Project Planning and Management

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Introduction to Projects
Definitions of ‘project’.
Newman define that “a project typically has a distinct mission that it is
designed to achieve and a clear termination point the achievement of the
mission”.
Gillinger defines “project” as the whole complex of activities involved in using
resources to gain benefits.
Project management institute, USA defined project as “a system involving the
co-ordination of a number of separate department entities throughout
organization, in a way it must be completed with prescribed schedules and
Project Planning and time constraints”.
According to the encyclopedia of management, “project is an organized unit
Management dedicated to the attainment of goal, the successful completion of a
development project on time, within budget, in conformance with
predetermined programme specification.”
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CHARACTERISTICS OF PROJECT CHARACTERISTICS OF PROJECT
1) Objectives: A project has a set of objectives or a mission. Once the

objectives are achieved the project is treated as completed 7) Customer specific nature: A project is always customer specific. It is the
2) Life cycle : A project has a life cycle. The life cycle consists of five stages customer who decides upon the product to be produced or services to be
i.e. conception stage, definition stage, planning & organising stage, offered and hence it is the responsibility of any organization to go for
implementation stage and commissioning stage. projects/services that are suited to customer needs.
3) Uniqueness: Every project is unique and no two projects are similar. 8) Change : Changes occur throughout the life span of a project as a natural
Setting up a cement plant and construction of a highway are two different outcome of many environmental factors. The changes may vary from
projects having unique features. minor changes, which may have very little impact on the project, to major
4) Team Work: Project is a team work and it normally consists of diverse changes which may have a big impact or even may change the very nature
areas. There will be personnel specialized in their respective areas and co- of the project.
ordination among the diverse areas calls for team work. 9) Optimality: A project is always aimed at optimum utilization of resources
5) Complexity: A project is a complex set of activities relating to diverse for the overall development of the economy.
areas.
6) Risk and uncertainty: Risk and uncertainty go hand in hand with project.
A risk-free, it only means that the element is not apparently visible on the
surface and it will be hidden underneath.
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Project management Importance of Project management

1. Defines a plan and organizes chaos – projects are naturally chaotic. A clear path
Project management is the planning, organizing and managing the effort to mapped out from start to finish ensures the outcome meets the goals of your project.
accomplish a successful project. 2. Establishes a schedule and plan – Without a schedule, a project has a higher
Project management institute, USA defined Project management is the probability of delays and cost overruns. A sound schedule is key to a successful project.
application of knowledge, skills, tools, and techniques to project activities to 3. Enforces and encourages teamwork – A project brings people together to share ideas
meet the project requirements. and provide inspiration. Collaboration is the cornerstone to effective project planning and
Project management is the practice of initiating, planning, executing, management.
controlling, and closing the work of a team to achieve specific goals and meet 4. Maximizes resources – Resources, whether financial or human, are expensive.
specific success criteria at the specified time. The primary challenge of project resources are used efficiently and economically.
5. Manages Integration – Projects don’t happen in a vacuum. They need to be integrated
management is to achieve all of the project goals within the given constraints.
with business processes, systems and organizations.
6. Controls cost – some projects can cost a significant amount of money so on budget
performance is essential.
7. Manages change – projects always happen in an environment in which nothing is
constant except change.
8. Managing quality – Quality is the value of what you produce.
9. Retain and use knowledge – ensures that knowledge is captured and managed.
10. Learning from failure – projects do fail. When they do, it is important to learn from
the process.
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Five Phase of Project management

Causes of Project Delay
Stages of Project Life Cycle
Dividing your project management efforts into these five phases can help give your Projects have a variety of reasons to experience delay.
efforts structure and simplify them into a series of logical and manageable steps. Main causes for project delay are :
1. Unreasonable project scope : Generally projects do not have an agreed scope of
works document agreed at the start of the project. Even though the scope is
identified in the contract documents, it is always possible for parties to interpret in
1 PROJECT CONCEPTION & INITIATION
the ways that are suitable and beneficial for them.
2. Inadequate early planning : It is of utmost importance for any project to
2 PROJECT DEFINITION & PLANNING commence with the full planning to ensure the successful execution of works. “Plan
the work, Work the plan”.
3 PROJECT LAUNCH & EXECUTION 3. Lack of risk management systems : risk management has various levels and it is
important to understand and attend to all these levels to allow for an effective risk
4 PROJECT PERFORMANCE & CONTROL management system.
4. Lack of resources & Labor productivity : The manpower is the most important
factor in the successful completion of any project. In case of projects where there is
5 PROJECT CLOSE a lack of manpower then it also affects the productivity of the existing workforce as
they would be required to undergo long working hours which would reduce the
productivity
Attributes of a Successful Project

Causes of Project Delay
Management
5. Over-ambitious estimates and incorrect task assessment : In projects which are in 1. Ensure all stakeholders understand the requirements : Gather and understand
the design and tender stage where there is an urgent requirement of the project requirements and make sure to get them approved by the stakeholders.
estimated cost, An incorrect task description or assessment may result in an 2. Understand Your Project Well , Develop both leadership and technical
incorrect or overambitious estimate which may either derail the project or make competencies Ensure that it includes a timeline and budget which should be
the project too costly and uneconomical for the owner. enough to cover the project requirements. Set an action plan as when to start the
6. Lack of task clarity : The lack of task clarity can give rise to errors as adequate project, what to do when, and when to finish, but be flexible for any inevitable
details will not be available and hence changes may be required to rectify the changes.
errors or incorporate the additional details as per the new information made 3. Create a risk response team, Look out for potential risks : have a risk response
available. team in place already as things are bound to go wrong or unexpected.
7. Design delays & Approval of drawings : The construction projects are envisaged 4. Set Realistic Goals , Create a detailed work plan It’s really important to
based on the conceptual design and drawings. If these conceptual design are not understand the limitation of the project not only for you but everyone in the team
converted to actual designs and drawings including the structural feasibility and including your client as well. A detailed work plan serves as a starting point for
practicality then it would necessitate changes to the original concept design which everyone as it tells who is supposed to do what and when that help project
would impact the perspective of the project itself. members to check off their project tasks and meet deadlines.
8. Owner interference & decision-making process 5. Communicate effectively
9. Inadequate contractor & Subcontractors experience 6. Monitor and track progress regularly , Avoid Scope Creep
7. Consolidate all project-related information
8. Hold a wrap-up meeting http://www.frontdesk.co.in/forum
, Evaluate the Project After Completion
Project Appraisal Project Appraisal
Development projects impose a series of costs and benefits on recipient communities Technical Appraisal
or countries. Those costs and benefits can be social, environmental, or economic in • Whether pre-requisites for the success of project considered?
nature, but may often involve all three. Appraisal is the analysis of a proposed project • Good choices with regard to location, size, process, machines etc.
to determine its merit and acceptability in accordance with established criteria. • materials, equipment,
Project appraisal is the process of assessing, in a structured way, the case for • factors of production availability,
proceeding with a project or proposal, or the project's viability. • suitability of the plans
Socio-Economic Appraisal
Technical
Institutional Financial • Social cost -benefit analysis
• Direct economic benefits and costs in terms of shadow prices
• Impact of project on distribution of income in society
Project • Impact on level of savings and investments in society
Political
Appraisal Social • Impact on fulfillment of national goals :-
• (1) Self sufficiency
• (2) Employment
• (3) Social order
Economical Environmental Gender
Project Appraisal Types of Feasibility
Ecological Appraisal Development projects take the following forms of feasibility studies :
• Impact of project on quality of :- Air, Water, Noise, Vegetation, Human life 1. Commercial viability
• Major projects ,such as these, cause environmental damage 2. Economic feasibility
• Power plants 3. Financial feasibility
• Irrigation schemes 4. Technical feasibility
• Industries like bulk drugs, chemicals and leather processing. 5. Management
• Likely damage & the cost of restoration The scope for scrutiny under each of these five heads would necessarily render
Financial Appraisal their careful assessment and the examination of all possible alternative approaches.
• Whether the project is financially viable?
• Servicing debt The process almost invariably involves making decision relating to technology, scale,
• Meeting return expectations location, costs and benefits, time of completion (gestation period), degree of risk and
Market Appraisal uncertainty, financial viability, organisation and management, availability of inputs,
• What would be the aggregate demand of the proposed product or service? know-how, labour Investment, Rate of return, Similarity to existing business ,Expected
• What would be the market share of the project under appraisal ? life, Flexibility, Environment impact, Competition etc. The detailed analysis is set down
• Past and current demand trends • Imports and exports in what is called a feasibility report.
• Past and current supply position • Nature of competition
• Production possibilities and • Cost structure
constraints • Elasticity of demand
Financial Appraisals Socio-Economic Appraisal
Finance is one of the most important prerequisites to establish an enterprise. It Socio-Economic Appraisal is employed mainly by governments and international
is finance only that facilitates an entrepreneur to bring together the labour, machines agencies to determine whether or not particular projects or policies will improve a
and raw materials to combine them to produce goods. In order to adjudge the community's welfare and should therefore be supported.
financial viability of the project, the following aspects need to be carefully analyzed : As cost benefit analysis enables the analyst to determine if a project will make a
• Cost of capital positive contribution to the welfare of a country, it should routinely be undertaken to
• Means of finance evaluate major government-funded projects and policies. The government should also
• Estimates of sales and production undertake a cost benefit analysis of any private project seeking government subsidies
• Cost of production or policy support, such as tariff protection.
• Working capital requirement and its financing
• Estimates of working results
• Break-even point
• Projected cash flow
• Projected balance sheet.
The activity level of an enterprise expressed as capacity utilization needs to be
well spelled out. However the enterprise sometimes fails to achieve the targeted level
of capacity due to various business uncertainty like unforeseen shortage of raw
material, unexpected disruption in power supply, instability to penetrate the market
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Project Financial Appraisal Techniques PRESENT VALUE AND FUTURE VALUE
There are various methods for Financial appraisal to evaluate the cash flows and COMPOUND INTEREST :
profitability of investment 3 For deposit of Rs 1000 in bank at 10% per annum rate of interest, after one year this
The methods should have three properties to lead to consistently correct decisions. amount will grow to Rs 1100. If we do not withdraw interest amount after second year
• It should consider all cash flows over the entire life of a project it become 1100+ 10X1100/100 = 1210 , after third year it will be 1331, after four year
• It should take into account the time value of money 1464 and so on.
• It should help to choose a project from among mutually exclusive projects which Future value = present value x (1+r)n
maximize the value of the companies’ stock where r = rate of interest and n= number of years
This formula can be employed for determining the present value of an
The two popular methods for Financial Appraisal are the
1) Simple Rate of Return
amount receivable in the future
2) Payback Period
They employ annual data at their nominal value. They do not take into account the life Present value = Future value
span of the project but rely on one year. (1+r)n
The two Discounted Cash Flow techniques for Financial Appraisal are the Present value = Future value x Discount factor
1) Net Present value Method (NPV) Where
2) Internal Rate of Return (IRR) Discount factor = 1
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the project’s entire life and the time factor by discounting (1+r) n
the future inflows and outflows to their present value.
Simple Rate of Return Method Pay-back period Method

Simple Rate of Return is the ratio of net profit in a normal year to the initial investment in Pay-back period for a project, measures the number of years required to recover a
terms of fixed and working capital. If one is interested in equity alone the profitability of project’s total investment from the cash flows it generates. 3
equity can be calculated. The simple rate of return could be presented as, 3 It is the expected number of years required to recover the original investment.
R = (F+Y)/I Re = F/Q If we consider a project with an investment of Rs. 30 crores and an expected cash flow of
where R = Simple rate of return on total investment; Rs. 3 crores per year for 10 years, the pay-back period is given by,
Re = Simple rate of return on equity capital
F = Net profit in a normal year after depreciation, interest and taxes; Payback period = Initial investment outlay = 30,00,00,000 = 10 years
Y = Annual interest charges; I = Total investment comprising of equity and debt; Annual cash flow 3,00,00,000
Q = Equity capital invested. The Payback period shows that the project’s initial investment is recovered in ten years.
• Normal year is a representative year in which capacity utilization is at technically Even if cash flows are not uniform, the pay-back period can be calculated easily by adding
maximum feasible level and debt repayment is still under way. together cash flows until the investment is recovered.
• The simple rate of return helps in making a quick assessment of profitability, The payback method is simple calculate and lays importance to recovering the original
particularly projects with short life. investment as fast as possible.
• Its shortcoming is that it leaves out the magnitude and timing of cash flows for the rest The shorter the payback period the quicker is the recovery of initial investment. But it
of the years of a project’s life. leaves out the time pattern of the cash flows within the pay-back period and the cash
• For evaluation, accurate data is required. In its absence simple rate of return may be flows after the payback period.
incorrect. Actually, it is biased against projects which yield higher returns in later years.
• Simple rate of return method is suitable for financial analysis of existing units. It is not The pay-back period method is not suitable for evaluation of alternatives and to make
suitable for optimizing investment.
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Discounted cash flow (DCF) techniques Net Present Value (NPV)

