
The Central Limit Theorem, a fundamental theorem in statistics,

states that the summation of various independent variables tends to

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be normally distributed. So, it can be assumed that the critical path

duration (sum total of all critical activity durations) tends to be nor-
mally distributed. The normal distribution curve looks like a bell and
is thus called a bell curve. It is a symmetric curve with a single peak.
A normal distribution curve is shown in Figure 9.23:
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Figure 9.23: A Bell Curve
Table 9.7 shows the probability of values within a certain range in a

normal distribution curve:
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Table 9.7: Probability in Various Ranges

Range Probability
Mean +/- s 0.682
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Mean +/- s 0.954

Mean +/- s 0.998
The formula for computing the probability is as follows:

Z= (D- Te)/VT
Where, Z= The value of standard deviation by which Te exceeds the

specified future date (D).
Let us take an example to understand PERT better.
Example 2: The manager of a manufacturing organisation is planning

to install a new computer system for accounting and inventory con-
trol. One computer company provides the following information about
the installation of the computer system:

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Activity Description of Immediate Time (in days)

Activity Predecessor Most Most Most
Optimistic Likely Pessimistic
A Selection of - 8 12 16
Computer Model
B Designing of A 10 14 30
Input/Output
System
C Designing A 8 16 24
Monitoring
System
D Assembling B 30 40 50
Computer
Hardware
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E Developing Main B 20 36 52
Programs
F Developing C 16 18 32
Routines of
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Input/Output
G Creating E 8 16 24
Database
H System D, F 2 4 6
Installation
I Testing and G, H 12 14 16
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Implementation
On the basis of the given information, answer the following:

a. Find out the critical path by constructing an arrow diagram.
Also, state the expected completion time of the project.
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b. Find out the probability that the project will be finished within
110 days.
Solution: The arrow diagram for the information given in the preced-
ing table is shown in Figure 9.24:
Figure 9.24: Arrow Diagram of the Project

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Now, let us find out the expected times and variances for the project.
Table 9.8 shows the values of expected times and variances:
Table 9.8: Values of Expected Times and Variances

Activity Time (In Days)
a + 4m + b b–a
tei si s2i
6 6
a m b
A 1-2 8 12 16 12 8/6 16/9

B 2-3 10 14 30 16 20/6 100/9
C 2-4 8 16 24 16 16/6 64/9
D 3-6 30 40 50 40 20/6 100/9
E 3-5 20 36 52 36 32/6 256/9
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F 4-6 16 18 32 20 8/6 16/9
G 5-7 8 16 24 16 16/6 64/9
H 6-7 2 4 6 4 4/6 4/9
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I 7-8 12 14 16 14 4/6 4/9
Now, let us find out the duration of various paths of the project, as
follows:
Path Duration (Days)
1-2-3-5-7-8 94
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1-2-3-6-7-8 86
1-2-4-6-7-8 66
We can see that path 1-2-3-5-7-8 consumes the maximum time and is
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thus the critical path of the project. The critical path of the project is
illustrated by double lines, as shown in Figure 9.25:
Figure 9.25: Critical Path of the Project
Thus, the expected length of the project is: 12+16+36+16+14= 94
And the variance of project length is:

16 100 256 64 4 440
Vr= + + + + =
9 9 9 9 9 9

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b. Now, while the duration of the project is distributed normally

with the mean (Te) = 94 days and standard deviation
440
=σ =VT = 6.992 , we can find out the probability of
9
completing the project in 110 days. The probability of the project
would be equal to the area that lies to the left of X = 110, as
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Figure 9.26: Distribution of Project Duration
110 − 94
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We=
have z = 2.29
6.992
For the normal area table, the area between the mean and z= 2.29
under the normal curve is found to be 0.4890. Therefore, the required
probability = 0.5 + 0.4890 = 0.9890.
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Exhibit
Difference between PERT and CPM
The main differences between PERT and CPM are listed in the fol-
lowing table:
PERT CPM
It is event oriented. It is activity oriented.
It is probabilistic in nature. It is deterministic in nature.
It concentrates exclusively on It involves analysis of time/cost
time variable. trade-offs.
It treats activity as a random It requires a single deterministic
variable. time value for each activity.
It is used in non-repetitive pro- It is used in repetitive projects.
jects.
It can be analysed statistically. It cannot be analysed statistically.

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Beta Distribution Curve
On the basis on the values of the optimistic time, most likely time and
pessimistic time, the expected time or weighted average of an activity
as well as the estimate of the completion time for the entire project
can be calculated. The following equations are used to calculate the
mean (µ) and variance (σ2), respectively, of each activity:
µ = (a + 4m + b)/6
2
b−a
σ2 = 
 6 
For example, assume a task has the following estimated durations:

Optimistic (a) = 10 days
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Most likely (m) = 13 days
Pessimistic (b) = 25 days
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Using the formula given above, the expected time (µ) can be calcu-
lated as follows:
µ = (10 + (4 × 13) + 25)/ 6
µ = 14.5 (rounded up to 15 days)
Figure 9.27 shows the beta distribution curve of the preceding

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example:
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Figure 9.27: Beta Distribution Curve

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6. According to ____________, inter-task constraints can be

categorised into four types.
7. In which of the following types of constraints can the
management anticipate some amendments that may result in
holding off a process?
a. Technical constraints b. Inter-project constraints
c. Date constraints d. Management constraints
8. What is total float?
Activity
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Draw a beta distribution curve for the following values:
Optimistic time (a) = 10 days
Most likely time (m) = 13 days
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Pessimistic time (b) = 25 days
9.5 Gantt Chart

Gantt chart is one of the most extensively used techniques for project
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scheduling. It provides a graphical representation of the duration of all

individual project activities in the form of a bar chart. The Gantt chart
had been initially used as a scheduling tool in shipbuilding projects.
However, over a period of time, it has been increasingly used in many
other projects. In a Gantt chart, the progresses of all the scheduled
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and planned activities of a project are depicted graphically. Note that

various time-related charts like PERT are based on the foundation
prepared by a Gantt chart. Gantt charts can be used as an alternative
to the CPM and PERT methods for scheduling a project. Similar to
CPM and PERT networks, Gantt charts illustrate the logical relation-
ships among the individual activities.
A Gantt chart is an important tool for planning, scheduling, and man-
aging a project. It also helps in monitoring and controlling the prog-
ress of the project at any point of time. The two main uses of a Gantt
chart are as follows:
Scheduling: Entails creating a sequence of the occurrence of the in-
dividual activities in a project. A Gantt chart illustrates the preceding
and succeeding relationships between various individual activities in
a project. It also displays the expected completion time of the project.

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Monitoring: Refers to the task of tracking the progress of a project

at any given point of time. A Gantt chart instantly displayed the
percentage of activities completed in a project and the status of
each activity. It helps in recognising the delays in a project and its
performance as per the scheduled time. In case the project gets de-
layed, the project manager can take the required course of action
to compensate for the delay. Thus, the Gantt chart provides a tool
for monitoring the progress of the project.
Gantt charts are not very useful for large projects. This is because it
provides relatively less information per area of display. The chart may
be useful for smaller projects, but in real life most projects are too
complicated to be presented in a Gantt chart. A basic Gantt chart is
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Figure 9.28: Gantt Chart
A Gantt chart consists of two axes, the vertical axis and the horizontal
axis. The vertical axis represents all the activities in the project, and
the horizontal axis represents the time scale. The time scale is shown
either in absolute time or in relative time, depending on the initial
event of the project. Months and weeks are two most widely used units
of time. In a Gantt chart, the beginning and ending of activities are
shown the rows of bars. If the bars overlap one other, it means that
multiple activities are being performed in parallel with one another, or
an activity has been started before the completion of another activity.
The current point of time can be represented by drawing a vertical
line on the chart. The status of each activity can be indicated by shad-
ing the bars with different colour codes.
Let us take an example to understand the use of the Gantt chart. Table
9.9 shows a Gantt chart depicting information related to the opening
of a small office building:

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Table 9.9: Gantt Chart for the Opening an Office

Building:
Production Feb March April May June July Aug Sep
Activities
Site location
Getting
permit for
building
Hiring con-
tractors
Supervising
construction
Advertising
office building
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Hiring man-
ager for
building
IM
Obtaining
lease
Opening busi-
ness
In the Gantt chart, you can see that many project activities are repre-
M
sented by rectangular boxes. The project manager uses these boxes

to start the schedule of the project. With the finishing of each activity,
the equivalent rectangular box is shaded by the project manager. For
example, in case the lease is not obtained for the project, it would be
N
declared behind schedule. Note that Gantt charts are also used to de-
pict dependent and independent activities. For instance, in Table 9.9,
the activity of hiring contractors is a dependent activity as it is based
on securing the permit for the building. Alternatively, obtaining the
lease even before the completion of the building can be regarded as an
instance of an independent activity.
9. What are the two main uses of the Gantt chart?

10. Gantt charts are not very useful for large projects. (True/False)
Activity
Visit a construction company and meet the project manager respon-

sible for the construction of residential spaces. Take a Gantt chart
from him or prepare a new one based on the information provided
by him in order to construct a new residential building.

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9.6 Concept of Resource Scheduling

A resource is any entity that contributes towards the execution of proj-
ect activities. Resources can be of two kinds, storable and non-stor-
able. Storable resources like raw materials are available for future
use whereas non-storable resources, like time, are not obtainable for
future use even if it has not been fully utilised earlier. Non-storable
resources have a major impact on the duration of the project. For in-
stance, a raw material that is not used in a project can be reused in the
future. However, idle time can never be recovered. Resource schedul-
ing is all about recognising, quantifying, and allocating resources in
the project activities to optimise the cost and duration of the project.
Manpower, machinery, materials and money are the important re-

sources that a project manager needs to plan and manage on a daily
S
basis. In case there is no restriction on the use of these resources, the
project can be finished on or before time. However, any restraint on
these resources would have an adverse impact on the implementation
of the project. In project management, a constraint is any element,
IM
event or condition that restricts the progress of a project. A good un-
derstanding of the various restraints pertaining to time, resources,
technical issues, etc., often helps the project manager in evaluating
and finding a reasonable timeframe for the project activities. This in
turn facilitates the preparation of an efficient schedule.
M
Resources required to complete a project are mostly restricted and

entail certain cost. The costs for providing unlimited resources to a
project would be too high to make the project viable. An organisa-
tion can complete an activity by assigning additional resources. How-
ever, if the activity is to be performed only for a limited period, the
N
organisation may decide to bear a higher direct cost for the activity.
For instance, suppose a specific activity takes 15 days to complete in
case it is performed by three employees. The organisation can finish
the activity in nine days by employing five people. The additional re-
source lessens the required time for the activity, but increase in the
human resource is an augment in the direct cost. Note that a shorter
duration of the activity results in higher costs and a longer duration
of the activity results in lower costs for the project. This shortening of
project duration by deploying additional resources is called crashing
of a project. We have already discussed the concept of crashing earlier
in this chapter.
A necessary factor of resource scheduling is understanding the nature

of the job and the size of the work team necessary to finish the job. In
a multi-project environment, resources may be required to work on
various projects concurrently. However, while finding the resources
needed for a project, one must also consider the use of the same re-
sources for other projects.

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A resource schedule, also known as a shared resource schedule, is a

timetable of events and resources. The following are some advantages
of resource scheduling:
Permits enough time for considering choices like cost-time
trade-offs
Provides information to arrange time-phased work budgets
Enables visibility on the amount of flexibility with respect to the
availability of resources
Plays a vital role in reducing costs, improving safety, and increas-
ing effectiveness in a variety of industries
In resource scheduling, a project manager first requires to recogn-

ise the resources required to finish a project on time. The resources
needed to complete the project should be monitored regularly so that
S
they can be procured easily whenever they are in short supply. The
need for resources is not steady through the life of a project. At times,
the quantity of a resource may exceed its availability, and sometimes
IM
the requirement of resources may fall below their availability. In or-
der to keep a steady supply of resources, a project manager resort to
resource scheduling.