Assumptions in calculating the net present value
The following assumptions are made about cash flows when calculating the net present
value: NPV ={T0 + T1 + …….. } – Initial Investment
• all cash flows occur at the start or end of a year
• initial investments occur T0
When appraising capital projects, basic techniques such as Simple Rate of Return and • other cash flows start one year after that (T1)
Payback could be used. Alternatively, companies could use discounted cash flow • Also interest payments are never included within an NPV calculation as these are taken
techniques such as Net Present Value (NPV) and Internal Rate of Return (IRR). account of by the cost of capital.
• Net present value is the sum of discounted future cash inflow & outflow related to the
• To appraise the overall impact of a project using DCF techniques involves discounting all
project. Generally, the weighted average cost of capital (WACC) is the discounting
the relevant cash flows associated with the project back to their PV (present value)
factor for future cash-flows in net present value method.
If we treat outflows of the project as negative and inflows as positive, the NPV of the
project is the sum of the PVs of all flows that arise as a result of doing the project
The stream of benefit from project is discounted to its present value from which initial
Decision rule:
cost is subtracted to get the net present value of project
The NPV represents the surplus funds (after funding the investment) earned on the
project, therefore:: if the NPV is positive -the project is financially viable NPV = B1/ (1+r) +B2/(1+r)2 +B3/(1+r)3 +B4/(1+r)4+Bn/(1+r)n –initial investment
if the NPV is zero - the project breaks even
if the NPV is negative - the project is not financially viable B1,B2, B3 …..Bn . Net benefit each year up to the last year counted
if the company has two or more mutually exclusive projects under consideration it should
choose the one with the highest NPV
Net Present Value (NPV) Benefit cost ratio (BCR)

Example : BCR indicate benefit per rupee of cost, it can be calculated using following formula
XYZ Inc. is starting the project at cost of Rs. 10,00,000. The project will generate cash-flow
of Rs. 4,00,000 , Rs. 5,00,000 & Rs. 5,00,000 in year 1, year 2 & year 3 respectively.
Company’s WACC is 10%. Find out NPV. BCR = Present value of benefit
Present value of cost
Formula of NPV = [4,00,000/( 1+0.1)1] + [ 5,00,000 / (1+0.1)2 ] +[ 5,00,000/ (1+0.1)3 ]
– 10,00,000
Value Range of Benefit Cost Ratio Generic Interpretation
Net present value = 3,63,636.3 + 4,13,223.1 +3,75,657.4 – 10,00,000 BCR < 1 Project generates losses.
= 11,52,516.8 – 10,00,000
BCR = 1 Project is neither profitable nor lossy.
The net present value of the project is 1,52,516.8 BCR > 1 Project is profitable
Here, the net present value of the project is positive & therefore the project should be C=60,000 C=50,000 I=24,000 I=24,000 ... I=24,000
accepted. 0 1 2 3 ... 10
minimum discount rate of 10% , first two year C: Cost, and after that project I:Income
BCR = 24,000*(P/F10%,1)*(P/A10%,9)
[60,000+50,000*(P/F10%,1)]
= 1.19
Internal Rate of Return (IRR) Method Market and demand Analysis

An internal rate of return is the discounting rate, which brings discounted future cash flow Market and demand analysis is concerned with two broad issues:
at par with the initial investment. In other words, it is the discounting rate at which the
company will neither make loss nor make a profit. 1) What is the likely aggregate demand for the product/service?
2) What share of the market will the proposed project enjoy?
It is obtained by trial & error method. We can also state that IRR is the rate at which the
NPV of the project will be zero. i.e. Present value of cash inflow – Present value of cash The goal of any market study is to find the point where supply and demand intersect to
outflow = zero supply the right quantity of a good at the right price. Since the world is complex and
2020 2021 2022 2023
dynamic, no one can ever identify that exact point. A market analyst accumulates
initial investment -1000000
after-Tax Cash Flow 400000 500000 500000
information on as many factors as possible to make an educated guess.
Market analysis has six basic
WACC components:
10% PV 363636.4 413223.1 375657.4
where: 1) Situational analysis and specification
SUM OF PV 1152517
Ct=Net cash inflow during the period t of objectives,
LESS INITIAL -1000000
C0=Total initial investment costs NPV 152516.9
2) Collection of secondary information,
IRR 18% 3) Conduct of market survey,
IRR=The internal rate of return
4) Characterization of the market,
t=The number of time periods 5) Demand forecasting,
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Market Analysis Market Analysis : Survey methods

1) Situational Analysis and Specification of Objectives: 3) Conduct of Market Survey: Secondary information, though useful, often does not
In order to get a “feel” of the relationship between the product and its market, the project provide a comprehensive basis for market and demand analysis. It needs to be
may informally talk to customers, competitors, middlemen, and others in the industry. supplemented with primary information gathered through a market survey, specific to the
Wherever possible, h may look at the experience of the company to learn about the project being appraised.
performances and purchasing power of customers, actions and strategies of competitors The market survey may be census survey or a sample survey. In a census survey, the entire
and practices of the middlemen. population is covered. The word ‘population’ is used here in a particular sense. It refers to
If such a situational analysis generates enough data to measure the market and get a the totality of all units under consideration in a specific study.
reliable handle over projected demand and revenues, a formal study need not be carried- The market survey, in practice, is typically a sample survey. In such a survey a sample of
out, particularly when cost and time considerations so suggest. population is contacted or observed and relevant information is gathered. On the basis of
2) Collection of Secondary Information: Secondary information is the information that such information, inferences about the population may be drawn.
has been gathered in some other context and is already available. Primary information, on The information sought in a market survey may relate to one or more of the following:
the other hand, represents information that is collected for the first time to meet the i) Total demand and rate of growth of vi) Satisfaction with existing products,
specific purpose on hand. Secondary information provides the base and the starting point demand, vii) Unsatisfied needs,
for the market analysis. v) India year book, ii) Demand in different segments of the viii) Attitudes toward various products,
General Sources of Secondary Information vi) Statistical year book, market, ix) Distributive trade practices and
i) Census of India, vii) Economic survey of industries, iii) Income and price elasticities of demand, preferences,
ii) National sample survey reports, viii) Annual survey of industries, iv) Motives for buying, x) Socio-economic characteristics of buyers.
iii) Plan reports, ix) Annual reports of the development wing, v) Purchasing plans and intentions,
iv) Statistical abstract of the Indian union, Ministry of Commerce and Industry, etc.
Market Analysis : Characterization of the Market Analysis : Characterization of the

Market Market
4) Characterization of the Market: iii) Price: Price statics must be gathered along with statistics pertaining to physical
Based on the information gathered from secondary sources and through the market quantities. It may be helpful to distinguish the following types of prices.
survey, the market for the product/ service may be described in terms of the following: a) Manufacturer’s price quoted as FOB (Free on Board) price or CIF (Cost, Insurance and
Freight) price,
i) Effective Demand in the Past and Present: To gauge the effective demand in the past b) Landed price for imported goods,
and present, the starting point typically is apparent consumption which is deemed as: c) Average wholesale price and
d) Average retail price.
Production + Imports - Exports - Changes in stock level iv) Methods of Distribution and Sales Promotion: The method of distribution may vary
with the nature of the product. Capital goods, industrial raw materials or intermediates
The figure of apparent consumption has to be adjusted for consumption of the product by and consumer products tend to have different distribution channels. Likewise, methods
the producers and the effect of abnormal factors. The consumption series, after such used for sales promotion (advertising, discounts, gift schemes, etc.) may vary from
adjustments, may be obtained for several years. product to product.
v) Consumers: Consumers may be characterized along two dimensions as follows:
ii) Break-down of Demand: To get a deeper insight into the nature of demand, the Demographic and Sociological Attitudinal
aggregate (total) market demand may be broken-down into demand for different Age Preferences
segments of the market. Market segments may be defined by: Sex Intentions
a) Nature of product. Income Habits
b) Consumer group, and Profession Attitudes
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Responses
Market Analysis : Characterization of the Market Analysis : Characterization of the

Market Market
vii) Government policy: The role of the government in influencing the demand and
vi) Supply and Competition: It is necessary to know the existing sources of supply and
market for a product may be significant. Governmental plans, policies, and legislations,
whether they are foreign or domestic. For domestic sources of supply, information along
which have a bearing on the market and demand of the product under examination,
the following lines may be gathered;
should be spell-out. These are reflected in:
a) Location,
a) Production targets in national plans,
b) Present production capacity,
b) Import and export trade controls,
c) Planned expansion,
c) Import duties,
d) Capacity utilization level,
d) Export incentives,
e) Bottlenecks in production and
e) Excise duties,
f) Cost structure.
f) Sales tax,
g) Industrial licensing,
Competition from substitutes and near-substitutes should be specified because almost
h) Preferential purchases,
any product may be replaced by some other product as a result of relative changes in
i) Credit controls, financial regulations
price, quality, availability, promotional effort and so on.
j) Subsides/ penalties of various kinds.
Market Analysis : Demand Forecasting Market Analysis : Demand Forecasting
5) Demand Forecasting: On the basis of analysis and interpretation of information Though statistical techniques are essential in clarifying relationships and providing
gathered about various aspects of market and demand from primary and secondary techniques of analysis, they are not substitutes for judgement. What is needed is some
sources, an attempt is made to forecast the future demand of the proposed product or common sense mean between pure guessing and too much mathematics.
service. There are various methods of demand forecasting available to the market analyst.
1. Survey of buyers’ intentions: also known as Opinion surveys. Useful when customers
1. Survey of buyers’ intentions are industrial producers. (However, a number of biases may creep up). Not very useful
2. Delphi method for household consumers.
3. Expert opinion Limitation: passive and “does not expose and measure the variables under management’s
4. Collective opinion control”
5. Naïve models
6. Smoothing techniques 2. Delphi method: it consists of an effort to arrive at a consensus in an uncertain area by
a. Moving average questioning a group of experts repeatedly until the results appear to converge along a
b. Exponential smoothing single line of the issues causing disagreement are clearly defined.
7. Analysis of time series and trend projections Developed by Rand Corporation of the U.S.A in 1940s by Olaf Helmer, Dalkey and Gordon.
8. Use of economic indicators Useful in technological forecasting (non-economic variables).
9. Controlled experiments
10. Judgmental approach
Demand Forecasting : Naïve models

Market Analysis : Demand Forecasting
3. Expert opinion / “hunch” method 5. Naïve models

ask “experts in the field” to provide estimates, eg., dealers, industry analysts, specialist Naïve forecasting models are based exclusively on historical observation of sales (or other
marketing consultants, etc. variables such as earnings, cash flows, etc). They do not explain the underlying casual
Advantages: relationships which produces the variable being forecast.
Very simple and quick method. Advantage: Inexpensive to develop, store data and operate.
No danger of a “group-think” mentality. Disadvantage: does not consider any possible causal relationships that underlie the
forecasted variable.
4. Collective opinion method
Also called “sales force polling”, salesmen are required to estimate expected sales in 1. To use actual sales of the current period as the forecast for the next period; then,
their respective territories and sections. Yt+1 = Yt
Advantages: 2. If we consider trends, then, Yt+1 = Yt + (Yt – Yt-1)
Simple – no statistical techniques. 3. If we want to incorporate the rate of change, rather than the absolute amount; then,
Based on first hand knowledge. Yt+1 = Yt (Yt / Yt-1)
Quite useful in forecasting sales of new products.
Disadvantages:
Almost completely subjective.
Usefulness restricted to short-term forecasting.
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Demand Forecasting : Analysis of time