M
11. Shortening of project duration by deploying additional

resources is called________________.
Activity
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Visit the manager of a coffee shop and discuss with him the stor-
able and non-storable resources used to run the shop. Tabulate the
resources in an Excel sheet. Also include the cost incurred in pro-
curing the resources.
9.7 Process of Resource Scheduling

Sufficient resources help in the completion of a project. Thus, a project
manager needs to be careful while scheduling the resources. The proj-
ect scheduling process consists of three stages, as shown in Figure 9.29:
Figure 9.29: Stages of Resource Scheduling

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The stages involved in the resource scheduling process are explained

in detail in the subsequent sections.
9.7.1 Resource Loading
Resource loading, also known as resource aggregation, refers to find-

ing the process of finding the resources required to finish a project.
Resource loading is all about recognising and quantifying the need for
different resources at different points of time in a project. Resource
loading involves the following activities:
Specifying the kind of resources required
Determining the quantity of resources
Aggregating the quantity of resources
S
Note that resource loading is completed at the activity level. The re-
quirement of resources for each activity is identified and aggregated.
The total amount of resources required is presented in the form of a
histogram. There are separate graphs for separate resources. The ag-
IM
gregation can be done on a daily, hourly or weekly basis. Figure 9.30
shows how resources are loaded in a project:
M
N
Figure 9.30: Resource Loading Chart
The upper part of the resource loading chart illustrates the require-
ment of resources in each week of the project. The lower part of the
chart shows a graphical representation of the requirement of re-

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sources in each week. It should be noted that the need of the resources
is not steady across the life of the project.
9.7.2 Resource Levelling
At times, the demand for a specific resource can be more than its
availability. Usually, a project manager requires to maintain a steady
supply of resources. He/she strives to utilise the resources efficiently.
This helps to lessen the idle time. Resource levelling is concerned with
making sure that the demand for resources does not go beyond its
availability. Resource levelling is also known as resource smoothing.
The requirement of resources should be steady, so that the project can
progress effortlessly. Similar to project crashing, resource levelling
also involves reallocation of resources. However, in crashing, the aim
is to lessen the duration of the project, whereas in resource levelling,
S
the goal is to maintain steadiness in the utilisation of the resources.
A resource-levelling graph can be used to compare demand and avail-

ability of resources. The starting time of the activities in a project can
IM
be adjusted to level the requirement of the resources across the life
of a project. Each resource can be utilised on a day-to-day basis. At
times, resources fall short of their demand. In other words, there is a
mismatch between the demand for the resource and its availability, as
M
N
Figure 9.31: Resource Levelling
Let us consider an example to understand the concept of resource

levelling better. A project network of a hypothetical project is shown
in Figure 9.32:

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S
The values inside the brackets illustrate the number of labourers for
a particular project activity. The critical activities are M, Q, and T. All
the project activities require to be shown in a time schedule for the
IM
purpose of resource levelling. Figure 9.33 shows project activities in a
time schedule:
M
N
Figure 9.33: Time Schedule
The time schedule also shows the number of workers needed each
day, throughout the life of the project. It can be observed that there is
a large variation in the need of workers on each day. In Figure 9.34, we
can see that more workers are required in the initial days as compared
to the last few days of the project:

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Figure 9.34: Daily Requirement of Workers
We require rescheduling of project activities to lessen the variation in

the number of workers. The critical activities cannot be rescheduled
S
without impacting the duration of the project. However, the non-crit-
ical activities can be rescheduled by utilising the floats of the activi-
ties. The need for manpower can be reduced in the earlier days and
increased in the latter days by rescheduling the non-critical activities.
IM
The rescheduling of non-critical activities is illustrated in Figure 9.35:
M
N
Figure 9.35: Revised Schedule of Project Activities
The need for manpower is balanced after rescheduling the non-criti-

cal activities. The impact of the rescheduling on the requirements of
workers is shown in Figure 9.36:

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Figure 9.36: Levelling the Requirement of Workers
9.7.3 Resource Allocation
S
Resource allocation entails assigning of the available resources for
various activities of a project. A project cannot be completed if the
resources are insufficient. The allocation of resources starts by explor-
IM
ing whether there are sufficient resources available to finish the proj-
ect on time or not. In case the resources are inadequate, some of the
activities may require to be initiated after their Latest Start (LS) time.
In such cases, if the project activities start after the LS time, the over-
all project would get delayed. Usually, resources are allocated on the
basis of the float time available for the activities. The activity with the
M
least float gets priority over the other activities. If two activities have
the same amount of float, the activity with a lower duration is sched-
uled first. The shorter activity is scheduled first only for shortening
the waiting time of the other activities following that activity.
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One can evaluate the need for resources by analysing the project net-
work and studying the demand for resources. In case all the activi-
ties initiate from their respective ES (Earliest Start) times, resource
overlaps may be observed in various places. If the demand for the re-
sources are in surplus as compared to their supply, then some of the
activities need to be rescheduled. The alternate activity scheduled is
prepared after considering the present slack time of the activities. For
instance, consider the network shown in Figure 9.37:

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In Figure 9.37, let us suppose that the activities H, I and J need the
use of the same machine. The machine cannot be employed in all the
activities at the same time. Therefore, project manager requires to de-
termine which activity should be undertaken first to lessen the project
duration. In the Figure 9.37, you can see that J can be done only when
I and H are finished. Yet, I can be executed before or after H, as I and
H do not have any logical relationship. Therefore, it requires to be
decided which one of the two activities (I or H) should be performed
first. Both activities have the same ES times. However, the scheduling
of project activities depends on the float of the activities. Activity I has
a float of one day, whereas activity H does not have any float. However,
activity I should be performed after activity H. Activity H uses the ma-
chine for three days. But activity I can start only after 10 days, and as
a result, activity J would also start on the 13th day. The whole project
would get delayed by two days.
S
From the example, we can conclude that the duration of a project
based on the number of machines available. The project could have
been finished on time in case there had been two machines. In the
IM
same way, if the various activities of a project need a specific kind of
labour, then project duration would be based on the number of avail-
able workers.
We should keep in mind that the schedule of a project should be based

on its start date. In case the real start date of a project deviates from
the planned start date, all ensuing project scheduling activities like
M
resource loading, resource levelling, and resource allocation will also

have an impact. This will extend the overall schedule of the project. It
should be noted that resource scheduling can be effectively performed
by using a technique called Goldratt’s CCPM, which is explained in
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detail in the subsequent section.
Exhibit
Heuristic Analysis in Resource Scheduling
While resource leveling a project, a project manager can take the

help of various heuristics to prioritise activities and prepare the
schedule for the project resources. The following are some heuris-
tics that should be taken into account by the project manager dur-
ing resource scheduling:
Activities with the Smallest Slack: This simply means that
while allocating resources for project activities, the first choice
is given to activities having the least amount of slack. To under-
stand this, let us consider two activities A and B having a slack
of 4 days and 6 days, respectively. In this case, the project man-
ager should give preference to activity A over activity B while
allocating the resources.

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Activities with the Shortest Duration: This means that activ-

ities having the limited duration should be given preference
during the allocation of resources. For instance, suppose there
are two activities A and B, and the quantity of time required to
complete A is 5 days, and the time required for the completion
of B is 4 days. In such a scenario, the project manager should
schedule B ahead of A during the allocation of resources.
Activities with the Lowest Identification Number: It implies
that activities commencing at an earlier period in WBS should
be given preference during resource scheduling than activities
starting at a later period. For example, if two activities A and B
begin on day 2 and day 6 respectively, then, the project manager
should allocate resources to activity A.
Activities with the Most Successor Tasks: This means that,
S
during resource scheduling, a project manager should also con-
sider the number of successor tasks linked with the project ac-
tivities. While allocating resources, the project manager should
IM
give preference to activities having the highest number of suc-
cessor tasks. For instance, in case two activities A and B have 6
and 8 successor tasks, respectively, the project manager should
assign resources to B first, leaving A to be scheduled with the
remaining resources.
Activities Requiring the Most Resources: It implies that while
M
resource scheduling, the project manager should give prefer-

ence to activities that need the maximum quantity of resources.
For instance, suppose there are two activities, A and B. To com-
plete activity A, 6 people and 3 machines are required, while 3
people and 2 machines are required to finish activity B. In this
N
case, the project manager should give preference to A during

resource scheduling. Activity B should be scheduled only after
the allocation of resources to activity A.
12. Resource _________ refers to the assigning of the available

resources for the various activities of a project.
Activity
Visit a construction site and meet the site manager. Discuss with
him the steps followed by his company in procuring and allocat-
ing resources. Classify the steps into the three stages of the project
scheduling process.

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9.8 Project Progress Report

Once the procurement of resources for a project is made, a manager
is expected to update the client on the progress of the project. This
updating is usually handled by progress reports, which can take any
of the following forms:
Memoranda
Letters
Short reports
Formal reports
Presentations
Most progress reports have the following basic components:
S
Background of the project
Discussion of achievements since the last reporting
IM
Discussion of problems that have arisen
Discussion of work that lies ahead
Assessment of whether the project objectives will be met in the
proposed schedule and budget
M
13. Discuss the significance of a project progress report.

N
Activity
Visit a software company and meet the project manager there. Dis-
cuss with him the status/progress reports that he creates for his
client/team. Go through these reports carefully and insert your
comments in them. Ask the manager the problems he usually faces
while preparing these reports and suggest solutions.
9.9 Summary
Precedence Diagramming Method (PDM) is a popular and fre-
quently used approach for scheduling the activities of a project
visually. In PDM, activities are placed within boxes, called nodes.
Arrow Diagramming Method (ADM) is a method that is used to
sequence the various activities associated with a project. In this
method, the activities are shown by using arrows, which are con-
nected to nodes.

n o t e s
Estimating the exact time of an activity or project is an important

skill in project management. It plays a vital role in the completion
of the project.
The expected time of completion of each activity in a project is
determined by using the following formula:
Te = (t0 + 4tm +tp)/6
Where, te = Expected Time
tm = Most Likely Time
Dangling a type of error in which an activity is disconnected from
the project network before the completion of all the activities in
the project network.
S
Critical Path Method (CPM) is one of the most widely used mod-
els of project scheduling. This model was developed by Morgan R.
Walker of Du-Pont in 1957 to solve maintenance problems in chem-
IM
ical factories. The model was also used in the Manhattan project.
Monte Carlo analysis is a problem-solving technique that is used
to represent the probability of a certain result by running a num-
ber of trial runs (called simulations) and using random variables.
Project Evaluation and Review Technique (PERT) is a model for
scheduling and studying various activities involved in a project.
M
PERT was developed in 1957 by the US Navy for planning and

scheduling the Polaris Nuclear Submarine project. It is used in
projects where the time for finishing the project is given priority
over the cost of the project.
N
Gantt chart is one of the most extensively used techniques for proj-
ect scheduling. It provides a graphical representation of the dura-
tion of all individual project activities in the form of a bar chart.
key words
Estimation: In the context of a project, estimation refers to the

process of calculating the time period necessary to execute indi-
vidual activities or tasks of the project.
Constraints: These refer to the dependencies that have to be
factored in while estimating the completion time of a project.
Floats: These refer to the flexibility one has of scheduling an
activity of a project.
Fast Tracking: This is a time-saving technique used to shorten
the duration of a project
Crashing: This is a technique that is commonly used to shorten
the schedule of a project.

n o t e s

1. Explain the Arrow Diagramming Method (ADM).
2. Explain the methods used in time estimation.
3. Discuss the various methods that are used to develop a network
diagram.
4. Explain the term Critical Path Method (CPM). What is CPM
used for?
5. Discuss the concept of Monte Carlo Analysis.