Demand Forecasting : Smoothing techniques
series and trend projections
6. Smoothing techniques The time series relating to sales represent the past pattern of effective demand for a
Higher form of naïve models: particular product. Such data can be presented either in a tabular form or
A. Moving average: are averages that are updated as new information is received. With graphically for further analysis. The most popular method of analysis of the time
the moving average a manager simply employs, the most recent observations, series is to project the trend of the time series. a trend line can be fitted through a
drops the oldest observation, in the earlier calculation and calculates an average series either visually or by means of statistical techniques. The analyst chooses a
which is used as the forecast for the next period. plausible algebraic relation (linear, quadratic, logarithmic, etc.) between sales and
Limitations: the independent variable, time. The trend line is then projected into the future by
One has to retain a great deal of data. extrapolation.
All data in the sample are weighed equally. Popular because: simple, inexpensive, time series data often exhibit a persistent growth
B. Exponential smoothing: uses weighted average of past data as the basis for a forecast. trend.
Yt+1 = aYt + (1-a) Yt or Y new = a Y old + (1-a) Y’ old, where, Disadvantage: this technique yields acceptable results so long as the time series shows a
Y new = exponentially smoothed average to be used as the forecast persistent tendency to move in the same direction. Whenever a turning point
Y old = most recent actual data occurs, however, the trend projection breaks down.
Y’old = most recent smoothed forecast The real challenge of forecasting is in the prediction of turning points rather than in the
a = smoothing constant projection of trends.
Smoothing constant (or weight) has a value between 0 and 1 inclusive. Four sets of factors: secular trend (T), seasonal variation (S), cyclical fluctuations (C ),
irregular or random forces (I).
O (observations) = TSCI
Assumptions:
The analysis of movements would be in the order of trend, seasonal variations and cyclical changes.
Effects of each component are independent of each other.
Demand Forecasting : Use of economic Demand Forecasting : Controlled

indicators experiments
The use of this approach bases demand forecasting on certain economic indicators, eg., 9. Controlled experiments
Construction contracts sanctioned for the demand of building materials, say, cement; Under this method, an effort is made to vary separately certain determinants of demand
Personal income for the demand of consumer goods; which can be manipulated, e.g., price, advertising, etc., and conduct the
Agricultural income for the demand of agricultural inputs, implements, fertilizers, etc,; experiments assuming that the other factors remain constant.
and Example – Parker Pen Co.
Automobile registration for the demand of car accessories, petrol, etc. Still relatively new and untried:
Steps for economic indicators: Experiments are expensive as well as time consuming.
See whether a relationship exists between the demand for the product and certain Risky – may lead to unfavourable reaction on dealers, consumers, competitors, etc.
economic indicators. Great difficulty in planning the study. difficult to satisfy the condition of homogeneity of
Establish the relationship through the method of least squares and derive the regression markets.
equation. (Y= a + bx)
Once regression equation is derived, the value of Y (demand) can be estimated for any
given value of x.
Past relationships may not recur. Hence, need for value judgement.
Limitations:
Finding an appropriate economic indicator may be difficult.
For new products – no past data exists.
Works best when the relationship of demand with a particular indicator is characterized
by a time lag. Eg., construction contracts will result in a demand for building
materials but with a certain amount of time lag.
Demand Forecasting : Judgemental

Technical analysis
approach
10. Judgemental approach Analysis of technical and engineering aspects is done continually when a project is
Required when: being examined and formulated. Other types of analyses are dependent and closely
Analysis of time series and trend projections is not feasible because of wide fluctuations intertwined with technical analysis.
in sales or because of anticipated changes in trends; and
Use of regression method is not possible because of lack of historical data or because of
management’s inability to predict or even identify causal factors. Materials and inputs
Even statistical methods require supplementation of judgement: An important aspect of technical appraisal is concerned with defining the materials
Even the most sophisticated statistical methods cannot incorporate all the potential and inputs required, specifying their properties in some detail, and setting up their
factors, e.g., a major technological breakthrough in product or process design. supply programme. There is an intimate relationship between the study of materials
For industrial products – if the management anticipates loss or addition of few large and inputs and other aspects of project formulation, particularly those concerned
buyers, it could be taken into account only through judgement approach. with location, technology, and equipment.
Statistical forecasts are more reliable for larger levels of aggregations. Materials and inputs may be classified into four broad categories:
(i) Raw materials,
(ii) processed industrial materials and components
(iii) auxiliary materials and factory supplies
(iv) utilities.
Technical analysis Technical analysis
Production technology (iii) Use by other units— The technology adopted must be proven by
For manufacturing a product/service often two or more alternative successful use by other units, preferably in India.
technologies are available. For example: (iv) Product mix— The technology chosen must be judged in terms of the total
• Steel can be made either by the Bessemer process or the open hearth process. product-mix generated by it, including saleable byproducts.
• Cement can be made either by the dry process or the wet process. (v) Latest developments— The technology adopted must be based on latest
• Soda can be made by the electrolysis method or the chemical method. development in order to ensure that the likelihood of technological obsolescence in
• Paper, using bagasse as the raw material, can be manufactured by the kraft the near future, at least, is minimized.
process or the soda process or the simon cusi process. (vi) Ease of absorption— The ease with which a particular technology can be
• Vinyl chloride can be manufactured by using one of the following reactions: absorbed can influence the choice of technology. Sometimes a high-level
acetylene on hydrochloric acid or ethylene or chlorine. technology may be beyond the absorptive capacity of a developing country which
Choice of technology may lack trained personnel to handle that technology.
The choice of technology is influenced by a variety of considerations: Product Mix
(i) Principal inputs— The choice of technology depends on the principal inputs The choice of product mix is guided primarily by market requirements. In the
available for the project. production of most of the items variations in size and quality are aimed the
(ii) Investment outlay and production cost— The effect of alternative technologies production of most of the items, variations in size and quality are aimed at
of investment outlay and production cost over a period of time should be carefully satisfying a broad range of customers. For example, production of shoes to different
assessed. customers.
Plant capacity Machinery and equipment

Plant capacity (also referred to as production as capacity) refers to the volume or The requirement of machinery and equipment is dependent on production
number of units that can be manufactured during a given period. Several factors technology and plant capacity. It is also influenced by the type of project.
have a bearing on the capacity decision.
(i) Technological requirement Structures and civil works
(ii) Input constraints Structures and civil works may be divided into three categories:
(iii) Investment cost i. Site preparation and development
(iv) Market conditions a. grading and leveling of the site
(v) Resources of the firm b. demolition and removal of existing structures
(vi) Governmental policy c. relocation of existing pipelines cables, roads, powerlines, etc.,
d. reclamation of swamps, draining and removal of standing water
Location and site e. connections for the following utilities
The choice of location and site follows an assessment of demand, size, and input ii. buildings and structures
requirement. Though often used synonymously, the terms 'location' and 'site' a. factory or process buildings;
should be distinguished. Location refers to a fairly broad area like a city, an b. ancillary buildings required for stores, warehouses, laboratories, utility
industrial zone, or a coastal area; site refers to a specific piece of land where the supply centers, maintenance services, and others;
project would be set up. c. administrative buildings
d. staff welfare buildings, cafetaria, and medical service buildings;
e. residential buildings.
Structures and civil works Work Schedule (Implementation schedule)

iii. outdoor works. The work schedule, as its name suggests, reflects the plan of work concerning
a. Supply and distribution of utilities (water, electric power, communication, installation as well as initial operation. The purpose of the work schedule is:
steam and gas); 1. To anticipate problems likely to arise during the installation phase and suggest
b. handling and treatment of emissions, wastages, and effluents; possible means for coping with them.
c. transportation and traffic arrangements (roads, railway tracks, paths, 2. To establish the phasing of investments taking into account availability of
parking areas, sheds, garages, traffic signals, etc.): finances.
d. outdoor lighting; 3. To develop a plant of operations covering the initial period (the running in
e. landscaping; period).
f. enclosure and supervision (boundary wall, fencing, barriers, gates, doors, In the project implementation schedule, the following information (the key
security posts, etc.). components) :
Project charts and layouts 1. Number and brief descriptions of project phases.
Once data is available on the principal dimension of the project— market size, plant 2. The deliverables set being archived within each project phase.
capacity, required technology, equipment and civil works, conditions obtaining at 3. Major activities for each deliverable.
plant site, and supply of inputs to the project— project charts and layouts may be 4. Key milestones.
prepared. These define the scope of the project and provide the basis for detailed 5. Responsibilities and assignments.
project engineering and estimation of investment and production costs. 6. Dependencies.
Economic analysis Economic analysis
An economic analysis is employed mainly by governments and international agencies 3. Identification of Costs and Benefits-The With-Without Principle: This is the basic
to determine whether or not particular projects or policies will improve a community's principle of any type of project evaluation. In practice, it means that an attempt should
welfare and should therefore be supported. be made to estimate the "the state of the world" as it will exist with the project in
The steps in preparing a standard economic evaluation are outlined below: existence. This should be contrasted with the "state of the world" that would have
1. Definition Objectives: The starting point and in many ways the most crucial aspect existed in the absence of the project (the "do nothing" option).
for the evaluation of an investment proposal is the specification of the objectives of the This principle has two important implications:
proposal and their relation'to the overall objectives of the agency. No appraisal of the First, economic evaluation must not simply be a comparison of before
project can be meaningful unless the objectives are clearly defined. project conditions with after project conditions because such comparison would
2. Identification Options: It is necessary to identify the widest possible range of options attribute the contribution of all pre-existing trends and external factors to the project
at the earliest stage of the planning process. One alternative that should be considered itself For example, reductions in on-going costs due to changed work practices should
is the possibility of the objective being met by the private sector. In developing various not be attributed to savings from an investment in new plant if the changes in work
options the first option to be considered is the base case of "do nothing" i.e. retain the practices would have been introduced regardless of the investment decision.
status quo. This is not to say the base case will not involve costs; in many cases doing Second, the analysis should include all impacts, both beneficial and otherwise, of the
nothing (for example continuing with a low maintenance programme) will result in cost proposal being evaluated. In particular, not only should the intended effects or benefits
penalties. One benefit of doing something may be the avoidance of these costs. which are the objectives of the project be included, but also the subsidiary or indirect
effects.
Where valuation is possible, two key concepts need to be kept in mind. Specific Issues
a) The Opportunity Cost Principle: The use of resources (manpower, finance a) Avoidance of Double Counting or Overstating of Benefits
or land) in one particular area will preclude their use in any other. Hence the In enumerating the costs and benefits of a proposal, care should be taken to avoid
basis for valuing the resources used is the "opportunity cost" of committing double counting. For example, the construction of a dam may increase the value of the
resources; i.e. the value these resources would have in the most attractive land which is to be irrigated as a result of the increased ability of the land to grow
alternative use. crops. The increased value of the land merely reflects the market's capitalisation of the
The adoption of this principle reflects the fact that the economic evaluation increased output stream. Inclusion of the net value of the increased output and the
of public sector projects should be conducted from the perspective of society increased land value would count the same benefit twice
as a whole and not from the point of view of a single agency. b) Treatment of Inflation
b) Willingness-to-pay Principle: In valuing the benefits of a project the aim is Due to inflation, costs and benefits which occur later will be higher in cash terms than
to place a monetary value on the various outputs of the project. Typically similar costs or benefits which occur earlier.
such outputs will include: c) Use of Shadow Prices
i) benefits for which a price is paid; and A shadow or accounting price is the price that economists attribute to a good or factor
ii) benefits for which no price is paid. on the argument that it is more appropriate for the purpose of economic calculation
Where the services are bought and sold it is generally presumed that the price than its existing price, if any. In evaluating any project, the economist may effectively
paid is a reasonable proxy for the values of the service to the consumer. correct a number of market prices and also attribute prices to unpriced gains and
losses that it is expected to generate.
d) Valuation of Specific Cost Items Costs to be Excluded from Analysis

i) Land and Pre-existing Buildings / Plant A number of items which are included as costs in accounting reports or financial
While a project may use land, buildings or plant already owned by an agency for which appraisals should not be included in an economic evaluation of an investment
no payment will be made, the opportunity costs of these assets should be included proposal.
ii) Labour a) Sunk Costs
In assessing labour costs, the value of existing labour resources transferred to the In an evaluation, all costs must relate to future expenditures only. The price paid 10
project, as well as additional labour required, should be included years ago for a piece of land or a plant item is of no relevance; it is the opportunity cost
iii) Overheads in terms of today's value (or price) which must be included. All past or sunk costs are
Labour related overheads such as supervision, transport costs, administrative costs, irrelevant and should be excluded.
printing and stationery etc., are also included. b) Depreciation
iv) Residual Values Depreciation is an accounting means of allocating the cost of a capital asset over the
At the end of the planning horizon or project life, some assets may still have some years of its estimated useful life. It does not directly reflect any opportunity cost of
value. Such assets may not have reached the end of their economic life and may still be capital.
of use to the agency or may be resale able. c) Interest
As future cash flows are discounted to present value terms in economic evaluations,
the choice of the discount rate is based on various factors which include the rate of
interest. The discounting process removes the need to include interest rate in the cash
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Social analysis Social analysis