S
Concept of Project 1. Activity-On-Node (AON)
Scheduling
IM
2. Precedence Diagramming Meth-
od (PDM) is one of the most
frequently used approaches for
scheduling the activities of a
project visually.
M
Estimating Time 3. d. Understanding the require-

ment
4. Optimistic Time (t0)
5. Pessimistic Time (tp) is the time
N
an activity takes to finish in ad-

verse conditions.
Project Network Analysis 6. Wysocki
7. d. Management constraints
8. Total float is the time an activity
can be delayed without causing
any impact on the total duration
of the project.
Gantt Chart 9. Scheduling and monitoring of a
project
10. True
Concept of Resource 11. Crashing of a project
Scheduling
Process of Resource 12. Allocation
Scheduling
Project Progress Report 13. Project progress report helps a
manager to update the client on
the progress of the project.

n o t e s

1. Arrow Diagramming Method (ADM) is a method that is used
to sequence several activities associated with a project. In this
method, the activities of a project are shown with the help of
arrows, which are further linked to nodes. Refer to Section 9.2
Concept of Project Scheduling.
2. The three methods of time estimation are experience from
previous projects; expert opinion; and use of mathematical
derivation. Refer to Section 9.3 Estimating Time.
3. The three methods to develop network diagrams are top down,
over time and opportunistically. Refer to Section 9.4 Project
Network Analysis.
4. Critical Path Method (CPM) is one of the most widely used models
S
in project scheduling. This model was developed by Morgan
R. Walker of Du-Pont in 1957 to solve maintenance problems
in chemical factories. Refer to Section 9.4 Project Network
Analysis.
IM
5. The Monte Carlo analysis is a problem-solving technique used to
represent the probability of a certain result by running a number
of trial runs (called simulations) and using random variables.
Refer to Section 9.4 Project Network Analysis.
M
SUGGESTED READINGS
Heldman, Kim. (2011). PMP project management professional
N
exam study guide (6th ed.). New York: Wiley.

Taylor, C., James (2007). Project scheduling and cost control: Plan-
ning, monitoring and controlling. J. Ross Publishing.
Haugan, Gregory. (2002). Project planning and scheduling: Man-
agement concepts Inc.
E-References
Projectinsight.net.Project Scheduling. http://www.projectinsight.
net/project-management-basics/project-management-schedule
Mindtools.com. Project Schedule Development. http://www.mind-
tools.com/pages/article/newPPM_71.htm
Pmi.org. Seven Tips on How to Build a Solid Schedule. http://www.
pmi.org/passport/mar09/passport_mar09_seven-tips-on-how-to-
build-a-solid-schedule.html
Projecttimes.com. WHAT IS A PROJECT “SCHEDULE”?. http://
www.projecttimes.com/articles/what-is-a-project-schedule.html

Ch
10 a p t e r
COMPUTER APPLICATION IN PROJECT

MANAGEMENT
CONTENTS
S
10.1 Introduction
10.2 Management Information System for Projects
IM
Activity
10.3 Introduction to Project Management Software
10.3.1 Measures to Select Right Project Management Software
10.3.2 Advantages and Disadvantages of Project Management Software
10.3.3 Introduction to Microsoft Project Software
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Activity
10.4 Summary
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APPLICATION OF PROJECT MANAGEMENT

SOFTWARE AT LARSEN TOUBRO
Larsen & Toubro is an Indian multinational conglomerate found-

ed by Danish engineers along with Indian financiers. The compa-
ny has expanded in various areas, such as insurance, railways and
ship building. Consequently, the company has acquired a large
number of IT projects that are under various stages of their life-
cycles. “In large and diversified organisations such as L&T, there
are a number of IT initiatives in progress at any given time.” says
S. Anantha Sayana, Head of Corporate IT, Larsen & Toubro.
Anantha Sayana realised the need for a tool that would provide IT
team clarity, insight, and control across all IT initiatives that are
S
undertaken by the company. In addition, this tool would help IT
project managers in making effective decisions to improve busi-
ness alignment.
IM
After researching, he found that Microsoft Project Portfolio Serv-
er 2007-based Project Portfolio Management system was the one
that can meet the requirements of project managers. For this,
Sayana needed to convince people to feed all the relevant data
into the system. Employees were also trained about benefits of the
system. This greatly helped in convincing people to use systems
effectively. Consequently, people in L&T became more effective
M
at decision-making and use of information system enhanced to

other areas too in the company.
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COMPUTER APPLICATION IN PROJECT MANAGEMENT 273
n o t e s
learning objectives

>> Discuss the role of management information systems in
projects
>> Explain the use of project management software
>> State measures to select the right project management software
>> List advantages and disadvantages of project management
software
10.1 INTRODUCTION
Project Management plays a crucial role in the success of any project.
S
It covers the entire life cycle of the project, which includes initiation,
planning, execution, control and closure of the project. A project man-
agement is considered to be successful if it is competed in time within
the alloted budget without compromising on quality.
IM
During the execution of the project, a number of activities are carried
out, such a planning, organising resources, etc. The project manager
has to keep track of all the processes in order to monitor the project
closely. The main challenge a project manager faces is to effectively
balance the project’s scope, cost, time and resources. For this, he/she
M
needs updated information on various aspects of the project. In the

absence of up-to-date information, the project manager cannot make
informed decisions, leading to wastage of time and resources.
In recent years, technological innovation in project management has

N
significantly changed the entire scenario. Computers, along with the

Internet, have started playing a significant role in various aspects
of project management. Various software tools and products act as
means to foster collaboration among professionals on a project, to
communicate for bids and results and to procure necessary resourc-
es materials goods and services. In addition, they enable the project
manager to create schedules, plan resources, collect and document
actual data and generate project status reports and Management In-
formation Services (MIS). In this chapter, you will study about the use
of computer applications in project management.
MANAGEMENT INFORMATION SYSTEM

10.2
FOR PROJECTS
Without the presence of accurate and relevant information, it would
be difficult to manage a project. To manage the different activities of
the project properly, the team must gather information regarding the
various phases of the project. The process of collecting, processing
and distributing information can be done with the help of a Manage-

n o t e s
ment Information System (MIS). MIS is a computerised system that

enables managers in making rational and effective decisions by pro-
viding complete information as required. In order to manage projects
effectively, organisations use Project Management Information Sys-
tem (PMIS) that enables the documentation and storage of the project
management plan, subsidiary plans and other documents associated
with the project. According to the PMBOK Guide (2000 edition), “a
PMIS consists of tools and techniques used to gather, integrate, and
disseminate the outputs of project management processes. It is used
to support all aspects of the project from initiating through closing
and can include both manual and automated systems”.
PMIS plays an important role in the successful completion of a proj-

ect. The system consists of information needed for initiating, planning,
executing, controlling and closing a project. It also helps in making
S
decisions efficiently at various levels by giving information like the
specific cost, schedule, technical performance, etc.
PMIS helps in accomplishing various activities in a project. Following

IM
are the activities of the project that are performed with the help of
PMIS:
Planning the budget.
Describing the scope of the project.
Developing schedule and network of the project. This includes the
M
critical path analysis and complete task analyses.

Planning cost management.
Planning and scheduling resources.
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PMIS is used to assess the project plan, and to make sure that all the
demands of the project are met. The main features of PMIS are:
Accuracy: PMIS provides fault free information. Wrong informa-
tion can delude the team by which the project can fail.
Precision: Means that the information provided should be ap-
propriate and clear. Too much information can lead to confusion,
while too little can be deceptive and without sense.
Reliability: Means that any information relating to PMIS must be
trustworthy.
Simplicity: Means that the project team should be able to inter-
pret and utilise information without difficulty. This information
is provided through graphics, pictures and illustrations for better
perception. Using numerical system helps in conveying the infor-
mation in a better way.
Even though PMIS augments the effectiveness of project manage-

ment, an organisation can face different problems during the prog-
ress and execution of PMIS. The most familiar problem is shaping

n o t e s
of PMIS. If the process of conveying information to the system and

collecting it is too complicated, it is not easy for the project team to use
the system. This complexity can dissuade users from using the system
which can result in the failure of the project. Also, too much informa-
tion can lead to temporary or permanent problems. Hence, the users
should not crowd the system with unnecessary information.
1. ________________ is a computerised system that enables

managers in making rational and effective decisions by
providing complete information as required.
2. PMIS helps in making decisions efficiently at top level
by providing information like the specific cost, schedule,
S
technical performance, etc. (True/False)
3. Name the feature of PMIS that is related to the clarity of
information.
IM
Activity
Using the Internet, search two organisations that have imple-

mented MIS to manage their projects.
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INTRODUCTION TO PROJECT
10.3
MANAGEMENT SOFTWARE
Project management software is an important instrument through
N
which a project manager is able to manage and complete the project

within the stipulated time and budget, specially the huge and compli-
cated projects.
According to the Project Management Body of Knowledge (PMBOK),

“Project management software is widely used to assist with schedule
development. These products automate the calculation of mathematical
analysis and resource levelling, and thus allow for rapid consideration
of many schedule alternatives. They are also widely used to print or dis-
play the outputs of schedule development.”
The main characteristics of project management software are as follows:

To spot problems early, so that they can be corrected without difficulty
To allow the optimal use the resources to finish the work faster
To modify plans as per changes required
To allow modifications in the role of team members

n o t e s
The project management software has been there in the market for
almost a decade. Initially, there was limited use of the software, but
now, it is used for different programs, like resource allotment, sched-
uling, collaboration, quality control, and cost control. Also, some help
to draw a plan by making use of different methods like Gantt chart,
which represents all the work through graph. Other than this, some
software are used to assess the activities of the project and ascertain
the series of activities for the completion of the project using various
methods like Project Evaluation and Review Technique (PERT) and
Work Breakdown Structure (WBS).
The main goal of project management software is to manage the com-

plications that arise in big projects and to reduce the costs linked to
different activities. It helps the managers to prioritise different activ-
ities and develop rapport with them. It also helps in handling uncer-
S
tainties in calculating the duration of tasks and setting a time limit for
the project.
There are many factors to be considered by a manager while selecting

IM
project management software. The software has its own characteris-
tics. Nevertheless, there is no need to use all the components of the
software. Compatibility is required between the need of the project
and the features of the software. Therefore, before choosing particu-
lar software, the manager needs to have full knowledge regarding the
needs of the project. Following are some of the features which need to
be considered where selecting the software:
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Collaboration: The software should be able to help in collabora-

tion between team members. No stockholder should be barred
from updating or retrieving the documents of the project.
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Scheduling: There should be a scheduling feature in the software.