SOCIAL COST BENEFIT ANALYSIS SOCIAL COST BENEFIT ANALYSIS
A social appraisal of a project goes beyond an economic appraisal to determine The Use of Distributional Weights in Social Analysis of Projects ( Million rupees)
which projects will increase welfare once their distribution impact is considered. Social
appraisal therefore tackles the moral and theoretical dilemma-that a project is worth
undertaking if it has the potential to produce a Pareto improvement in welfare.
Distributional Weights
One of the most commonly used methods of undertaking a social cost benefit analysis
is to introduce distributional weights in to the cash flow. Distributional weights are
attached to changes in income, costs and benefits, received by different income groups,
ensuring that a project's impact on the income of low income groups receives a higher
weight than the same rupees impact on the income of high income groups.
In the example shown below the government of a country with a highly skewed income
distribution is considering two mutually exclusive projects, A and B. Project A's costs
are borne by the rich and its benefits are received by the poor, while project B is the
opposite. Its costs are borne by the poor and its benefits are received by the wealthy.
Since the two projects are mutually exclusive the project with the highest NPV should
be selected
Capital budgeting Capital budgeting
Capital Budgeting – Definition The important steps involved in the capital budgeting process are
“Capital budgeting” has been formally defined as follows. 1. Project Generation. Investment proposals of various types may originate at different
1) “Capital budgeting is long-term planning for making and financing levels within a firm. Investment proposals may be either proposals to add new product
proposed capital outlay”. - Charles T. Horngreen to the product line or proposals to expand capacity in existing product lines. Secondly,
2) “The capital budgeting generally refers to acquiring inputs with longterm proposals designed to reduce costs in the output of existing products without changing
returns”. - Richards & Greenlaw the scale of operations. The investment proposals of any type can originate at any level.
3) “Capital budgeting involves the planning of expenditure for assets, the In a dynamic and progressive firm there is a continuous flow of profitable investment
returns from which will be realized in future time periods”. - Milton H. Spencer proposals.
The long-term activities are those activities that influence firms 2. Project Evaluation. Project evaluation involves two steps: i) estimation of benefits
operation beyond the one year period. The basic features of capital budgeting and costs and ii) selection of an appropriate criterion to judge the desirability of the
decisions are: projects. The evaluation of projects should be done by an impartial group. The criterion
• There is an investment in long term activities selected must be consistent with the firm’s objective of maximizing its market value.
• Current funds are exchanged for future benefits 3. Project Selection. There is no uniform selection procedure for investment proposals.
• The future benefits will be available to the firm over series of years. Since capital budgeting decisions are of crucial importance, the final approval of the
Capital budgeting is a step by step process that businesses use to determine the merits projects should rest on top management.
of an investment project. The decision of whether to accept or deny an investment 4. Project Execution. After the final selection of investment proposals, funds are
project as part of a company's growth initiatives, involves determining the investment earmarked for capital expenditures. Funds for the purpose of project execution should
rate of return that such a project will generate.
be spent in accordance with appropriations made in the capital budget.
Criteria of Capital budgeting Profitability index / Benefit-cost ratio
There are two broad criteria of capital budgeting : It is the ratio of value of future cash benefits discounted at some required rate of return
1. Non discounting criteria to the initial cash outflows of the investment
The method of capital budgeting are the techniques which are used to make PI method should be adopted when the initial costs of projects are different. NPV
comparative evaluation of profitability of investment. method is considered good when the initial cost of different projects is the same. PI
The non-discounting methods of capital are as follows : can be calculated as under :-
• Pay back period method (PBP)
• Accounting rate of return method (ARR) Present value of Cash inflows
PI =
Present value of Cash outflows
2. Discounting Criteria
• Net present value method (NPV)
If PI>1 the project will be accepted.
• Internal rate of return method (IRR)
If PI<1 the project will be rejected.
• profitability index method (PI) / Benefit-cost ratio
When PI>1, NPV will be positive, when PI<1 NPV will be negative. In case, more than
one project
have PI>1 then the project whose PI is the highest will be given first preference and the
project with minimum PI will be given last preference.
Project Planning Project Planning Process
Project planning refers to everything you do to set up your project for success. It’s the The basic processes of project planning are:
process you go through to establish the steps required to define your project objectives, Scope planning – specifying the in-scope requirements for the project to facilitate
clarify the scope of what needs to be done and develop the task list to do it. This creating the work breakdown structure
project objectives can be identified in a community plan or a strategic plan. Project Preparation of the work breakdown structure – spelling out the breakdown of the
planning is at the heart of the project life cycle, and tells everyone involved where project into tasks and sub-tasks
you’re going and how you’re going to get there. Project schedule development – listing the entire schedule of the activities and
The planning phase is when the project plans are documented, the project deliverables detailing their sequence of implementation
and requirements are defined, and the project schedule is created. It involves creating a Resource planning – indicating who will do what work, at which time, and if any
set of plans to help guide your team through the implementation and closure phases of special skills are needed to accomplish the project tasks
the project. Budget planning – specifying the budgeted cost to be incurred at the completion of
the project
Procurement planning – focusing on vendors outside your company and
subcontracting
Risk management – planning for possible risks and considering optional contingency
plans and mitigation strategies
Quality planning – assessing quality criteria to be used for the project
Communication planning – designing the communication strategy with all project
stakeholders
UNIDO project life cycle

Investment Phase
Project Phases and Stages
UNIDO (United Nations Industrial Development Organization) has divided project A) Negotiation and contracting stage. : There are four phases to the negotiation
cycles into phases and stages as follows process. The first is preparation, when you acquire all the documentation, facts, data
1. Pre-investment Phase and information necessary to bring others into agreement. For example, when
a) Identification of investment opportunity (Project Idea). negotiating contract details with external contractors, a project manager must gather
b) Preliminary selection stage (Pre-feasibility study). the number of project phases, breakdown of deliverables, milestones, time scales,
c) Project formulation stage (Techno-economic feasibility study). resource requirements and expectations
d) Evaluation and decision stage (Evaluation report and Detailed Project Report). The second stage is to exchange information and disclose necessary details with the
2. Investment Phase other party. This aids efficiency and reduces frustration by ensuring relevant
a) Negotiation and contracting stage. information is available to all and appropriate considerations are made prior to
b) Project design stage meeting. On a project, this information may include cultural or environmental
c) Construction stage considerations, company standards, rules and policies.
d) Start-up stage Bargaining is the third phase. It is at this stage that most of the interaction between
3. Operational Phase parties takes place, and individuals display a range of different negotiation styles and
a) Short-term views tactics to make their case. It is during bargaining that the risk of unsuccessful or
b) Long-term views troublesome negotiations is highest, with increased potential for tempers and
frustrations to flare.
UNIDO's stage,1(b). 1(c) and 1(d) coincide with the Government of India's practice of
The final phase of negotiation is closure. Like in a project life cycle, this phase formally
three stage project scrutiny, namely (i) Pre-feasibility study. (ii) techno-economic
seals and binds the parties into the outcomes of the agreement.
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Investment Phase Investment Phase

B) Project design stage : C) Construction stage : The construction stage involves site preparation, construction
of buildings and other civil works, together with the erection and installation of
equipment in accordance with proper programming and scheduling.
This is the implementation phase, where the project plan is put into motion and the
work of the project is performed practically on site. It is essential to maintain control
and communicate as needed during each implementation stages.
he team members involved in this phase will be responsible for Requests for
Information (RFIs), Change order management, conflict resolution, inspections,
submittal reviews, adhering to schedules and coordinating timely payments. Oversight
In the Project Design Stage the Project Manager details how the project will be managed in this area is critical because it has significant impact on a project's total cost.
and governed. The Project Plan is targeted at funders, management and Project
Managers. It is used in all later Stages to manage the project. Project Design differs from D) Start-up stage : start of manufacturing project or development project
the Operational Planning Stage in that you are thinking at a higher level about managing
the project. For example:
• How will decisions be made and who has the authority?
• If the Implementation Phase must happen in August, then when does the money
have to be secured to start the project?
• What staff training is required and when?
Project Work (Work Breakdown Structure) Project Work (Work Breakdown Structure)
A WBS, as per PMI is “a deliverable-oriented hierarchical decomposition of the work to The rule applies at all levels within the hierarchy: the sum of the work at the “child” level
be executed by the project team to accomplish the project objectives and create the must equal 100% of the work represented by the “parent” and the WBS should not
required deliverables. It organizes and defines the total scope of the project. Each include any work that falls outside the actual scope of the project, that is, it cannot
descending level represents an increasingly detailed definition of the project work. The include more than 100% of the work… It is important to remember that the 100% rule
WBS is decomposed into work packages. The deliverable orientation of the hierarchy also applies to the activity level. The work represented by the activities in each work
includes both internal and external deliverables.” package must add up to 100% of the work necessary to complete the work package.
The concept of work breakdown structure developed with the Program Evaluation and 2. Use Nouns, Not Verbs
Review Technique (PERT) by the United States Department of Defense (DoD). PERT was the purpose of a WBS is to track deliverables, not activities. The "what" of the work
introduced by the U.S. Navy in 1957 to support the development of its Polaris missile matters, not the "how" of getting there.
program One way to achieve this goal is to use nouns when adding elements to the WBS. That is,
every element in the WBS should be either a noun or an adjective.
WBS Design principles Think of "House foundation" instead of "Removing earth to create the foundation", or
1. The 100% Rule : Rule states that the WBS includes 100% of the work defined by the "Communication plan document" instead of "Gathering requirements for
project scope and captures all deliverables – internal, external, interim – in terms of the communication plan".
work to be completed, including project management. The 100% rule is one of the most The goal of this "nouns, not verbs" exercise is to force you to keep your elements broad
important principles guiding the development, decomposition and evaluation of the in scope. Activities usually describe the final level in any work package. Your WBS should
WBS. focus on one level above that.
Project Work (Work Breakdown Structure) Project Work (Work Breakdown Structure)
Levels of WBS Component of WPS ELEMENT
A most common level structure of WBS is as shown below: WBS element should contain the following four items:
1. The scope of work, including any “deliverables.”
PROJECT 2. The beginning and end dates for the scope of work.
3. The budget for the scope of work.
Task (Activity) 4. The name of the person responsible for the scope of work.
Level 1 Level 2 Level 3 Level 4 Level 5
Sub-Task 1. Project
High Level Scope
Scope Breakdown Work Stream Trade
Breakdown
1.1 Milestones and
Work Package Prelims
1.2 Design
1.3 Procurement
1.4 Construction
1.4.1 building block-1
1.4.1.1 Earthworks 1.4.1.1.1 Scrub & Clear
1.4.1.1.2 Trim and Grade
1.4.1.2 Structure
1.4.1.2.1 Formwork
1.4.1.2.2 reinforcement
1.4.1.2.3 Concrete
Project Work (Work Breakdown Structure) Project Formulation and constraints

Level 1 Level 2 Level 3 Level 4 Level 5
1.4.1.3 First Fix Services 1.4.1.3.1 Electrical
1.4.1.3.2 Mechanical
1.4.1.3.3 Hydraulic Project formulation is the systematic development of a project idea for arriving at an
investment decision. It has the built-in mechanism of ringing the danger bell at the
1.4.1.4 Fit Out 1.4.1.4.1 Framing
1.4.1.4.2 Ceilings earliest possible stage of resource utilization. Project formulation is a process involving
1.4.1.4.3 Walls the joint efforts of a team of experts. Each member of the team should be familiar
1.4.1.4.4 Joinery
1.4.1.4.5 Services Fit Off
with the broad strategy, objectives & other ingredients of the project. Besides being
an expert in his area of specialization, he should be able to play his role in the overall
1.4.2 building block-2 scheme of things.
1.4.2.1 Earthworks 1.4.2.1.1 Scrub & Clear
1.4.2.1.2 Trim and Grade
It is an important stage in the pre-investment phase it include :
1.4.2.2 Structure • The risk assessment and management identify what are potential risks and
1.4.2.2.1 Formwork obstacles the project will likely encounter and how to manage them.
1.4.2.2.2 reinforcement
1.4.2.2.3 Concrete
• The objective analysis facilitates the systematic identification and prioritization of
objectives and opportunities in a hierarchy or relationship of means-ends.
1.4.2.3 First Fix Services 1.4.2.3.1 Electrical • The planning and organizing of project framework in the Logframe through the
1.4.2.3.2 Mechanical
1.4.2.3.3 Hydraulic analysis of inputs, activities, results, purpose or outcome, and overall objective or
goal as a result of strategy analysis and selection.
1.4.2.4 Fit Out 1.4.2.4.1 Framing • The communication plan which describes how the project team is going to
1.4.2.4.2 Ceilings
1.4.2.4.3 Walls effectively communicate with each other within the project and to those who
http://www.frontdesk.co.in/forum 1.4.2.4.4. Joinery engage with the project externally.
1.4.2.4.5 Services Fit Off
Project Formulation and constraints Breakeven Analysis
• The monitoring and evaluation plan which develops a clear plan for monitoring Breakeven analysis is used to determine when your a business will be able to cover all
and evaluation. its expenses and start to make a profit. it describes the relationship between costs
• The work plan and budget plan which lay out detailed arrangements for technical and revenue. it is also called cost-volume analysis since it is useful to identify the
and operational aspects of project implementation such as the scheduling of volume of production at which the business break-even.
project activities and budget planning.
• The consolidation of the above results into a complete project document namely a In Break-Even Analysis a
project proposal which is used to communicate with stakeholders and potential profit occur after the Total
donors. revenue (TR) exceed the
Total cost (TC). Total cost
includes fixed cost (FC)
and variable costs (VC).
Break-Even happen when

TC = TR
Sensitivity Analysis Sensitivity Analysis
Sensitivity Analysis is also called what if analysis , it is the assessment of impact for THE PURPOSE OF SENSITIVITY ANALYSIS 10
an output of a system by changing its inputs. Sensitivity analysis is a technique for investigating the impact of changes in project
Sensitivity analysis focuses analysing the effects of changes in key variables on the variables on the base-case (most probable outcome scenario). Typically, only adverse
project’s IRR or NPV, the two most widely used measures of project worth. changes are considered in sensitivity analysis.
The purpose of sensitivity analysis is:
In the economic analysis of the projects, there are also other aspects of project 1. to help identify the key variables which influence the project cost and benefit
feasibility which may require sensitivity analysis. These include: 10 streams
1. Demand analysis: to assess the sensitivity of the demand forecast to changes in 2. to investigate the consequences of likely adverse changes in these key variables
population growth, per capita consumption, prices, etc. 3. to assess whether project decisions are likely to be affected by such changes
2. Least cost analysis: to verify whether the selected least-cost alternative remains 4. to identify actions that could mitigate possible adverse effects on the project.
the preferred option under adverse conditions
3. Sustainability analysis: to assess possible threats to the sustainability of the
project
4. Distributional analysis: to analyse whether the project will actually benefit the
poor.
Project Budgeting Project Budgeting
A project budget is the total projected costs needed to complete a project over a Rough estimate : Project managers develop the first budget estimate used before or
defined period of time. It’s used to estimate what the costs of the project will be for during the project initiation phase; to get a quick estimate of what would the costs of
every phase of the project. the project be to see if there is an interest in the organization or donor. It provides a
If you had a bigger budget, you could probably get more people to do your project rough idea of the project budget, estimates are based on high-level objectives,
more quickly and deliver more. That’s why no project plan is complete until you come provides a quick view of the project deliverables, Most rough estimates, depending on
up with a budget. But no matter whether your project is big or small, and no matter the project, have a range of variance from –25% to +75%.
how many resources and activities are in it, the process for figuring out the bottom Contract estimate, is more accurate, it is formulated late in the project's initiation
line is always the same. stage, it's done either from the donor’s RFP (request for proposal) requirements,
Steps in Preparation of budget 11 which sometimes includes conditions and formats on how to present a budget
1. Resource Requirements : Resource requirements involve determining what A contract estimate is quick, but not very accurate. The range of variance in the
resources (people, equipment, services, and material) and the quantities of those budget estimate is from –10 % to +25 %.
resources are required to complete the project. Definitive Estimate, is the most accurate of the estimate types, but takes the most
2. Budget Estimate : Determine the costs of each requirement which will result in time to create. The definitive estimate makes use of the work breakdown structure
the creation of the project budget. A cost estimate, which is the process to (WBS); This type of estimate is usually made during the planning phase of the project
approximate the costs that the project will spend to get or use the project to get detailed information on all the project costs and it uses the organization chart
resources There are three types of budget estimates that occur during the project of accounts to track costs in the accounting system. The accuracy of this estimate is
cycle, these estimates – rough estimate, contract estimate and definitive estimate normally -5% to +10%,
Project Budgeting Project Scheduling

Project scheduling is a mechanism to communicate what tasks need to get done and
3. Budget Development :
which organizational resources will be allocated to complete those tasks in what
This step involves putting it all together, including information from the organization
timeframe. A project schedule is a document collecting all the work needed to deliver
about cost recovery fees, shared cost pools, taxes, fees, and donor regulations or
the project on time.
restrictions. This step also includes the creation of a document that defines budget
Scheduling is laying out of the actual jobs of the project in the time order in which
authority and control mechanisms; the project budget management plan.
they have to be performed.
• Manpower and material requirements needed at each stage of construction are
4. Budget Approval
calculated, along with the expected completion time of each of the jobs.
The final steps in estimating the budget are getting approval. The completed project
• A schedule shows the starting and completion dates of each activity and the
budget should be reviewed by the project team and be reviewed by the
sequential relationship among the various activities
representative from the finance department.
Most commonly used tool for project scheduling are
• Bar chart (GANTT Chart)
• CPM
• PERT.
The project schedule is the tool that communicates
• what work needs to be performed
• which resources of the organization will perform the work and
• the timeframes in which that work needs to be performed.
Project Scheduling Techniques Project Scheduling Techniques

BAR Chart (GANTT Chart) Milestone GANTT Chart
Properties: Milestone Chart is an improved version of a bar chart. It is called Gantt Milestone
• This is a horizontal bar chart plotted over time (e.g. days, weeks or months). Chart. Combined activity bar charts can be converted to milestone bar charts by
• Each activity is shown as a bar (its length based on a time estimate). placing small triangles or circles or a flag at strategic locations in the bars to indicate
• Depending on task dependencies and resource availability, these bars may be completion of certain milestones within each activity or group of activities as shown in
sequential, or run in parallel. the figure below
• Each bar is plotted to start at the earlier possible start date
Bar charts are useful and • A milestone implies some
used to detect the amount of specific stage or point
resources needed for one where major activity either
particular project. begins or ends, or cost data
Resource aggregation is done become critical.
by adding resources vertically • Each bar in a milestone
in the schedule. chart again represents an
The purpose of this activity or job or task and
aggregation is to estimate the all the bars took together
work production and represent the entire
establishing estimates for project
man-hour and equipment
needed
Project Scheduling Techniques

Schedule Network Analysis
Microsoft Project Gantt Chart
• The schedule network is a graphical display (from left to right across a page) of all
logical interrelationships between elements of work — in chronological order.
• This order is from initial planning through to project closure.
• As the project progresses, regular analysis of this network diagram is a check to
ensure that the project is proceeding ‘on track’
Network diagrams are one of the modern tools of project management. There are
three popular network based scheduling techniques.
• Critical Path Method (CPM)
• Project Evaluation and Review Technique (PERT)
• Microsoft Project (and others) have blended CPM and PERT into one approach
• PERT was developed for the Polaris missile/submarine project in 1958

• CPM developed by DuPont during the same time
Initially, CPM and PERT were two different approaches
• CPM used deterministic time estimates and allowed project crunching
• PERT used probabilistic time estimates
Microsoft Project Gantt Chart
Network Scheduling Advantage Terminologies in network diagrams
1. Consistent framework Activity (Task):

2. Shows interdependences • An activity is any identifiable job which requires time,
3. Shows when resources are needed manpower, material and other resources to complete.
4. Ensures proper communication • The arrow in a network diagram represents activity.
5. Determines expected completion date Concurrent (parallel) activities:
6. Identifies critical activities • Which can be performed simultaneously and
7. Shows which of the activities can be delayed independently to each other.
8. Determines start dates • In the figure, A and B are concurrent activities.
9. Shows which task must be coordinated Event - The result of completing one or more activities
10. Shows which task can be run parallel Network - The combination of all activities and events that define a project
11. Relieves some conflict • Drawn left-to-right
12. Allows probabilistic estimates • Connections represent predecessors
Path - A series of connected activities
Critical - An activity, event, or path which, if delayed, will delay the completion of
the project
Critical Path - The path through the project where, if any activity is delayed, the
project is delayed
• There is always a critical path
http://www.frontdesk.co.in/forum • There can be more than one critical path
Terminologies in network diagrams Terminologies in network diagrams
Serial Activities: Two conventions can be used for developing networks are:
Performed one after the other, in Activity on Node (AON) Activity on Arrow (AOA)
succession. Here the nodes represent activities, while Here arcs represents activities of the
In the figure A and B are serial activities. arc(arrow) represent the precedent relations project and nodes represents events
Activity duration: A comes before B,

An activity’s duration is estimated the time required A B C
which comes before C
for its completion. A B C
Time unit may be hours, days, weeks or months.
Activity duration= Work quantity/Production rate
A A and B must both be
A
B C
completed before C
Event (Node): can start
The beginning or end of the activity is
C
known as event.
B
It represents specific time and does not B B and C cannot begin B
consume time manpower, material, and
A until A is completed A
other resources.
http://www.frontdesk.co.in/forum C http://www.frontdesk.co.in/forum
C
Terminologies in network diagrams Terminologies in network diagrams

Dummy Activity: Latest Finish Time (LF):
Which doesn’t consume resources like time, cost, manpower, equipment etc. It is the latest time the
But is only used to show relationships. activity must be completed
It is represented by Dashed Arrow. without delaying project
duration.
Earliest Start time (ES): It is equal to the latest
Earliest Finish Time
It is the earliest occurrence time of the head
(EF):
possible time an event.
It is the earliest
activity or operation
possible time for
can be started. Latest Start time (LS):
completion of an
It is equal to the It is the latest possible time;
activity without
earliest occurrence an activity can be started
delaying the project
time of the tail event of without delaying the project.
completion time.
that activity. It is LS= LF – duration
EF= ES + duration
represented either EST LSi=LFj – tij
EFj=ESi+tij
or simply ESi
Slack Rules to draw Network diagram