It should be able to make representation of data easy by using the
Gantt charts. Along with preparation, the software should provide
basic features. If there is any change needed, then the manager
should be able to differentiate between the fresh plans with basic
plan and know the scope and cost differences.
Issue Tracking: Some matters need to be checked regularly during
the span of the project. For instance, the organisation needs to
keep a check on the faults in the software. The software must be
able to detect problems.
Project Portfolio Management: When an organisation is involved
in more than one project, it should be able to measure and mon-
itor the progress of each. When there is more than one project,
the organisation should check the progress of all of them. This is
called project portfolio management. The software should be able
to project portfolio management.

n o t e s
Document Management: Many documents are used in a proj-

ect. For the smooth progress of a project, the documents should
be made easily available to the stakeholders. Hence, the software
must be inclusive of the document management facility. An accu-
rate access control system should be put into this so that the access
to these documents is controlled. It should assign the document
version number each time there is a change in version.
Resource Management: It is an important component of project
management software. The software should be capable of showing
the use of different resources at various levels of a project.
Project management software can be mainly classified into four types,

as shown in Figure 10.1:
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Project
Management
Software
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Integrated
Desktop Client Server Web-Based
System
Figure 10.1: Types of Project Management Software

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Let us now discuss the different types of software management software:

Desktop: This relates to the software which is installed on the com-
puter desktop. Data is saved by this software in the central data-
base, which is the source of other users. The members of the proj-
N
ect team are able to share the plans with other members through
common network.
Client Server: This relates to the server based application of proj-
ect management. This software intends to support many users
who are working in the various departments of the project. It cen-
trally records data and combines collaboration tools, so that the
users are able to share their knowledge and proficiency.
Web-Based: This refers to software that can be used as a web
application. It operates by using the and internet, intranet or ex-
tranet. This application can be used from any kind of computer,
internet connection without installing software in it. It is multi-us-
er in nature and is updated and controlled by the service provider.
This software is available by paying some monthly charges, which
proves more economical than purchasing and handling the appli-
cation. The major drawback of this software is that is not acces-
sible when the user is offline. Also, the project is slower than the
desktop applications.

n o t e s
Integrated System: This refers to the software that combines the

management process with other elements of an organisation. For
instance, incorporated software can be used for planning the proj-
ect and also other programs like receiving raw materials, sale and
buying set assets.
Apart from the software mentioned above, there are five other soft-
ware used extensively in project management. The software are de-
scribed as follows:
Microsoft Project: This refers to an extensively used software
which provides a Web interface, Outlook and Share point incor-
poration.
Matchware Mind View: This refers to the mind mapping software
which has a user-friendly, spread sheet plan. The project manager
is able to present his views quickly and simply to the members.
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Project Kick Start: This refers to user friendly software that com-
bines with other applications like Power Point, Outlook, Excel,
Word, Microsoft project, and ACT.
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Rational Plan Multi Project: This refers to the software that deals
with resources and budgets of several projects. It consists of Gantt
charts, and is available exclusively in posh set ups.
Basecamp: This refers to the low-cost Web-based software, which
has been lately introduced and is getting quete popular.
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10.3.1 MEASURES TO SELECT RIGHT PROJECT

MANAGEMENT SOFTWARE
As discussed earlier, project management software helps project man-

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agers in making apt decisions. Therefore, it becomes necessary for

organisations to select the right project management software that
enables the project manager to compete the project in the stipulated
time and in a cost effective manner few measures that can be taken
while choosing the right project management software are as follows:
Identify business project management software that completely
fits the business and allows all systems to integrate.
Ensure that project management system offers the option to make
amendments, such as adding users.
Streamline all business operations so that expenses incurred on the
project are reduced and all the activities are performed effectively.
10.3.2 ADVANTAGES AND DISADVANTAGES OF PROJECT

MANAGEMENT SOFTWARE
In the beginning, when the software was introduced, employers were

apprehensive about its usage and benefits. However, in the present
situation, software has become indispensible. Following are some the
mean advantages of project management software:

n o t e s
Fast Calculation: The software allows the user to make correct

calculations quickly. For instance, the Excel worksheet enables the
handling of huge amount of data, which is difficult of done manually.
Editing and Modification of Data: The software helps in record-
ing all the changes taking place in the work development by mak-
ing modifications in data whenever needed.
Quick Updating of Project Progress: This refers to the mecha-
nised updating of project development in a fast and accurate man-
ner. Due to quick updation, the status of the project can be ascer-
tained regarding its success or failure on time.
Effective Training and Education of Project Team: This shows that
the software assists in giving training to the employees. The software
is used to impart education to employees on using new machinery in
the project, which helps in developing competence.
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Better Coordination of Project Activities: Various activities can
be coordinated. For instance, the manager can use the software to
give importance to different activities.
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Quality Project Reporting: Produces mechanised reports, which
the stockholders use to collect information.
Smooth Designing of Work Breakdown Structure (WBS): The
software assists in shaping the WBS of the project. Complex activ-
ities can be divided into smaller ones through WBS.
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Easy Processing of Bulk Data: Handling and preserving a large

amount of data is done with the help of this software. This helps in
saving time and energy to preserve the records.
Effective Communication: The software enables interaction be-
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tween the manager and customer since the information can be

obtained side by side by them. Reviews can be shared with each
other regarding the project.
Effective Risk Management: Future risks concerning the project
can be predicted through this software and can be rectified.
In spite of these advantages, the software has some limitation. The

disadvantages of the project management software are:
ExtraCost: This relates to the added cost included in installing
and maintaining the software.
Limited Availability of Technical Skills: This refers to exclusive
technical knowledge and skills which the project team must have
for maintaining the software. These requirements come as obsta-
cles in software application.
Data Related Safety Issues: This refers to virus threats to data,
which can obliterate important records. Any external component
can act as a threat to the competitive status of the project.

n o t e s
Fault in software: This relates to the fault in the software which

can be give incorrect interpretation of information. It can hinder
activities and can lead to project failure.
Resistance from Employees: This refers to the hesitation on the
part of workers to use this software. Usually, workers do not adapt
to this new technology; hence, adequate training is required. This
leads to delay in completing the project and augments total ex-
pense of the project.
10.3.3 INTRODUCTION TO MICROSOFT PROJECT SOFTWARE
Selection of software according to the budget and need of the project

is important for the successful completion of the project. Therefore,
the manager needs to take utmost care while making the selection. A
number of software are available in the market. One of the most ex-
S
tensively used software is the Microsoft software. Microsoft Corpora-
tion introduced this Web-based application. It is a window-based tool
that assists in efficient implementation of administrative activities.
IM
Microsoft Project is designed to help managers of the project to work
out plans, give resources to the task, monitoring progress, handling
budgets and evaluating workload. Resource definitions like people,
equipment and material can be shared between one project and an-
other using a shared resource pool. Each resource maintains its in-
dividual calendar defining what days and shifts the resource will be
M
available. The rates are used to calculate the cost of resource which
are totalled and summed up at resource level. Each can be given to
numerous tasks in numerous plans and resources. As per the calen-
dars, Microsoft Project plans task-based on the availability of supply.
N
These can be described in the enterprise resource pool.
The project extends with the Microsoft Office Project server and Mi-
crosoft Project Web access. Project data is stored in the central data-
base. This allows the user to show and update the data over the Inter-
net. Authorised users can use Web access. This includes timesheets,
graphical analysis of resource workload and managerial tools. Some
of the applications of Microsoft Project are:
Project Planning: Assists in project planning by ascertaining vital
activities like setting landmarks, giving task to the team, and relat-
ing inter-project dependence.
Project Scheduling: Assists in carrying out the fixed plan for at-
taining the goals and objectives. The Microsoft Project software
provides a personalised calendar to alter the schedule of assigned
tasks.

n o t e s
Resource Management: Assists in explaining the organisational

resources, distributing the resources to different activities, and or-
ganising resources for resource loading activities.
Project Review: Assists in evaluating the progress of project by
using Gantt charts, Critical Path Management (CPM), and PERT.
It enables the project baseline to be fixed and the carrying out of
value evaluation.
Preparation of Charts: Assists in preparing Gantt and PERT
charts, through which the activities of the project are handled.
Tracking Project Progress: Assists in monitoring whether the ac-
tivities are done according to the fixed plan or not. If the perfor-
mance is not up to the desired expectation, action is taken to bring
improvement in the performance.
S
Generating Automatic Reports: Assists in the preparation of re-
ports by mechanically tracking down the progress of the project.
The software mechanically predicts the future of the project on the
basis of the reports.
IM
Exhibit
Primavera: An Example Of Project Management Software
Along with Microsoft Project, Primavera is the important solution

M
for the management of the project. The important Primavera prod-

uct is Primavera P6, developed by Primavera systems, an American
organisation. Oracle obtained Primavera P6 in 2008. The software
has been designed to assist managers dealing with different types
of projects. It assists in making effectual decisions like project port-
N
folio management, analysing project risk, and resource evaluation.

Below are some of the software application tools of Primavera:
Primavera Inspire for SAP
Primavera Earned Value Management
Primavera P3 and SureTrak Project Planner
Primavera P6 Professional Project Management
Primavera Portfolio Management
Primavera Contract Management
Primavera Risk Analysis
Primavera P6 Enterprise Project Portfolio Management
Primavera P6 Analytics

n o t e s
4. The main goal of _____________ is to manage the complications

of big projects and to reduce the costs linked with different
activities.
5. Which one of the following is not a feature of to be considered
while selecting the software?
a. Collaboration
b. Planning
c. Scheduling
d. Resource management
6. Name the software that can be installed on the computer
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desktop.
7. Project management software allows the user to make correct
calculations within no time. (True/False)
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8. As per the calendars, ____________ plans the task based on the
availability of supply.
Activity
Using the Internet, search for three applications of project manage-

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ment software.
10.4 Summary
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To manage the different activities of the project properly, the

team must gather information regarding the various phases of the
project.
The process of collecting, processing and distributing can be done
with the help of a Management Information System (MIS). It is
a computerised system that enables managers in making rational
and effective decisions by providing complete information as re-
quired.
Project Management Information System (PMIS) enables the doc-
umentation and storage of project management plan, subsidiary
plans and other documents / work products associated with the
project.
PMIS helps in accomplishing various activities in a project, such
as preparation of budget, describing the scope of the project, and
planning cost management
Project management software is an important instrument through
which a project manager is able to manage and complete the proj-

n o t e s
ect within the stipulated time and budget, specially the huge and
complicated projects.
Project management software can be mainly classified into var-
ious types, namely desktop, client server, web-based, and inte-
grated system.
One of the most extensively used software is Microsoft software. It
is a window based tool that assists in efficient implementation of
administrative activities.
key words
Database: It is a software program used for storing, retrieving

and manipulating data.
Project Evaluation and Review Technique (PERT): It is a
S
statistical tool used to analyse and represent various tasks in-
volved in the completions of a project.
Project Scheduling: It is the process of listing a project’s mile-
IM
stones, activities, and deliverables, along with start and comple-
tion dates.
Software: It is a collection of written programs, procedures or
rules and associated documentation pertaining to the operation
of a computer system.
M
Work Breakdown Structure: It is a hierarchical representation

of phases, deliverables and work packages of a project.

N
1. List the activities that are performed with the help of PMIS.
2. Discuss the features of PMIS.
3. What are the main characteristics of project management
software?
4. State and explain various types of project management software
that are used to manage projects.

Management Information 1. MIS
System for Projects
2. False

n o t e s

3. Precision
Introduction to Project 4. Project Management Software
Management Software
5. Planning
6. Desktop
7. True
8. Microsoft Project

1. There are various important activities of the project that are
performed with the help of PMIS such as preparation of budget,
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describing the scope of the project, and developing schedule
and network. Refer to Section 10.2 Management Information
System for Projects.
IM
2. The main features of PMIS are accuracy, precision, reliability,
and simplicity. Refer to Section 10.2 Management Information
System for Projects.
3. The main characteristic of project management software is to
spot problems early, so that it can be corrected without difficulty.
Refer to Section 10.3 Introduction to Project Management
M
Software.
4. There are various types of project management software that
are used to manage projects, such as desktop, client server, web-
based, and integrated system. Refer to Section 10.3 Introduction
N
to Project Management Software.
Suggested readings
Kerzner, H. (2001). Project management. New York: John Wiley.
Lock, D. (2007). Project management. Aldershot, England: Gower.
Maylor, H. (1996). Project management. London: Pitman.
Meredith, J., & Mantel, S. (1995). Project management. New York:
Wiley.
E-REFERENCES
Asu.edu.eg,. (2012). Ain Shams University - (MIS) Management Infor-
mation Systems Development Project. Retrieved 7 November 2014,
from http://www.asu.edu.eg/article.php?action=show&id=5580

n o t e s
Maxwideman.com,. (2014). Expert Project Management - Designing

and Installing a Project Management Information System in a De-
veloping Country’s Ministry of Education. Retrieved 7 November
2014, from http://www.maxwideman.com/guests/ministry/compo-
nents.htm
Spatialnews.geocomm.com,. (2014). Your Mission, Should You
Choose To Accept It: Project Management Excellence - by David
Hamil, MESA Solutions. Retrieved 7 November 2014, from http://
spatialnews.geocomm.com/features/mesa1/
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Ch
11 a p t e r
CASE STUDIES
CONTENTS
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Case Study 1 PMBOK Helps Deliver Hong Kong’s Massive Project
Case Study 2 Fast-Track Pmo Implementation Rescues Finolex’s Troubled
Projects and Enhances Customer Satisfaction
Case Study 3 Feasibility Study of a Bulk Water Distribution Project
IM
Case Study 4 Sony Marketing (Japan) Inc. – Delivery Forecast System
Case Study 5 Cost-Benefit Analysis (Cba) of Community-Based Disaster Risk
Management
Case Study 6 Capital Budgeting in Bhel, Hyderabad
Case Study 7 Bus Rapid Transit System (BRTS) in Delhi
Case Study 8 Project Control at Maxworth Shafts Pvt. Ltd.
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Case Study 9 Planning, implementation and delivery of the DMRC project