The Slack time for an activity is the time between its earliest and latest start time , or 1. Each activity is represented by one and only one arrow in the network. This implies
between its earliest and latest finish time that no single activity can be represented twice in the network.
Float or Slack is the amount of time that an activity can be delayed past its earliest start 2. No two activities can be identified by the same beginning and end event. In such
or earliest finish without delaying the project. cases, a dummy activity is introduced to resolve the problem as shown in
3. Thus a network should be developed on the basis of logical or technical dependence.
4. The arrows depicting various activities are indicative of logical precedence only;
hence length and bearing of the arrows are of no significance.
5. The flow of the diagram should be from left to right.
6. Two events are numbered in such a way that the event of higher number can happen
only after the event of lower number is completed.
7. Arrows should be kept straight and not curved. Avoid arrow which cross each other.
8. Avoid mixing two directions vertical and standing arrows may be used if necessary.
9. Use dummy activity freely in rough graph but final network should have only
reluctant dummy.
10. The network has only one entry point called the start event and one point of
emergence called end event.
11. Angle between the arrows should be as large as possible.
Microsoft Project AON Network Microsoft Project AON Network
Note the tasks in red are along the critical path and tasks in blue are non-critical.
Looking closer we see that some activities, such as Grade Site and Set
Foundations, are performed in parallel. Others, such as Lay Control Cable and
Remove Equipment are in a strict series relationship.
Critical Path Method (CPM) Critical Path Method (CPM)

Critical path:
Unlike bar chart, it uses arrows to represent activities and length of arrows has no
The longest path in a CPM network is called critical path.
relation with activity duration. Start or end of an activity is called event and it is shown
There may be more than one critical path in a network.
by circles with the special designation.
Project duration:
Terminology:
The time required to travel critical path is called project duration.
• Starting event is called tail event and ending event is called head event.
Critical activities:
• Some event plays dual both the role of head and tail such events are called dual role
The activities lying on critical path are called critical activities.
events.
Floats
• Activity which must be completed before start of another activity is predecessor.
Float means the available free time for an activity, which is useful for managers to
• Activity which starts after completion of an activity is its successor.
manage the limited resources.
An activity has four types of floats.
Total Float (TF):
It is the total free time for an activity i.e.
maximum time by which completion of
an activity can be delayed without
affecting project completion time.
TF= (LF-ES)-tij = ( LF-tij )- ES = LS – ES
Activity B is successor of activity A and activity A is predecessor of activity B.
Total float for this activity A-B is (LS – ES) = (14 – 9) = 5

Free Float (FF): CPM example:
It is the spare time allowable for an activity so that the start time of succeeding activities
are not affected. There are three paths:
It is based on the possibility that all events occur at their earliest time.
FF = (EF -ES) – tij =EF – (ES+tij) Duration(week
Paths
Numerical example: s)
Free float for the activity A-B is = 20 – (9 + 10) = 20 – 19 = 1
1-2-3-4 4+0+7=11
Independent Float (IF or Ind. Float):
It is the maximum delay allowable for an activity so that the start time of succeeding 1-2-4 4+6=10
activities are not affected.
It may come negative but should be taken as zero. 1-3-4 3+7=10
IF = EF – LS – tij
Numerical example: Hence from above definition,
Independent float for the activity A-B is = 20 – (14 + 10) = 20 – 24 = -4 (considered as 0)
Critical path= 1-2-3-4
Interfering Float (Int. Float):
Project duration= 11 weeks(time duration
It is name given to head event slack. It is the difference between TF & FF.
along the critical path)
Int. Float= TF – FF Critical activities= 1,2,3,4
Interfering float for the activity A-B is = 5 – 4 = 1

CPM example: Significance of critical path:
• If there is any delay in either starting or if the time taken to complete critical
Event
Duration Earliest Start Earliest Finish Latest Start Latest Finish
Total Float activity exceeds the estimated time, project implementation period will get
(Weeks) Time Time Time Time
extended.
1-2 4 0 4 0 4 0 • Thus, any delay in critical activities leads to time overrun of the project which
ultimately results in cost overrun.
2-3 0 4 4 4 4 0
Advantages of Critical Path Method
3-4 7 4 11 4 11 0 • Makes dependencies visible.
1-3 3 0 3 1 4 1 • Organizes large and complex project.
• Enables the calculation of float of each activity.
2-4 6 4 10 5 11 1
• Encourages the project manager to reduce project duration.
Characteristics of critical path: • Increases visibility of the impact of schedule revisions.
It is the longest path of activities. • Provides opportunities to respond to the negative risk going over-schedule.
It determines the total project duration. Shortcomings
There may be more than one Critical Path in a network. • In large and complex projects, there will be thousands of activities and dependency
A Critical Path may consist of less no. of activities than Non-critical Path. relationships.
The Critical Activities demand the requirement of resources prior to other activities to • This method doesn’t account for resource and resource allocation.
complete the project in time.
Project Evaluation and Review Technique Project Evaluation and Review Technique
(PERT) (PERT)
Like CPM, PERT is also a network based planning tool developed by US Navy in 1958. It Expected time (te)
was used for scheduling Polaris Missile Project. From three time estimates, we calculate average time i.e. expected time (te) using the
• But, unlike CPM, PERT is used for novel projects like research and development (R following formula.
& D) where it is difficult to estimate activity duration accurately. te=(t0+4 tm+tp)/6
• CPM is used for projects with prior experience such as civil engineering works.
• It is a probabilistic approach for estimating project duration of an activity and For example when to = 3, tp = 9 and tm = 6 then, as per the formula,
event-oriented network diagram. te =to + 4 x tm + tp/6= 3+ 24 + 9/6 = 6;
• PERT is preferred for those projects in which correct time determination for various when the three estimates are placed in time scale.
activities cannot be made.
PERT uses three-time estimate for each activity with a view to overcoming uncertainty
in time estimates.
Optimistic time estimate (t0):
It is minimum time i.e. the shortest possible time required to complete the activity in
ideal conditions.
Pessimistic time estimate (tp):
Maximum time required to complete the activity in the worst condition. When the probability follows beta distribution (as assumed in PERT), and in the scale of
Most probable time estimate (tm): time, time units 12 represents 100 per cent probability, then time units 6 is 0.5 or 50 per
Time required to complete the activity in normal circumstances. cent probability. The most likely estimate is a probability of 0.5. As we have noted in the
averaging formula the weightagehttp://www.frontdesk.co.in/forum
for to tm and tp are 1, 4, and 1, respectively.
(PERT) (PERT)
The 0 to 2 in the time scale representing 1/6 th = 0.17, The network is constructed in PERT as per the te developed from the three different
2 to 6 in the time scale representing 4/12 th = 1/3 th =0.33, time estimates as shown below:
6 to 10 is 0.33 All the different estimates of
10 to 12 is 0.17. time as well as the worked out
Therefore, the probability of tm will lie between 2 to 10 i.e. 0.33 + 0.33 = 0.66 te are shown in the network
PERT considers te as more probable time estimate for activities and then the network diagram against the relevant
construction and the critical path is drawn considering te-s for the respective activities. activity. There is, however, no
The estimate of te as explained specific rule for writing such
here is more reliable as it takes estimates on the network.
into account the longest and We will now redraft the network (to have a cleaner diagram) with only the te and
the shortest possible time work out the Critical Path as per the following steps:
estimates also and it provides a Step 1. Calculating EST s and plotting them on the network as detailed below:
probability of 50 per cent. event ① = start with 0;
Once the te is worked out for event ② = EST of tail +te i.e. 0+5=5 days
each of the activities the event ③= 0+ 14 days;
network can be constructed event ④ = 5+15=20 days
following the same principle event ⑤ = highest of 14 +9, 5+8, and 20+4(as there are different tail events) = 24 days;
event ⑥ = 24+5=29 days http://www.frontdesk.co.in/forum
(PERT) (PERT)
Step 2. We are to come backward from the end event ⑥. Step 3:
Calculating the LFTs and plotting them on this network as follows: We know the events having same EST and LFT are on the critical path and now we find
of event ⑥ = EST of event (6) = 29 days, as already found in Step 1; those are 1, 2, 3, 4, 5 and 6. The critical path is now shown by double-line arrows and
of event ⑤ = LFT of head event minus te, i.e. 29 – 5 = 24 days; the project duration is 29 days.
of event ④ = 24 – 4 = 20 days; This is subject to the random variation of the actual performance time as against
of event ③ = 24 – 9 = 15 days; te (time estimates for PERT) of 5, 15, 4 and 5 time units for activities on the critical
of event ② = lowest of 24 – 8,20 – 15 and 15-9 (as there are three different head path.
events) = 5 days; Therefore, the actual time to perform the four activities A, D, G and H represents the
of event ① = 5-5 = 0 day. time to complete the project and PERT works out by means of statistical theory the
probability of meeting the time target.
With the ESTs and LFTs
calculated as detailed in Step
1 and Step 2 above we will
produce the network diagram
as:
EST = Early start Time

LFT = Late finish Time
Finance Financial terms

Finance is defined as the management of money and includes activities such as Debt instruments are tools an individual, government entity, or business entity can
investing, borrowing, lending, budgeting, saving, and forecasting. There are three main utilize for the purpose of obtaining capital. Debt instruments provide capital to an entity
types of finance: (1) personal, (2) corporate, and (3) public/government. that promises to repay the capital over time. Credit cards, credit lines, loans,
Financial terms and bonds can all be types of debt instruments.
A recourse is a legal agreement which gives the lender the right to pledged collateral if
the borrower is unable to satisfy the debt obligation. Recourse refers to the legal right to Debt financing occurs when a firm raises money for working capital or capital
collect. expenditures by selling debt instruments to individuals and/or institutional investors.
Collateral is an asset that a lender accepts as security for extending a loan. If the
borrower defaults on her loan payments, the lender may seize the collateral and sell it to Lease financing enables the renting or leasing of assets rather than buying the assets.
recoup some or all of his losses. Lease finance is a viable financing alternative whereby project costs are met by procuring
Non-recourse finance is a type of commercial lending that entitles the lender to assets and equipment on hire. Items like cars, consumer durables, computers or a house
repayment only from the profits of the project the loan is funding and not from any may be leased.
other assets of the borrower. Such loans are generally secured by collateral.
Limited recourse finance As the name suggests, in limited recourse project financing, Generally leases are of two types:
responsibilities and obligations of the sponsors is limited. Limited recourse debt is a debt • Operating Lease: A short-term lease. The possession of asset returns to the owner or
in which the creditor has limited claims on the loan in the event of default. the lessor at the end of the lease term.
Equity Financing : Equity financing is the process of raising capital through the sale of • Finance Lease: here the lessee has an option to buy the asset at the end of the lease
shares. Equity financing comes from many sources; for example, an entrepreneur's tenure. Generally for a longer period.
friends and family, investors, http://www.frontdesk.co.in/forum
or an initial public offering (IPO). http://www.frontdesk.co.in/forum
Finance Function : Objectives Finance Function : Scope