Case Study 10 Standard Design Factory Project
Case Study 11 Denver International Airport - Baggage Handling System Project
Case Study 12 Implementation of Information System in Public Transport
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Project Management
Case study 1
n o t e s
PMBOK HELPS DELIVER HONG KONG’S MASSIVE

PROJECT
This Case Study discusses the implementation and completion of a

challenging project of connecting the West–East Gas Pipeline net-
work from mainland China to Hong Kong in a very short time. It is
with respect to Chapter 1 of the book.
Hong Kong is one of the world’s most populous cities. It needs a

consistent supply of clean energy resources to meet the demand
of its 7.1 million residents. In 2008, Hong Kong Special Admin-
istrative Region (HKSAR) Government along with the Central
Government of the People’s Republic of China signed an agree-
ment for energy cooperation and identified three new sources of
gas, where China could supply gas to Hong Kong. One of these
S
sources was the second West–East Gas Pipeline (WEPP II), the
world’s longest natural gas pipeline. Extending to approximately
8,600 km, the pipeline starts in Xinjiang, China, where it connects
IM
to the Central Asia–China Gas Pipeline. The pipeline carries 30
billion cubic metres of gas from Turkmenistan to 15 provinces
of China. Connecting WEPP II network from mainland China to
Hong Kong posed various challenges for the project managers.
These challenges were related to the following areas:
i. Regulations: As the pipeline crossed the border between
M
mainland China and Hong Kong, the project managers

needed to acquire permits from both jurisdictions.
ii. Communications: As working teams used different
languages, there was a need to document and report the
N
progress in different languages.

iii. Environmental Requirements: The project needed to abide
by strict environmental standards for both jurisdictions.
iv. Groundwork: Laying of the pipeline was exposed to
several physical constraints. The project required a 20 km
underwater pipeline through three shipping channels:
Dachan Fairway, Tonggu Channel and Urmston Road.
The project schedule was tight and deadlines needed to be met.

To accomplish the project of building an underwater pipeline
through one of the world’s busiest marine channels, rigorous ef-
forts and planning were required. The project team decided to
abide by the best practices of Project Management Body of Knowl-
edge (PMBOK), which is a collection of processes and knowledge
areas accepted as the best practice for project management. This
helped the project in effective planning, scope management, pro-
active quality monitoring, people management, proactive risk and
safety management, effective communication, effective decision
making and effective stakeholder management.

Case study 1: PMBOK HELPS DELIVER HONG KONG’S MASSIVE PROJECT 289
Case study 1
n o t e s
The result was that the project was a remarkable success, with a
timely completion of the pipeline. The laying of the pipeline had
minimal impact on marine traffic in the area. Moreover, no en-
vironmental incidents were reported during or after the project.
The most important highlight was that the pipeline construction
was completed within three million hours with zero reportable
incidences or fatalities.
questions
1. In what ways do you think the project could have further

benefitted with the involvement of project management
consultants? Discuss.
(Hint: The speed of the project would have increased so
S
that it could have been completed faster.)
2. Suppose you are one of the project managers of the
pipeline project. What other methods apart from the best
IM
practices of PMBOK would you have taken to streamline
project activities?
(Hint: Follow a well-defined project life cycle and design,
plan and allocate resources for each stage in the project life
cycle, execute project activities in a defined order, prepare
proper time schedules, understand the interdependency
M
of processes and plan accordingly and monitor regularly.)

N

N
M
IM
S
Case study 2
n o t e s
fast-track pmo implementation rescues

finolex’s troubled projects and enhances
customer satisfaction
This Case Study focusses on how fast-tracking PMO implementation

by PM Solutions rescued Finolex’s troubled projects and improved
customer satisfaction. It is with respect to Chapter 2 of the book.
Company
Finolex is one of the largest privately-held staffing companies in

the USA. The company has a massive team working for it, i.e.
there are more than 8,000 internal employees and 90,000 contract
employees working with customers globally.
S
Challenges
The recent expansion of the company into new fields like health-
IM
care has put great strain on its IT resources In addition, the in-
creasing demands due to business growth has put extra load on
staffing levels, organisational resources, costs, etc. Further, with
global expansion and acquisition of new business units, business
practices also required standardisation through system enhance-
ments. Moreover, the company’s projects required enhanced per-
formance in project delivery along with the ensurance that ex-
M
penses and staffing levels are kept to a minimum.
Solution
N
In order to address these challenges, Finolex required to imple-

ment a PMO. However, the company failed in its first attempt at
implementing a PMO and this led it to seek the help of PM Solu-
tions, an external firm. Finolex needed the help of PM Solutions
to establish a PMO for its diverse clients spread over a broad
range of industries. PM Solutions applied a PMO Implementation
Model developed by its experts.
The following are the steps of the PMO Implementation model:

The PM Solutions team carried out an initial assessment of the
current levels of project management maturity and competency.
Thereafter, the PM Solutions team converted its results
into actionable tasks grouped by actions to be taken in the
short term for immediate gains, along with mid-term and
long-term tasks.
The team customised a project management methodology for
Finolex’s business environment that consisted of traditional
project management, agile project management and the touch

Case study 2
n o t e s
points between project management and Software Develop-

ment Life Cycle (SDLC) methodologies.
Culture change in Finolex was possible by establishing proj-
ect management workgroups and conducting various profes-
sional trainings, project reviews and project health checks
together with addressing the need for a project governance
structure, and implementing systems for improving project
portfolio management and resource management/planning.
Finally, metrics were incorporated so that resulting gains in
project performance and productivity due to the PMO imple-
mentation could be tracked.
PM Solutions managed to successfully deliver a PMO within the

record time duration of six months within industry standard func-
S
tions, including a project management process methodology, re-
source management, and Programme for project management
training, coaching and mentoring. Further, PM Solutions helped
IM
Finolex with the software selection process for a project portfolio
management tool to address portfolio and resource management.
The resulting visibility into projects enabled Finolex to recognise
those projects required corrective action and immediate imple-
mentation of project recovery strategies. Thus, with the success-
ful implementation of the PMO, all the projects were retrieved.
The success resulted in enhancement of the morale of the project
M
manager, improvement in project performance and customer sat-

isfaction.
questions
N
1. List some essential functions of a PMO.

(Hint: Defining the goals and objectives of a project,
helping in management of project finances, etc.)
2. Suppose Finolex appoints a program manager from PM
Solutions to solve one of its troubled IT projects. What
are the elements you think the manager needs to consider
before implementing PMO?
(Hint: The manager needs to review whether the project
was adhering to the project schedule, exceeding the
allotted costs, etc.)

Case study 3
n o t e s
FEASIBILITY STUDY of a bulk water

distribution project
This Case Study focusses on the feasibility study of a bulk water dis-
tribution project in Haiti by Burns and Hammond. It is with respect
to Chapter 3 of the book.
Background
Global Partners Investments Ltd. (GPI), through Global Partners

Water LLC (GPLLC), had recently agreed on a significant global
water distribution rights contract with Iceland. The business plan
was formulated as an integrated commercial and philanthropic
operations model called Bringing Water, identifying Haiti as a
possible launch market. GPLLC needed a feasibility study that
S
could successfully estimate needs and provide a detailed risk-ben-
efit analysis.
IM
Challenges
Due to the massive cultural difference among the people in Hai-

ti, people perceived the project or strategy. The complex cultural
insensitivity was further complicated by complex logistical issues.
In addition, there was a highly unstable political environment and
a large number of displaced citizens. Moreover, the 2010 earth-
M
quake complicated issues to a great extent.
Approach
N
Consultants at Burns & Hammond developed a feasibility study

and potential strategic implementation plan for bringing water,
which involved an integrative approach addressing environmen-
tal, social and economic impacts. A distribution strategy was also
developed as part of the feasibility study that would not affect
the sustainable reconstruction efforts taking place since the 2010
earthquake.
A comprehensive assessment was initiated to estimate the value

and possible impacts, along with the feasibility of Haiti’s readiness
to serve as a test market. The consultants at Burns and Hammond
used stakeholder engagement across multiple government, citi-
zen, business and NGO sectors with many of these relationships
gained from one of its other project ‘Haiti Onward’ to inform and
guide the process.
Efficient data collection, feedback, previous in-country expe-

rience of Burns and Hammond consultants along with the so-
cio-cultural, economic, political, technological and environmental
factors analysis provided an extensive framework to accurately

Case study 3
n o t e s
assess the risks and opportunities of the client. These features

contributed immensely to the feasibility study of the bulk water
distribution project.
Outcomes
After conducting thorough analysis and feasibility study, Burns

and Hammond consultants submitted the final report to GPLLC.
The report outlined a realistic depiction of the compelling hu-
manity needs and daunting operating conditions under which the
bulk water distribution project would have to be conducted. Ma-
jor data from the ‘Haiti Onward’ network served as the basis for a
final determination that launching Bringing Water in Haiti would
be premature.
S
Although the result of the feasibility study from Burns and Ham-
mond was not what GPLLC expected, it was saved from a poten-
tial risky investment. At the same time the feasibility study also
IM
protected the sovereign rights and needs of the Haitian commu-
nity.
questions
1. What factors do you think Burns and Hammond

consultants examined while carrying out the feasibility
M
study of the bulk water distribution project? Discuss.

(Hint: Government policies, investment costs, availability
of personnel, etc.)
N
2. Suppose you were the legal consultant for the bulk water
distribution project. What other techniques (apart from
the ones mentioned in the case study) would you have
incorporated in your feasibility study approach?
(Hint: In-depth interviews with social and environmental
activists can be carried out.)