The objective of finance function is to arrange as much funds for the business as
4. Maximising Value of Firm. Finance function also aims at maximizing the value of the
are required from time to time. This function has the following objectives.
firm. It is generally said that a concern's value is linked with its profitability.
1. Assessing the Financial requirements. The main objective of finance function is to assess
the financial needs of an organization and then finding out suitable sources for raising
them. The sources should be commensurate with the needs of the business. If funds are Scope of Finance Function
needed for longer periods then long-term sources like share capital, debentures, term loans The scope of finance function is very wide. While accounting is concerned with
may be explored. the routine type of work, finance function is concerned with financial planning,
2. Proper Utilisation of Funds : Though raising of funds is important but their effective policy formulation and control.
utilisation is more important. The funds should be used in such a way that maximum i) Financial Planning. The first task of a financial manager is to estimate short term
benefit is derived from them. The returns from their use should be more than their cost. It and long-term financial requirements of his business. For this purpose, he will prepare a
should be ensured that funds do not remain idle at any point of time. The funds committed financial plan for present as well as for future.
to various operations should be effectively utilised. Those projects should be preferred ii) Deciding Capital Structure. The Capital structure refers to the kind and proportion of
which are beneficial to the business. different securities for raising funds. After deciding about the quantum of funds required
3. Increasing Profitability. The planning and control of finance function aims at increasing it should be decided which type of securities should be raised.
profitability of the concern. It is true that money generates money . To increase profitability, iii) Selection of Source of Finance. After preparing a capital structure, an appropriate
sufficient funds will have to be invested. Finance function should be so planned that the source of finance is selected. Various sources from which finance may be raised, include:
concern neither suffers from inadequacy of funds nor wastes more funds than required. A share capital, debentures, financial institutions, commercial banks, public deposits, etc.
proper control should also be exercised so that scarce resources are not frittered away on iv) Selection of Pattern of Investment. When funds have been procured then a
uneconomical operations. Thehttp://www.frontdesk.co.in/forum
cost of acquiring funds also influences profitability of the decision about investment pattern is to be taken. The selection of an investment
business. pattern is related to the use of funds.
Project Finance Infrastructure Projects Financing
Project finance refers to the long term financing of infrastructure and industrial Infrastructure projects typically bear a long period of gestation, which needs to be
projects based on the projected cash flows of the project rather than the balance supported by debt of a longer tenure. Inadequate availability of long-term debt
sheets of the project sponsors. from domestic financial institutions posed an challenge for sustainable financing of
The salient features of project finance are as follows: PPP projects.
1. The lenders finance the project looking at the creditworthiness of the project, not The Government decided to create a new financing vehicle India Infrastructure
the creditworthiness of the borrowing party. The repayment of the loans is made Finance Company Limited (IIFCL) with a mandate to provide long-term debt to PPP
from the earnings of the project. projects . The exposure of IIFCL in any project was limited to 20 % of the project
2. Project financing is also known as “limited recourse” financing as the borrower costs, which translated to about 30% of project debt, assuming a debt equity ratio of
has a limited liability. The security taken by the lenders is largely confined to the 70:30.
project assets. Provisions in income tax act
Public-Private Partnership (PPP) Section 10(23G) of the Income Tax Act
India needs large investments in infrastructure for accelerating inclusive growth This clause exempts tax on income from dividends, interest and long term capital
aimed at poverty alleviation and improvement in quality of life. Due to fiscal gains from any investment made in an enterprise engaged in the business of
constraints public investment can not meet the project financial needs, Public- developing, maintaining and operating an infrastructure facility — and has been of
Private Partnership (PPP) has emerged as the principal vehicle for attracting private great help in facilitating infrastructure investments.
investment in infrastructure projects. Tax holidays under section 80IA
PPP projects are usually financed on a 30:70 ratio of equity and debt, mobilisation of Section 80IA of the Income Tax Act relates to infrastructure projects and provides for
the requisite debt resources ishttp://www.frontdesk.co.in/forum
very difficult task for government. 100 percent tax deduction onhttp://www.frontdesk.co.in/forum
profits for 10 years and 50 percent for the next five.
Infrastructure Projects Financing Financial Needs Assessment
Hybrid Annuity Model (HAM) Needs are simply the differences between your current achievements and your desired
Hybrid annuity means that payment is made in a fixed amount for a considerable accomplishments.
period and then in a variable amount in the remaining period. In this, Government Needs assessments can be a systematic process to guide decision making.
will contribute to 40% of project cost in the first five years through annual payment • Needs assessments can provide justification for decisions before they are made.
(annuity). The remaining payment will be made on the basis of the assets created • Needs assessments can be scalable for any size project, time frame, or budget.
and the performance of the developer. Here, hybrid annuity means the first 40% • Needs assessments can offer a replicable model that can be applied by novices or
payment is made as fixed amount in five equal instalments whereas the remaining experts.
60% is paid a variable annuity amount after the completion of the project depending • Needs assessments can provide a systemic perspective for decision makers
upon the value of assets created • Needs assessments can allow for interdisciplinary solutions to complex problems
National Investment and Infrastructure Fund (NIIF) Scope of Financial Needs Assessment:
The Government has set up National Investment and Infrastructure Fund (NIIF), as We can break down decisions into three levels:
announced in the Union budget 2015-16, with a proposed corpus of INR 40,000 • Strategic : typically involves financial goals, objectives, and strategic policies defining
crore, which may be raised from time to time. The Government’s share/contribution the relationship between organizations and the society they serve
in the corpus will be 49 percent, the balance 51 percent raised from strategic anchor • Tactical : includes the financial policies and procedures put in place to both support
partners viz., Multilateral/bilateral institutions, Sovereign Wealth Funds, Pension strategic decisions and guide operational decisions, thereby defining the goals and
funds and domestic Public sector enterprises. This would help in leveraging objectives of an organization or institution
resources from public as well as private sector and augmenting equity flow to • Operational : includes all sorts of short- and long-term financial decisions that typically
infrastructure projects http://www.frontdesk.co.in/forum
involve implementing projectshttp://www.frontdesk.co.in/forum
or programs and carrying out tasks to produce results
Financial Needs Assessment Financial Needs Assessment
Estimating Working Capital Requirement : There are broadly three methods of 2. Regression analysis
estimating or analysing the requirement of working capital This statistical estimation tool is utilized by mass for various types of estimation. It tries
1. Percentage of revenue or sales, to establish trend relationship. We will use it for working capital estimation. This method
2. Regression analysis expresses the relationship between revenue & working capital in the form of an
3. Operating cycle method. equation (Working Capital = Intercept + Slope * Revenue). The slope is the rate of
Estimating working capital means calculating future working capital. It should be as change of working capital with one unit change in revenue. Intercept is the point where
accurate as possible because the planning of working capital would be based on these regression line and working capital axis meets (Will not go deeper into statistical details).
estimates and bank and other financial institutes finance the working capital needs to be At the end of the statistical exercise with past revenue and working capital data, we will
based on such estimates only. get an equation like below:
1. Percentage of revenue or sales, Working Capital = -6.34 + 0.46 * Revenue
It is the easiest of the methods for calculating the working capital requirement of a 3. Operating cycle method.
company. This method is based on the principle of ‘history repeats itself’. For estimating, This is probably the best of the methods because it takes into account the actual
a relationship of sales and working capital is worked out for say last 5 years. If it is business or industry situation into consideration while giving an estimate of working
constantly coming near say 40% i.e. working capital level is 40% of sales, the next year capital. A general rule can be stated in this method. Longer the working capital operating
estimation is done based on this estimate. If the expected sales are 500 million rupees, cycle, higher would be the requirement of working capital and vice versa. We would
200 million rupees would be required as working capital. agree to the point also. The following formula can be used to estimate or calculate the
working capital
Working Capital = Cost of Goods Sold (Estimated) * (No. of Days of Operating Cycle /
365 Days) + Bank and Cash Balance.
Evolution of Financing Needs in

Infrastructure financing methods
Infrastructure
Evolution of Financing Needs in Infrastructure in India Municipal bonds:
This methodology is an excellent opportunity but is least used to mobilize debt
• 1984 Development of Capital markets and PPP through FIRE (D) program financing. Indian government offers two types of municipal bonds: Revenue Bonds and
• 1988 1) Asian Development Bank's first microfinance project was approved Government Obligation Bonds. Government has come in association with IL&FS to
2) Tamil Nadu Urban Development Fund was established to finance urban induce good credit quality and reliability in debt instrument market. If local government
infrastructure projects by issuing Urban Infrastructure Funds wants to issue municipal bonds, they need to provide financial structure (Type of dent:
• 1988 : Asian Development Bank's first microfinance project was approved GO or RO, terms, repayment plan, interest rates), credit rating issued by ICRA or CARE,
• 1990 : BOT, Gujarat infrastructure development act authorization and approval documents, prospectus (information of potential investors,
• 1991 Private Investments invited post Liberalization disclosures), guarantees and transaction costs
• 1995 Ahmadabad Municipal Corporation requested credit rating from CRISIL to Urban infrastructure funds
launch Municipal Bonds A local government which is inefficient in raising commercial capital on its own due to
• 1998: New Tirupur Area Development Corporation Limited (NTADCL), Tamil Nadu less credit rating or structural bottlenecks, UIFs is an initiative by government. Four types
Corporation for Industrial Infrastructure Development Ltd (TACID) formation of funds (Capital fund, project development funds and credit rating enhancement fund,
• 2002 1) Tamil Nadu Urban Development Fund established a trust- Water Pooled Grant fund) are maintained are managed by the PDC or internal staff. The main
financing objectives of these funds are to provide the access of funds to the incompetent local
2) Local currency financing using debt swaps and external commercial government, reduce cost of capital, promote PPP and develop urban infrastructure
borrowing (ECB)and hedging for risk mitigation projects.
• 2009 Technical Assistance Fund (TAF) UNAIDS fund For increasing building capacity in
various country
Infrastructure financing methods Partnership Models of PPP

Pool Financing: PPP (public private partnership) using various partnership model (BOT, BOO, BOLT) is to
Due to the budgetary constraints, it was difficult for local small governments to exploit facilitate easy access of capital for infrastructure projects. One of the tools of PPP is VGF
the ‘municipal bond mechanism’ and generate long term financing debt. The other (viability gap financing) which had high return but high risk as well. New financing
issues with municipal bonds was high fixed issuance cost percentage and availability in resources need to be developed not only on the debt side but also on the equity side.
less quantity and hence they weren’t able to lure the institutional investors. Pooling • Build-Operate-Transfer (BOT) ,
technique is used in order to facilitate a SPV and create the interest of capital market for • Build-Own-Operate (BOO),
local small government. Tamil Nadu and Karnataka were the first two states to use this • Build-Operate-Lease-Transfer (BOLT),
technique in 2002 to issue the bonds of Rs. 130.4 Crore for sanitization and water • Design-Build-Operate-Transfer (DBFOT),
project in 14 local governments. It used the US based bond bank model which • Lease-Develop-Operate (LDO),
hypothetically form and administer a SPV and also issue the bonds on its own name for • Operate-Maintain-Transfer (OMT), etc.
the group of local governments. From this hypothetical unit the local government • Leasing
borrows and the repayment of these borrowed funds is done by the pooled • Joint Venture
government. • Operations or management contracts
Microfinance : This new innovative tool is to facilitate the triple bottom population and • Cooperative Arrangements
provide them opportunities to build infrastructure. India’s more than 30% population • Lease Renovate Operate Transfer (LROT)
lives in slum areas and seeing their financial weakness, no commercial bank or municipal • Design Construct Manage Finance (DCMF)
bond is accessible. SKS, APS (2004) and other MFIs took the responsibility and provided • Build Own Operate Remove (BOOR)
funds at high interest rates. Even though this tool is to promote more PPP, but interest
rates are very high that repayments become default.
Partnership Models of PPP Partnership Models of PPP

BOT: It is conventional PPP model in which private partner is responsible to design, DBFO: In this model, entire responsibility for the design, construction, finance, and
build, operate (during the contracted period) and transfer back the facility to the public operation of the project for the period of concession lies with the private party.
sector. LDO: In this type of investment model either the government or the public sector entity
• Private sector partner has to bring the finance for the project and take the retains ownership of the newly created infrastructure facility and receives payments in
responsibility to construct and maintain it. terms of a lease agreement with the private promoter.
• Public sector will allow private sector partner to collect revenue from the users. The • It is mostly followed in the development of airport facilities.
national highway projects contracted out by NHAI under PPP mode is a major Management contract: Here, the private promoter has the responsibility for a full range
example for the BOT model. of investment, operation and maintenance functions. He has the authority to make daily
BOO: In this model ownership of the newly built facility will rest with the private party. management decisions under a profit-sharing or fixed-fee arrangement.
• On mutually agreed terms and conditions public sector partner agrees to ‘purchase’ Service contract: This approach is less focused than the management contract. In this
the goods and services produced by the project. approach, the private promoter performs a particular operational or maintenance
BOOT: In this variant of BOT, after the negotiated period of time, project is Transferred function for a fee over a specified period of time.
to the government or to the private operator.
BOOT model is used for the development of highways and ports.
BOLT: In this approach, the government gives a concession to a private entity to build a
facility (and possibly design it as well), own the facility, lease the facility to the public
sector and then at the end of the lease period transfer the ownership of the facility to
the government.
• This approach has been used for the development of highways and ports.
Financing Sources :
Projects Finance Life cycle
Infrastructure Projects
Preliminary project
assessment
Project Identification Issue of LOI (Letter of Intent) Resources
Due diligence
Resolution of Due Conventional Non-conventional
diligence issue
Internal External Commercial loan
Term sheet Term Sheet negotiations Issue of term Tax External Borrowing PPP
signing sheet
Non Tax Govt loan Pricing mechanism
Drafting of financial
document capital Grant Land as resource
Financial Project
closure Implementation and completion Accessing capital market
monitoring Operation and Social capital through community
monitoring participation
Debt Servicing
Non-conventional Financing sources :