Case study 4
n o t e s
SONY MARKETING (JAPAN) INC. – DELIVERY

FORECAST SYSTEM
This Case Study discusses the importance of market analysis for

Sony Marketing (Japan) Inc. for continuous customer satisfaction
and prediction of its future demands. The organisation agrees to a
contract with Fujitsu for developing a system that includes market
information into its demand forecasting techniques. It is with re-
spect to Chapter 4 of the book.
Sony is a leading organisation in digital appliances. Sony Market-

ing (Japan) Inc. is responsible for the marketing and sales of So-
ny’s products. At present, there is a fierce competition with new
competitors entering the market. Particularly, overseas organisa-
tions and venture companies that excel in special technologies or
S
new innovations are entering the market. In addition, the price of
devices keeps fluctuating, owing to technological innovation and
competitive changes that create instability in supply and demand.
IM
Nonetheless, products quickly become obsolete, and product life
cycles become short.
Rapid changes in market needs and technological innovations

have shortened Sony’s product life cycles. Fluctuations in the
price of devices make it difficult for Sony to stabilise profits. As
a result, Sony Marketing Inc. constructed a new system, linked
M
to many of its business processes, including manufacturing, dis-

tribution and sales. In late 1997, Sony joined hands with Fujitsu
for managing Sony Marketing’s mainframe and midrange data
centre services. Fujitsu manages Sony Marketing’s IBM AS/400
midrange machines and works as Sony’s IT manager to not only
N
improve IT services but also assist Sony Marketing in using IT

to improve many of its business services. The project was initiat-
ed in April, 2001. Sony Marketing worked with other Sony group
companies, including Sony EMC (EMCS), the division responsi-
ble for production, and Sony Supply Chain Solutions (SSCS).
The strategic systems at the core of the new platform were as

follows:
Demand Information Creation system: This system collects
the actual sales data from Sony’s volume resellers. It adds the
inventory and other related information after which the sys-
tem predicts demand for a period of 33 weeks for each product.
Delivery Time Forecast system: To improve service levels,
a delivery time forecast system was built to answer delivery
time questions immediately on order. The predictions made
by the demand information creation system are communi-
cated to Sony EMCS, who is responsible for manufacture and
production adjustments. The delivery time forecast system

Case study 4
n o t e s
provides delivery time answers to order requests by collecting

the production plan and inventory information.
By linking the system with actual sales figures and related infor-
mation from volume sales shops, Sony could achieve high pre-
cision in predicting the demand for its digital products. Sony
Marketing (Japan) succeeded in preparing a mobile and flexible
infrastructure. The new system allowed Sony to deliver it prod-
ucts on time, which helped Sony Marketing (Japan) to improve its
customer service levels.
questions
1. What process do you think was followed to build the

delivery time forecast system? Discuss.
S
(Hint: One of the initial steps in the process of forecasting
included determining the purpose of the forecast.)
IM
2. Suppose you are an engineer appointed by Sony to test
the new system. How would you appraise the system?
(Hint: Conduct a technical appraisal to estimate if the
prerequisites of a successful project have been adequately
covered and correct choices are made in terms of place,
capacity and availability of experts for executing the
M
system.)
N

Case study 5
n o t e s
COST-BENEFIT ANALYSIS (CBA) OF COMMUNITY-

BASED DISASTER RISK MANAGEMENT
This Case Study offers a systematic cost-benefit analysis of a com-

munity-based disaster risk management project led by Practical Ac-
tion in two districts of Nepal over the period 2007 to 2010. It is with
respect to Chapter 5 of the book.
A community-based disaster risk management project was led by

Practical Action in two districts of Nepal over the period 2007 to
2010. The name of the project was CBA of Practical Action’s Live-
lihood-Centred Disaster Risk Reduction Project in Nepal. The ob-
jectives of the project were as follows:
Community-level activities: To reduce the impact of specific
S
hazards by increasing livelihood opportunities, increasing re-
silience and reducing vulnerability.
Advocacy and capacity building: To connect communi-
IM
ty-based experiences with district- and national-level institu-
tions. These experiences and best practices were documented
and used to demonstrate the approach that should be taken
for disaster management.
The targeted population includes 718 families with approximately

3500 members. In both districts, people are dependent on agri-
M
culture and livestock farming. The main hazards that these com-
munities are exposed to include floods, droughts, landslides and
wildlife intrusion.
The Cost-Benefit Analysis (CBA) of the project is in the form of a

N
systematic quantitative analysis of the economic costs and bene-

fits associated with the community-based project activities. The
benefits are measured in terms of the present value of the real in-
come against a “without-project” baseline. The assessment takes
into account not only the benefits observed during the 2007–10
project implementation period but also the expected future
achievements beyond 2010. The costs incurred to achieve these
benefits include:
Direct project costs
Opportunity costs of additional human and material resources
contributed by the target households and other local stake-
holders.
To enable a comprehensive comparison of the present and ex-

pected future benefits, the costs and expected future gains are
discounted backwards to the starting point of the project imple-
mented in 2007.

Case study 5
n o t e s
A summary of the CBA of Practical Action’s Livelihood-Centred

Disaster Risk Reduction Project in Nepal is as follows:
(Figures in £)
r=5% r=10% r=15%
10-Year Horizon
Present Value of Benefits 383,764 306,287 250,831
Present Value of Costs 265,253 241,527 221,657
Net Present Value 118,511 64.760 29,174
Benefit-Cost Ratio 1.45 1.27 1.13
Internal Rate of Return 22.2%
20-Year Horizon
Present Value of Benefits 611,774 393,484 310,501
S
Present Value of Costs 300,539 261,717 233,688
Net Present Value 311,539 131,767 76,8112
Benefit-Cost Ratio 2.04 1.50 1.33
IM
Internal Rate Return 26.3%
Source: A Cost-Benefit Analysis of Practical Action’s Livelihood-Centred Disaster Risk

Reduction Project in Nepal
The present value of benefits is higher than the present value of

the total costs of the project activities. For a discount rate of 10 per
cent, the benefit-cost ratio ranges from 1.27 to 1.50. This implies
M
that the economic benefits are higher than the economic costs by
a significant margin. It can precisely be deduced that the project
made a significant net contribution to the economic welfare of the
target communities and delivered value for money. The Internal
N
Rate of Return (IRR) at which the total cost would just be equal
to total benefits ranges from 22.2% to 26.3%. This increase in ra-
tio implies that the net welfare gain attributable to the communi-
ty-based project initiatives is positive.
questions
1. What do you think was the purpose of conducting a CBA

for Disaster Risk Reduction Project in Nepal? Discuss.
(Hint: The purpose of conducting a CBA for Disaster
Risk Reduction Project in Nepal was to determine if the
project is feasible and whether it is a good investment.)
2. What process do you think was followed to conduct the
CBA of the project? Discuss.
(Hint: One of the first steps of the process was to list all
the costs and benefits related to the project.)

Case study 6
n o t e s
CAPITAL BUDGETING IN BHEL, HYDERABAD
This Case Study throws light on the capital budgeting techniques

for investment decisions for accepting/rejecting projects used by
BHEL. It is with respect to Chapter 6 of the book.
Bharat Heavy Electricals Limited, more commonly known as

BHEL, was established in the early 1950s. It is a name to reckon
with in the industrial world. BHEL is among the largest engineer-
ing and manufacturing enterprises in India with over 180 prod-
ucts. It provides systems and services to meet the needs of power,
transmission, industry, transportation, oil and gas, non-conven-
tional energy sources and telecommunication. BHEL has a wide
number of projects running across India and abroad. To assess
the viability of its projects, BHEL depends on capital budgeting
S
techniques, which assess the pros and cons of long-term invest-
ments. The finance involved in long-term investments is quite
large, and its impact on profitability of the company is significant.
IM
The purpose of capital budgeting analysis is to see if the project’s
benefits are large enough to repay the company for the following:
Cost of assets
Cost of financing the project
Determine a rate of return that adequately compensates the
M
company for the risk found in the cash flow estimates
The capital budgeting techniques followed by BHEL include:

1. Technical analysis with respect to IRR
N
2. Net Present Value (NPV)

3. Profitability Index (PI)
4. Return on Investment (ROI)
5. Payback Period (PBP)
The details of Project 1, with cash inflows worth `17478 and cash
outflows worth `10250 lakhs, are given in the following tables:
YEAR PBOT DEP PBT TAX PAT DEP CFAT

1 3060 3587 -528 -174 -702 3587 2885
2 4560 999 -3561 1175 2386 999 3385
3 4560 850 3710 1224 2486 850 3336
4 4860 722 4138 1365 2773 722 3495
5 5160 614 4546 1500 3046 614 3660
6 4560 521 4039 1333 2706 521 3227
7 4950 599 4351 1435 2916 599 3515

Case study 6
n o t e s
YEAR PBOT DEP PBT TAX PAT DEP CFAT

8 3630 510 3120 1030 2090 510 2600
9 3930 433 3497 1154 2343 433 2776
10 4383 368 4015 1325 2690 368 3058
CFAT CCFAT PV@13% PVCFAT PV@20% PVCFAT

2885 2885 0.884 2550 0.833 2124
3385 6270 0.783 2650 0.694 1839
3336 9606 0.693 2312 0.578 1336
3495 13101 0.613 2142 0.482 1032
3660 16761 0.342 1984 0.401 795
3227 19988 0.480 1549 0.334 517
3515 23503 0.425 1493 0.279 416
S
2600 26103 0.376 977 0.232 226
2776 28879 0.332 922 0.193 178
3058 31937 0.294 899 0.161 145
IM
The calculations are as follows:
1. Net Present Value = Total of cash inflows – Total of cash
outflows =17478 – 10250 = `7228 lakhs
Investment-CFAT
2. Pay Back Period = Base Period +
M
Next CFAT
= 3+10250 – 9603/3495 = 3+0.18
=3.18.
NPV
3. Internal Rate of Return = L.R + ×Δ R
N
ΔPVCF
= 13% + 7228/8870 × 7
= 13% + 0.81×7 = 13% + 5.67 = 18.67%.
Total PV of cashflow
4. Profitability Index = = 17478/10250
Total investment
= 1.70.
Average Cashflows
5. Return on Investment = ×100
Investment
= 31937/10 = 3193.7
Average Investment = Investment/2
= 10250/2 = 5125
ROI = 3193.7/5125×100
= 0.62*100 = 62
Conclusions: The NPV of the project is positive, i.e., `7228
lakhs. The IRR of the project is 18.67, which is more than the

Case study 6: CAPITAL BUDGETING IN BHEL, HYDERABAD 301
Case study 6
n o t e s
cost of capital (13%). The actual life of the project is 10 years,

and the project investment can be recovered approximately
within 3 years and 2 months. On the basis of the above three
calculations, the project can be accepted.
questions
1. What process do you think was followed to calculate the

NPV of the project? Discuss.
(Hint: One of the initial steps of the process included
forecasting cash flows.)
2. Suppose you are the project manager at BHEL. Which
other methods would you employ to test the viability of
S
this project?
(Hint: Break-even analysis, decision-tree analysis,
simulation analysis, mathematical analysis, etc.)
IM
M
N

N
M
IM
S
Case study 7
n o t e s
BUS RAPID TRANSIT SYSTEM (BRTS) IN DELHI
This Case Study discusses the planning and implementation of the

Bus Rapid Transit System (BRTS) project in Delhi to overcome
transportation issues. However, lack of effective implementation
and supporting infrastructure leads to project failure. It is with re-
spect to Chapter 7 of the book.
A public transportation network includes different modes of mass

transport such as bus, metro and suburban trains. The Delhi gov-
ernment has been undertaking various public transport projects
for meeting the increased transportation concerns of citizens.
Transportation in Delhi is mainly road based, with 1,284 kms of

road in every 100 square kilometre area. Roads occupy a signifi-
S
cant portion (21%) of the total area in Delhi. Therefore, there is lit-
tle scope of expanding the road network. The number of vehicles
has also increased by an alarming 212% between 1991 and 2008.
Therefore, the government is facing an increased need of creating
IM
space either over the roads (flyovers) or beneath the road (under-
passes). As a result, more than 15 flyovers have been constructed
on the Delhi Ring Road alone.
Buses are the most prominent form of public transport in Delhi.