Infrastructure Projects Financing
Infrastructure Projects
Project Monitoring
Designing the Monitoring System
 Identify key factors to be controlled

 Monitoring - Collecting, recording, and reporting – Scope
information concerning any and all aspects of – Cost
project performance – Time
 Controlling - Uses the data supplied by monitoring  Information to be collected must be identified
to bring actual performance into compliance with  Do not want to avoid collecting necessary data because it is
the plan hard to get
 Evaluation - Judgments regarding the quality and  Do not want to collect too much data
effectiveness of project performance  The next step is to design a reporting system that gets the
data to the proper people in a timely and understandable
manner
Reporting and Corrective Actions Earned Value Analysis
 Everyone should be tied into the reporting system Earned Value Analysis (EVA) is a method that allows the project manager
 Reports should address each level to measure the amount of work actually performed on a project beyond
 Not at same depth and frequency for every level the basic review of cost and schedule reports
 Lower-level needs detailed information • Have covered monitoring parts
 Senior management levels need overview reports • Timing and coordination between individual tasks is important
 Report frequency is typically high at low levels and less frequent at • Must also monitor performance of entire project
higher levels • Crux of matter should not be overlooked
 Reports must contain relevant data • One way is by using an aggregate performance measure called earned
 Must be issued frequently value
 Should be available in time for control The Earned Value Chart and Calculations
 Distribution of project reports depends on interest • Actual against baseline ignores the amount of work accomplished
– For senior management, may be few milestones • Earned value incorporates work accomplished
– For project manager, there may be many critical points
• Multiply the estimated percent work complete for each task by the
planned cost
• Only need percent complete estimate for tasks currently in progress
Earned Value Analysis Earned Value Analysis
Earned Value Management measures progress against a baseline. It involves The most commonly used cost-efficiency indicator is the cost performance index
calculating three key values for each activity in the WBS: (CPI). It is calculated thus:
The Planned Value (PV)—that portion of the approved cost estimate planned to be CPI = EV / AC
spent on the given activity during a given period. The sum of all individual EV budgets divided by the sum of all individual AC's is
The Actual Cost (AC)—the total of the costs incurred in accomplishing work on the known as the cumulative CPI, and is generally used to forecast the cost to complete
activity in a given period. This Actual Cost must correspond to whatever was a project.
budgeted for the Planned Value and the Earned Value (e.g. all labor, material, The schedule performance index (SPI), calculated thus:
equipment, and indirect costs). SPI = EV / PV
The Earned Value (EV)—the value of the work actually completed. is often used with the CPI to forecast overall project completion estimates.
These three values are combined to determine at that point in time whether or not A negative schedule variance (SV) calculated at a given point in time means the
work is being accomplished as planned. The most commonly used measures are the project is behind schedule, while a negative cost variance (CV) means the project is
cost variance: over budget.
Cost Variance (CV) = EV - AC “To complete” and “At Completion”
and the schedule variance: • Project manager reviewing what is complete and what remains
Schedule Variance (SV) = EV - PV • Final cost and final completion date are moving targets
These two values can be converted to efficiency indicators to reflect the cost and • The project manager compiles these into a to complete forecast
schedule performance of the project. • Actual + forecast = final date and cost at completion
Project Monitoring
Earned Value Chart
Classical Decision-Making Approach
The classical approach to making decisions in project management is a very rational
ETC = (BAC + EV)/CPI set of steps:
EAC = ETC + AC Identify the problem – recognize there is a problem, define the goals, and gather the
where, information needed to make a rational decision.
ETC = Estimated cost to complete
BAC = Budget at completion Generate all possible solutions – brainstorm all solutions, preferably in a group.
EV = Earned value Don't filter anything even remotely reasonable at this point.
CPI = Cost performance index Generate objective criteria – generate the measurement criteria to assess the
EAC = Estimated cost at possible solutions for feasibility and reasonableness. Begin taking into account
completion
AC = Amount expended to date criteria for measuring the success or failure of the decision.
(actual cost) Select the best option – using the filtering criteria, make a decision on the best
possible solution.
Implement the solution – put into place the preferred solution.
Monitor the results – track and monitor the outcome of the implemented solution
and the results that ensue. This may take some time for long-term outcomes to
become apparent. Did the proposed solution work or should another solution be
implemented?
Taken from A managerial approach by Jack http://www.frontdesk.co.in/forum

R Meredith and Samuel K Mantel Jr. http://www.frontdesk.co.in/forum
Project Monitoring
Project Control
Criteria for decision making
Some of the important criteria for decision-making are as under: Focus of Control 14 • Reporting was poor
· Time overrun/ under-run i.e., whether the ‘activities’ are on course, delayed or • Scope • Budget was inadequate
advanced, particularly the critical ones; whether criticality of ‘activities’ has changed • Technical problems • Correction not on time
or likely to change. • Technical difficulties • Input price changed
· Cost overrun/ under-run. i.e., whether actual cost is more than/ less than the value • Quality problems • Time
of work done. • Client wants changes • Difficulties took longer than
· Resources availability; matching availability of manpower, construction equipment, • Interfunctional complications planned to solve
funds, etc. with the schedule. • Technological breakthroughs • Initial estimates were optimistic
• Intrateam conflict • Sequencing was incorrect
• Market changes • Unavailable resources
• Cost • Preceding tasks were incomplete
• Difficulties may need more • Change orders
• Governmental regulations were
resources
altered
• Scope may increase
• Initial bid was too low
Project Control Project Cash Flows

The Fundamental Purposes of Control 14 A cash flow statement is a listing of the flows of cash into and out of the business or
1. The regulation of results through the alteration of activities project. Think of it as your checking account at the bank. Deposits are the cash inflow
2. The stewardship of organizational assets and withdrawals (checks) are the cash outflows. The balance in your checking account is
Physical Asset Control your net cash flow at a specific point in time.
• Control over the use of physical assets Working capital is an important part of a cash flow analysis. It is defined as the amount
• Includes preventive and corrective maintenance of money needed to facilitate business operations and transactions, and is calculated as
• Must also control inventory current assets (cash or near cash assets) less current liabilities (liabilities due during the
Human Resource Control upcoming accounting period).
• Controlling and maintaining the growth of people Cash flow and profitability are different. A cash flow statement lists cash inflows and
• People working on projects can gain a wide range of experience cash outflows while the income statement lists income and expenses.
• Measurement of human resource conservation is difficult A cash flow statement shows liquidity while an income statement
• Performance appraisals and other measures are not satisfactory devices shows profitability.
Financial Resource Control A balance sheet is a financial statement that reports a company's assets, liabilities and
• Current asset control shareholders' equity at a specific point in time, and provides a basis for computing
• Project budget rates of return and evaluating its capital structure.
• Capital investment control Financial statements include:
• Techniques same as those applied to general operation of the firm 1. Balance sheet
• Context is different because project is accountable to an outsider 2. Income statement
• Must exercise due diligence over resources owned by the client 3. Cash flow statement.
Reference Reference
1. http://elearning.nokomis.in/uploaddocuments/Project%20Finance%20Ne 11. PROJECT MANAGEMENT FOR DEVELOPMENT ORGANIZATIONS - A

w/chp%206%20Financial%20appraisal/PPT/PPT%20- methodology to manage development projects for international
%206.%20FINANCIAL%20APPRAISAL.pdf humanitarian assistance and relief organizations
2. Prasana Chandra: Projects-Planning Analysis, Selection, Implementation 12. Project Management-Tools and Trade-Offs by Ted Klastorin
& Review, Tata McGraw Hill, New Delhi. 13. PROJECT MANAGEMENT Techniques in Planning and controlling
3. Prasana Chandra : Financial Management, Tata McGraw Hill, New Delhi. construction projects by HlRA N. AHUJA
4. M.Shaghil and M. Mushtaque : Project Planning and Management Vol. 1 14. A managerial approach by Jack R Meredith and Samuel K Mantel Jr.
5. C. Choudhury : Project Management, Tata McGraw Hill, New Delhi – 1995 15. Financial Management and Policy by James C. Van Horne
6. I.M. Pandey : Financial management, Vikas Publishing. Ed. 8. 16. Financial Planning and Policy by Earnest W. Walker
7. Laura Brown and Tony Grundy : Strategic Project Management 17. Essentials of Managerial Finance: J. Fred Weston and Eugene F. Brigham
8. P. Gopala Krishnan and V. Rama Moorthy : Project Management
9. Johan, M. Nicholas : Project Management for Business & Technology, Ed.
2nd.
10. PROJECT RISK EVALUATION METHODS - SENSITIVITY ANALYSIS - MIRELA
ILOIU, DIANA CSIMINGA

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CHARACTERISTICS OF PROJECT CHARACTERISTICS OF PROJECT

1) Objectives: A project has a set of objectives or a mission. Once the

Project management Importance of Project management

Five Phase of Project management

Attributes of a Successful Project

Project Appraisal Project Appraisal

Project Appraisal Types of Feasibility

Financial Appraisals Socio-Economic Appraisal

Project Financial Appraisal Techniques PRESENT VALUE AND FUTURE VALUE

Simple Rate of Return Method Pay-back period Method

Discounted cash flow (DCF) techniques Net Present Value (NPV)

Net Present Value (NPV) Benefit cost ratio (BCR)

Internal Rate of Return (IRR) Method Market and demand Analysis

Market Analysis Market Analysis : Survey methods

Market Analysis : Characterization of the Market Analysis : Characterization of the

Market Analysis : Characterization of the Market Analysis : Characterization of the

Market Analysis : Demand Forecasting Market Analysis : Demand Forecasting

Demand Forecasting : Naïve models

3. Expert opinion / “hunch” method 5. Naïve models

Demand Forecasting : Analysis of time

Demand Forecasting : Use of economic Demand Forecasting : Controlled

Demand Forecasting : Judgemental

Technical analysis Technical analysis

Technical analysis Technical analysis

Plant capacity Machinery and equipment

Technical analysis Technical analysis

Structures and civil works Work Schedule (Implementation schedule)

Economic analysis Economic analysis

Economic analysis Economic analysis

Economic analysis Economic analysis

d) Valuation of Specific Cost Items Costs to be Excluded from Analysis

Social analysis Social analysis

Capital budgeting Capital budgeting

Criteria of Capital budgeting Profitability index / Benefit-cost ratio

Project Planning Project Planning Process

UNIDO project life cycle

Investment Phase Investment Phase

Project Work (Work Breakdown Structure) Project Formulation and constraints

Project Formulation and constraints Breakeven Analysis

Break-Even happen when

Sensitivity Analysis Sensitivity Analysis

Project Budgeting Project Budgeting

Project Budgeting Project Scheduling

Project Scheduling Techniques Project Scheduling Techniques

Project Scheduling Techniques

• PERT was developed for the Polaris missile/submarine project in 1958

Network Scheduling Advantage Terminologies in network diagrams

1. Consistent framework Activity (Task):

Terminologies in network diagrams Terminologies in network diagrams

Activity duration: A comes before B,

Terminologies in network diagrams Terminologies in network diagrams

Slack Rules to draw Network diagram

Microsoft Project AON Network Microsoft Project AON Network

Critical Path Method (CPM) Critical Path Method (CPM)

Critical Path Method (CPM) Critical Path Method (CPM)

Critical Path Method (CPM) Critical Path Method (CPM)

EST = Early start Time

Finance Financial terms

Finance Function : Objectives Finance Function : Scope

Project Finance Infrastructure Projects Financing

Infrastructure Projects Financing Financial Needs Assessment

Financial Needs Assessment Financial Needs Assessment