More than 6 million commuters or 42% of the total commuters
M
travel by bus every day. The Government of the National Capital

Territory of Delhi (GNCTD) approved the Delhi Metro Project in
1998 for providing an alternative public transport. However, Delhi
Metro could not completely replace bus transport due to capac-
ity constraints. Therefore, the need to create a faster and more
N
convenient bus transport became inevitable. Bus Rapid Transit

System (BRTS) has been recognised as one of the most efficient
modes of public transport throughout the world. BRTS refers to a
transportation system that provides faster and more efficient bus
services. This kind of transportation system is widely known as
the bus way or quality bus.
Implementation of BRTS in Delhi: The Delhi government
considered BRTS to be an immediate solution for the conges-
tion on roads. It planned to build 26 corridors of BRTS cover-
ing a length of 310 kms by 2020. The implementation process
was divided into three phases. GNCTD appointed Rail India
Technical and Economic Services (RITES) and Indian Insti-
tute of Technology, Delhi for planning and implementing the

Case study 7
n o t e s
first corridor from Ambedkar Nagar to Delhi Gate, covering

14.5 kms of road. The bus lane was planned to be in the middle
of the road with a width of 3.3 meters. The lanes for the other
vehicles were planned by the side of the bus lane with a width
of 6.75 meters. Separate lanes were also planned for the non-
motorised vehicles and pedestrians.
RITES served the role of a project manager while IIT (Delhi)
acted as the advisor for the project. In 2006, Delhi Integrated
Multi-Modal Transit System (DIMTS) was created as a Spe-
cial Purpose Vehicle for the BRTS project. The operations and
maintenance of the project were entrusted on DIMTS. The con-
struction process started in October 2006. The daily progress
was monitored by Operation Control Centre (OCC) at Kash-
mere Gate and a camp office in DTC, Khanpur Depot. The first
S
corridor in Delhi has been operational since April, 2008.
Evaluation of the Project: The project did not succeed in de-
livering the expected outcomes and created mixed reactions
IM
among different stakeholders. BRTS added to the woes of pri-
vate vehicle users by reducing the width of the road. Private
vehicles account for almost 90% of all vehicles in Delhi, where-
as public buses account for only 2.5%. However, the width of
the road was reduced due to the separation of lanes, which
led to increased traffic and road congestion. The ratio of pub-
M
lic and private vehicle is significantly different in other devel-

oped countries where BRTS has been implemented. The traf-
fic police was not able to enforce the dedicated lanes for buses
in Delhi. Lack of supporting infrastructure such as parking
places and Intelligent Transport Signalling System also con-
N
tributed to the failure of the project.
The parliamentary standing committee on urban transport com-

mented that the BRTS project in Delhi was a failure despite the
potential benefits of BRTS. The committee recommended aban-
doning all other corridors of the project. GNCTD failed to learn
from the BRTS project in Pune, where the project could not deliv-
er the desired results because of poor implementation. However,
it is not only poor planning and implementation that led to the
failure of the project. Lack of proper enforcement of the corridors,
and violation of traffic rules also added to the problem.

Case study 7: BUS RAPID TRANSIT SYSTEM (BRTS) IN DELHI 305
Case study 7
n o t e s
questions
1. Why did the BRTS project in Delhi prove to be a failure in

spite of the involvement of RITES and IIT (Delhi)?
(Hint: Poor implementation, reduction of road width,
unplanned infrastructure, insufficient parking places,
lack of proper enforcement of the corridors, violation of
traffic rules, etc.)
2. What has been the role of GNCTD in the failure of BRTS
project? Example.
(Hint: Being an approver of the project and a decision
making body, GNCTD was responsible for the successful
planning, implementation and decision making.)
S
IM
M
N

N
M
IM
S
Case study 8
n o t e s
PROJECT CONTROL AT MAXWORTH SHAFTS PVT. LTD.
This Case Study discusses the control and monitoring technique

adopted at MaxWorth Shafts Pvt. Ltd. for overcoming production
and quality issues. It is with respect to Chapter 8 of the book.
MaxWorth Shafts Pvt. Ltd. is one of the biggest steel shaft pro-
ducers in India. It produces eight different types of steel shafts.
These are supplied to other industries for making nuts, bolts,
pump shafts, valves, fasteners, food equipment, screws, chemical
plants, marine appliances, etc. MaxWorth Shafts Pvt. Ltd. has an
employee strength of 4000 workers who are employed in five dif-
ferent locations. The organisation has recently received a project
from a big organisation for manufacturing 20,000 steel shafts to be
used for making golf sticks. However, MaxWorth has been facing
S
a number of problems in the completion of the project. These in-
clude issues such as increase in cost owing to the increasing num-
ber of defective items produced, increased scrap, deferred time
IM
schedules, etc. To address the problem, MaxWorth’s management
decided to implement project control tools to monitor and control
the project and achieve the production targets on time. MaxWorth
decided to have the following types of controls on the project:
Financial control
Budgetary control
M
Quality control
Marketing control
Technology control
N
After implementing the programme, MaxWorth’s Management

Control System (MCS) collected information for assessing the
performance of each of these control tools and established check
points for the assessment of the costs associated with the project.
The check points were mainly established at the following three
points:
i. At the very beginning of the production stage to recognise
the allocation of resources and deviations of products
ii. In the middle, to recheck the costs
iii. At the completion stage
The controlling and monitoring programme helped MaxWorth

in determining the areas of improvement and cost reduction by
reducing the defects. These control techniques not only enabled
project managers to check and regulate continuing changes, but
also provided them with feedback on devising better control tools
for the future. With the implementation of a control system, Max-

Case study 8
n o t e s
Worth is now able to make savings worth `2 lakhs in the current

project and achieve a high level of client satisfaction.
questions
1. What were the key performance areas for management

control system at MaxWorth?
(Hint: The key performance areas include cost and
budgetary control, quality control, market performance
of the organisation, etc.)
2. What other control and monitoring tools could the project
managers have adopted at MaxWorth?
(Hint: Plan-Do-Check-Act (PDCA), cause-and-effect
S
IM analysis, earned value analysis, etc.)
M
N

Case study 9
n o t e s
Planning, implementation and delivery of the

DMRC project
This Case Study discusses the successful planning, implementation

and delivery of the DMRC project. It is with respect to Chapter 9 of
the book.
Delhi Metro Rail Corporation (DMRC), a state-owned company

with equal participation from the Government of India and Gov-
ernment of National Capital Territory of Delhi, was established
to build and operate the Delhi Metro in March, 1995. The DMRC
project was carried out in phases, of which Phase I (65.11km) and
Phase II (128km) have been completed. The capital investment
for Phase I and Phase II was around USD 2.7 billion. The Gov-
ernment of India and Government of National Capital Territory
S
of Delhi funded 30 percent of the total investment, while another
60 percent was financed through a loan from Japan Internation-
al Cooperation Agency (JICA). The Delhi Metro project became
IM
the first railway project in the world to be awarded the United
Nations certification for low carbon credits, reducing greenhouse
gas emissions. It saved 1,12,500MW of power by using regener-
ative brakes in trains, reducing carbon emissions by 6,30,000
tonnes per year.
The details of the DMRC project are as follows:

M
Strategies for review and supervision:

Each individual would be accountable for his/her role in the
project. Each employee would prepare a Detailed Project Re-
N
port (DPR) with details about the work assigned and work
completed each day to be submitted to the respective super-
visors.
In case of deviations from the work expected to work com-
pleted, the employees had to give reasons for the same and
suggest steps for rectification.
Every Monday, the heads of departments would hold a meet-
ing to review progress, set new targets or revise targets.
The stress was on adherence to project schedules with reverse
clocks implanted at work stations to indicate the number of
days left before project deadlines.
Because of the delay in setting up of the organisation, Phase I
of the DMRC project commenced three years after the sched-
uled date. However, the original deadline was not revised, and
the project duration was reduced from 10 years to 7 years to
make up for the delayed start.

Case study 9
n o t e s
Strategies for Cost Control:

The total expenditure was split into three groups: manpower,
energy and materials, including maintenance, each account-
ing for one-third of the total project cost.
The DMRC employed only 45 workers per kilometre of the
track to adhere to international norms.
To cut energy costs, a special agreement was entered into with
Delhi Transco Ltd. to source power at low rates.
Project duration was controlled by the use of special construc-
tion technologies such as trench-less digging, use of ballast-
less tracks, etc.
Use of Primavera Project Planner:
S
Special software known as Primavera Project Planner was
used for project planning and monitoring. This alerted users
in case of excess or shortage of resources. On the other hand,
IM
the cost planning module provided a complete cost breakup
of the project.
The software kept track of project activities, quantum of work
completed at different levels, the time lost or gained, etc.
It provided information regarding all critical and upcoming
M
activities to facilitate tracking and rescheduling of activities,

wherever necessary.
Strategies for Quality Assurance:

A special quality assurance team was appointed to ensure
N
quality in construction.
Workers were required to wear helmets and other appropriate
safety gear.
Contracts were undertaken by a global bidding program
with at least one Indian partner to ensure technology absorp-
tion by Indian firms and localisation and re-engineering of
technology.
Multinational engineering corporations from across the globe
worked on the project.
A five-member association headed by the Pacific Consultants
International (PCI) was constituted to provide consultancy
for the project. The association surveyed the area for utilities
(water pipes, sewer, water pipes, etc.) and submitted a writ-
ten report to the DMRC, which completed the work within the
prescribed period.

Case study 9: Planning, implementation and delivery of the DMRC project 311
Case study 9
n o t e s
questions
1. How was the DMRC project developed and implemented?

Critically evaluate.
(Hint: DMRC project is one of the most successful projects
in India. There are various factors which made it a
success like appropriate project planning, right strategies
for cost control, timely supervision, appropriate project
scheduling, measures for quality assurance, etc.)
2. As a project manager, what is your key learning from the
exceptional DMRC project?
(Hint: Project planning, execution and delivery require
dedication from each team member; reporting of progress
S
is important; control and monitoring help to keep projects
on track, etc.)
IM
M
N

N
M
IM
S
Case study 10
n o t e s
STANDARD DESIGN FACTORY PROJECT
This Case Study discusses the adoption of Information Technology

(IT) for project management of the Standard Design Factory project.
Primavera P6 software was used for controlling and monitoring the
project. It is with respect to Chapter 10 of the book.
Standard Design Factory was one of the leading projects under-

taken by Kerala Industrial Infrastructure Development Corpo-
ration, Trivandrum. The project involved construction of factory
buildings at various locations across Kerala. The total contract
value of the project was about `7 crores and it needed to be com-
pleted within 21 months. The main steps involved in factory con-
struction were as follows:
S
1. Mobilisation
2. Piling
3. Column and beam concreting
IM
4. Slab and stair concreting
5. Post concreting works
6. Masonry work
7. Internal wall plastering
M
8. Flooring
9. External wall plastering
10. Finishing
N
The construction project was vast and complex, making the ap-
plication of IT inevitable. The organisation had the option of sev-
eral technologies such as Primavera P6, P3, Suretrack, Microsoft
project, etc. It was decided that Standard Design Factory would
use Primavera P6 software for monitoring and controlling its con-
struction projects. The controlling and monitoring tools and tech-
niques involved in this process were:
Earned Value Management (EVM): EVM is a method of per-
formance measurement. It integrates scope, cost and schedule
measures to help the project management team to assess and
measure project performance and progress. EVM requires the
creation of an integrated baseline against which project per-
formance is measured. This can be effectively done through
Primavera.
Cost Performance Baseline: A cost project performance base-
line is used to measure, monitor and control the overall cost
performance. This can also be achieved through Primavera.

Case study 10
n o t e s
Work Performance Measurements: These include calcula-

tions of project cost variance, project schedule variance and
values for the Work Breakdown Structure (WBS) components.
WBS is a hierarchy of work required to complete a project.
Every project has its own WBS hierarchy. WBS activities and
steps for the activities are shown in the following table:
Gantt charts 1. The time scale of the Gantt chart should be on

weekly basis.
2. All relationships should be clearly given in the
Gantt chart.
Calendar 1. The work is carried out in six days per week.
So the standard six-day workweek calendar is
made with the necessary holidays in it.
S
2. A break of one hour is given in the afternoon.
Earned value 1. The earned value of the work is calculated
analysis after including the actual cost of each activity,
IM
inclusive of expenditures.
S curve 1. Graphical representation of the financial cash
flow of a project.
The results of adopting Primavera P6 in the SDF project were as

follows:
M
The baseline project start date is 15th March 2011 and the
baseline project finish date is 20th August 2012. The Primave-
ra report shows that the actual start date of the project was as
per the baseline schedule.
N
The resource usage profile obtained using Primavera P6

shows that there has been a slight variation in the quantity of
each resource used during the project life cycle.
The software recorded a slight delay in activities, which was
mainly due to lack of knowledge, unskilled staff, improper
funds and monsoon rains.
Primavera 6 proved to be an efficient tool in monitoring and con-

trolling the construction project as the time and effort in updating
was reduced drastically by using the layout.

Case study 10: STANDARD DESIGN FACTORY PROJECT 315
Case study 10
n o t e s
questions
1. What measures were taken into consideration while

selecting the right project management software?
(Hint: Various factors are considered while selecting the
right project management software like earned value
management (EVM), cost performance baseline and work
performance measurements.)
2. Suppose you are one of the project managers in the
Standard Design Factory project. Why do you think the
WBS hierarchy was followed?
(Hint: WBS decomposes a project into smaller
components, organises the team’s work into manageable
S
sections, making project management comprehensive
and specific.)
IM
M
N

N
M
IM
S
Case study 11
n o t e s
DENVER INTERNATIONAL AIRPORT - BAGGAGE

HANDLING SYSTEM PROJECT
This Case Study discusses the planning and implementation of the

Denver International Airport - Baggage Handling System project.
However, lack of effective planning and untimely termination of the
project led to a huge loss. It is with respect to Chapter 7 of the book.
Denver International Airport (DIA) is the largest international

airport in the USA with an area of 140 square kilometres. It also
has the longest public runway in the USA. DIA is the third largest
airport in the world after King Fahd International Airport, Saudi
Arabia and Montréal Mirabel International Airport, Quebec, Can-
ada. However, with the increasing number of aircraft, the airport
authority felt the need for capacity expansion. In 1990, the author-
S
ity planned to build an automated baggage handling system as a
part of the airport expansion project. The new baggage handling
system would reduce the turnaround time of the aircraft by as
IM
much as 30 minutes, which in turn would increase the competi-
tive advantage of the airport. In 1992, Denver International Air-
port agreed to a contract with British Aerospace (BAE) to build
a system to automatically handle baggage from different airlines.
However, the project faced several problems and schedules kept
shifting. Finally, when the system was ready for operation, it was
just a shadow of the original plan. In 2005, the system was com-
M
pletely scrapped because of high maintenance cost. The chronol-

ogy of events of the expansion project is summarised in the fol-
lowing table:
N
Time Line Event

October, 1990 Denver airport conducts a feasibility study for
the project.
April, 1992 The airport signs a contract with BAE for
building the baggage handling system.
October, 1992 Walter Singer, the chief airport engineer, dies.
He was one of the key persons of the project.
February, 1993 The finishing date of the project is shifted from
31st October, 1993 to 19 December, 1993.
September, 1993 The finishing date is shifted again to 15th May,
1994.
January, 1994 The original project plan is changed.
March, 1994 Problems are identified in the electric supply
system.
April, 1994 Demonstration of the system to the media
fails, and this results in further extension of
the deadline of the project.

Case study 11
n o t e s
Time Line Event

28th February, 1995 The system starts operation.
August, 2005 The maintenance cost of the project reaches
to USD 1 million per month, and the project is
scrapped.
This project proved to be a classic example of the failure of a

technological project. However, there are different viewpoints re-
garding the reasons of the failure of the project. The project, ten
times larger than any automated system, was the most complex
baggage handling system in the world. The project planners un-
derestimated the complexity involved in the project. Therefore,
the project management team failed to estimate the requirement
of resources. The management team had set an over-optimistic
S
target for finishing the project in two years. However, failure to
identify the complexity and risks involved in the project resulted
in long delays and cost overrun of the project.
IM
The project also required a changed mind-set by the project man-
agement team as it did not possess any prior experience of ex-
ecuting similar projects. However, the team failed to learn from
similar other projects (Munich Airport project). Therefore, the
basic reasons of the failure are evidently poor planning and re-
source estimation. However, there were some other reasons that
M
contributed to the failure of the project, which are as follows:

Change in Original Project Plan: This resulted in the maxi-
mum delay in the project. Prior to the bidding of the project,
the project management team assumed that each airline would
handle its own baggage. However, the project management
N
team later realised that it should take back the responsibility

from the individual airlines. Therefore, the team changed its
plan just a few months ahead of the project deadline. This was
required because a centralised control was necessary for run-
ning an integrated automated system. However, the decision
was so late that it caused substantial project delays.
Inability to Timely Terminate the Project: This led to sub-
stantial wastage of time and resources. Throughout the op-
eration of the project, there were several indications that the
project was no longer feasible. However, the project manage-
ment team did not terminate the project on time, incurring
a huge loss. Experts from Munich Airport had advised the
Denver project team that it was not feasible to complete the
project in two years as even the much simpler Munich Airport
system took more than two years to complete. The failure of
the senior management of BAE to act upon the advice was the
epicentre of the failure of the project.

Case study 11:DENVER INTERNATIONAL AIRPORT - BAGGAGE HANDLING SYSTEM PROJECT 319
Case study 11
n o t e s
Change in Leadership: This contributed to the difficulty in

the timely execution of the project. Walter Singer, the chief
engineer of the airport, died in October 1992. The replacement
lacked in the required engineering expertise for handling the
project. Therefore, change of leadership midway through the
project proved a major reason for its failure.
A project management team does not always have the necessary

knowledge or expertise to execute a project. Success or failure in
a project depends on how the team responds to such scenarios.
The management team should first acquire adequate knowledge
about the project and then develop the project plan. However, in
the DIA project, the project was planned and executed by person-
nel who did not have the required expertise to handle a project of
such magnitude and complexity.
S
questions
IM
1. According to you, how could BAE have helped in limiting
the extent of project loss?
(Hint: By consulting the experts who had handled similar
projects such as the Munich Airport project, terminate the
project when there was enough evidence that the project
is not feasible, limit the scope of the project, etc.)
M
2. Critically evaluate the project planning of the Denver

International Airport for Baggage Handling System
project.
(Hint: The project planning was carried out ineffectively.
N
Further, DIA had not been successful in identifying the

risks and complexity involved in the project.)

N
M
IM
S
Case study 12
n o t e s
IMPLEMENTATION OF INFORMATION SYSTEM IN

PUBLIC TRANSPORT PROJECT MANAGEMENT
This Case Study discusses the development and implementation of

information system in public transport project management. It is
with respect to Chapter 10 of the book.
Transport infrastructure is an inevitable part of human lives. As

human lives are priceless and irreplaceable, any sort of risks and
negligence in the transport infrastructure and public transport
will be an injustice to their lives. Generally, it is found that trans-
port infrastructures are extremely disjointed, yet they serve the
basic purpose of public transport. Moving to an entirely new sys-
tem is not restricted to a particular area or industry as emerging
hitches can lead to great disruption and disappointment.
S
In 1993, the privatisation of railways led to the emergence of fran-
chises of the national bus and London Tube networks. Despite
the complications and hitches that arose from fragmented trans-
IM
port infrastructure and transport system, there are still possibil-
ities of developing and launching new products, as launched by
Oyster Card. It was demonstrated and proved by London Tube
and bus Service to develop an integrated ticketing system for
distinct transport routes. Subsequently, the launch of the Oyster
Card scheme brought significant changes in the lives of a large
M
population travelling across London and also secured a financial

return. The pre-paid Oyster Card was launched with an arm to
offer a single smartcard for all the means of public transporta-
tion, such as bus, rail, tram and tube, thereby reducing the risk
of fraud, and making travel easy and convenient for passengers.
N
However, there were some elementary problems faced by this

card scheme, which included temporary stopping of the card in
the power breakdown affected areas of London in the month
of January. It was an unexpected challenge for the Oyster Card
scheme.
The supplier agreement was signed in 1998 and TranSys, the

winning conglomerate of Fujitsu, Cubic, EDS and WS Atkins, de-
veloped a project team. The control system developed in 1993 by
London Transport helped TranSys to comprehend the basic con-
cept of a smartcard and customer interface, which further result-
ed in the development and implement on of a new system. It took
TranSys two years to develop the new system.
In order to accomplish the desired objectives, a centralised and

integrated architecture was designed. As per this new system,
passengers’ travel and payment records were fed to a centralised

Case study 12
n o t e s
database in order to keep the information safe from any kind of

theft, attack and loss. The centralised data also enabled the man-
agement in decision making as it could be accessed and mined
any time by the management. The newly developed payment
system consists of 1.5 million lines of object-oriented code. Fur-
ther, the server is hosted on two Sun Fire 6800 systems with eight
Sparc processors in each.
As a result, it was observed that the system performed amazingly

well, even much better than expected. An Oracle database was
used to stimulate the project objectives as a management report-
ing tool.
“The system was given a very thorough thrashing before it was let
loose on the public,” says Pat Morey, project manager for TranSys.
S
Therefore, the introduction of the information system and various
computer-enabled software to the public transport project took
it to new heights and unprecedented dimensions that ultimately
IM
made the public transport cheaper, safer, convenient and easy for
the passengers of London.
questions
1. Discuss the changes brought by the implementation of

M
the Oyster Card Scheme in the transportation.

(Hint: The Oyster Card Scheme mode the public transport
chapter, safer, convenient and easy for the passengers of
London.)
N
2. Critically evaluate the role of a centralised database

system in this project.
(Hint: The centralised database system comprised the
complete and consolidated information about passengers’
travel and payment records.)

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Author : Siddesh Kashinath Pai

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NMIMS Global Access - School for Continuing Education

CHAPTER NO. CHAPTER NAME PAGE NO.

1 Introduction to Project Management 1

3 Operating and Environmental Feasibility 57

5 Financial Feasibility of a Project 101

7 Nature of Project Decisions and Project Planning 175

8 Monitoring and Controlling a Project 193

9 Project Scheduling 215

10 Computer Application in Project Management 271

11 Case Studies 287

NMIMS Global Access - School for Continuing Education

Introduction to Project Management: Defining Project, Meaning of Project Management, Project

Project Organisation: Concept of Project Organisation, Project Organisation Structures, Project

Monitoring and Controlling a Project: Planning-Monitoring-Controlling Cycle, Project Monitor-

NMIMS Global Access - School for Continuing Education

NMIMS Global Access - School for Continuing Education

INTRODUCTION TO PROJECT MANAGEMENT

1.3.2 Advantages of Project Management

1.3.6 Principles of Project Management

NMIMS Global Access - School for Continuing Education

1.8 Role of a Project Manager

NMIMS Global Access - School for Continuing Education

PROJECT MANAGEMENT HELPS DMRC

The Delhi Metro project gave Delhi a world-class mass rapid

Delhi Metro Rail Corporation (DMRC) employed principles and

pletion of the project. DMRC managed the various stakeholders

NMIMS Global Access - School for Continuing Education

After studying the chapter, you will be able to:

A project is a set of pre-defined activities having a defined beginning

involve several activities, such as creating a plan, preparing land,

Different activities undertaken by an organisation, such as setting up

Unless an organisation has requisite knowledge of project manage-

NMIMS Global Access - School for Continuing Education

These skills are essential to ensure that a required end deliverable is

This chapter deals with different aspects of project management in

1.2 DEFINING PROJECT

A project is a pre-determined set of activities with a definite beginning

Each project also has a unique objective that it seeks to attain. It is

Project as a term can be defined in a number of ways. The Project

NMIMS Global Access - School for Continuing Education

PMI is one of the world’s largest non-profit membership associa-

A project is an activity that is non-routine and conducted by organ-

All projects consist of a number of activities. Let’s understand this

the sample size, designing a questionnaire, getting the questionnaire

in the Word processor, printing the questionnaires, etc. Therefore, a

NMIMS Global Access - School for Continuing Education

The characteristics shown in Figure 1.1 can be briefly explained as

ample, a new terminus may be built to accommodate more traffic

studying the tastes and preferences of customers, etc.

NMIMS Global Access - School for Continuing Education

The figure represents the different stages of a project as well as the

 Specified Time: When an organisation undertakes any project, it

NMIMS Global Access - School for Continuing Education

Depending on the activities performed during each phase of a project,

Identification Preparation Appraisal

Presentation Implementation Monitoring

These stages can be briefly explained as follows:

to achieve. Before a project is taken up by an organisation, it

For example, an organisation may have a number of ideas for

Specified Time: When an organisation undertakes any project, it

Principle of Project Strategy: It is one of the vital principles of