MMG402 Project Management

Yashwantrao MMG 402
Chavan
Maharashtra
Open University
MBA : SECOND YEAR

SEMESTER IV
MANUFACTURING MANAGEMENT GROUP
PROJECT MANAGEMENT
Unit 1 Projects and Importance of Project Management 9
Unit 2 Project Organization Structure 32
Unit 3 Market and Demand Analysis 45
Unit 4 Projected Cash Flow & Balance Sheet 58
Unit 5 Organization Strategy & Product Portfolio Management 68
Unit 6 Project Selection Methods and Investment Criteria 80
Unit 7 Defining the Project 91
Unit 8 Estimating Project Times and Costs 101
Unit 9 Project Quality Management 110
Unit 10 Developing Project Plan 121
Unit 11 Scheduling Resources and Cost 130
Unit 12 Reducing Project Duration 139
Unit 13 Progress, Performance Management and Evaluation 147
Unit 14 Project Audit and Closure 158
Unit 15 Managing Risk 166

YASHWANTRAO CHAVAN MAHARASHTRA OPEN UNIVERSITY
VICE-CHANCELLOR : Prof. E. Vayunandan
DIRECTOR, SCHOOL OF COMMERCE & MANAGEMENT : Dr. Pandit Palande
NATIONAL ADVISORY BOARD
Dr. Pandit Palande Prof. Devanath Tirupati, Dr. Surendra Patole
Former Vice Chancellor Dean Academics, Assistant Professor,
Director, School of Commerce Indian Institute of Management (IIM) School of Commerce &
& Management, Bangalore. Management,
Yashwantrao Chavan Maharashtra Yashwantrao Chavan Maharashtra
Open University, Nashik Open University, Nashik
Prof. Sudhir. K. Jain Prof. Karuna Jain, Dr. Latika Ajitkumar Ajbani
Former Vice Chancellor Director, Assistant Professor,
Professor & Former Head N I T I E, Vihar Lake, School of Commerce &
Dept. of Management Studies Mumbai Management,
Indian Institute of Technology (IIT) Yashwantrao Chavan Maharashtra
Delhi Open University, Nashik
Prof. Vinay. K. Nangia

Professor & Former Head
Department of Business Studies,
Indian Institute of Technology (IIT)
Roorkee
Author Editor
Dr. Gunjan Soni Dr. Satyander K. Sharma
Assistant Professor Associate Professor
Department of Mechanical Engineering Department of Management
MNIT Jaipur BITS Pilani, Pilani Campus
Rajasthan, India Rajasthan, India
Instructional Technology Editing & Programme Co-ordinator

Dr. Pandit Palande Dr. Latika Ajitkumar Ajbani
Former Vice Chancellor Assistant Professor
Director, School of Commerce & Management, School of Commerce & Management
Yashwantrao Chavan Maharashtra Yashwantrao Chavan Maharashtra
Open University, Nashik Open University, Nashik
Production
Shri. Anand Yadav
Manager, Print Production Centre, Y. C. M. Open University, Nashik- 422 222
© 2018 Yashwantrao Chavan Maharashtra Open University, Nashik.

(First edition developed under DEB development grant)
q First Publication : February 2018 q Publication No. : 2267
q Typesetting : S.D. Printers, Malaviya Nagar, Jaipur. q Cover Design : Shri. Avinash Bharne
q Printed by : Shri. Ajit Modak, M/s. Print Lines, A-Road, NICE, Satpur, Nashik - 422 007
q Publisher : Dr. Dinesh Bhonde, Registrar, Y. C. M. Open University, Nashik- 422 222
ISBN : 978-81-8055-457-5 MMG 402

Introduction
I am very pleased in placing the first edition of this study material on 'Project Management'
to the students and practitioners of this subject. This book is designed as per the revised syllabus
prescribed by the YCMOU Nashik from August 2015. It gives equal importance to the theoretical
aspects as well as to the practical case studies. Hence this edition will be an ideal companion not
only to the scholars but also to the average students. I am sure that this work would subserve the
genuine interest of all the students concerned in enriching their knowledge of this ever-growing
Project Management discipline.
I have made a sincere attempt to make the subject easy to understand. For this purpose the
theory on each topic is written in a simple and lucid language to enable the students to grasp the
essence of subject.
Any suggestions will be appreciated.
I am confident, that students will welcome new edition of this book.
With knowledge, hard work, marvelous success is just around the corner.
All The Best!

- Dr. Gunjan Soni
Copyright © Yashwantrao Chavan Maharashtra Open University, Nashik.
All rights reserved. No part of this publication which is material protected by this copyright
notice may be reproduced or transmitted or utilized or stored in any form or by any means now
known or hereinafter invented, electronic, digital or mechanical, including photocopying,
scanning, recording or by any information storage or retrieval system, without prior written
permission from the Publisher.
The information contained in this book has been obtained by authors from sources believed
to be reliable and are correct to the best of their knowledge. However, the publisher and its
authors shall in no event be liable for any errors, omissions or damage arising out of use of this
information and specially disclaim any implied warranties or merchantability or fitness for any
particular use.
Message from the Vice-Chancellor
Dear Students,
Greetings!!!
I offer cordial welcome to all of you for the Master’s degree programme of Yashwantrao
Chavan Maharashtra Open University.
As a post graduate student, you must have autonomy to learn, have information and
knowledge regarding different dimensions in the field of Commerce & Management and at the
same time intellectual development is necessary for application of knowledge wisely. The process
of learning includes appropriate thinking, understanding important points, describing these points
on the basis of experience and observation, explaining them to others by speaking or writing
about them. The science of Education today accepts the principle that it is possible to achieve
excellence and knowledge in this regard.
The syllabus of this course has been structured in this book in such a way, to give you
autonomy to study easily without stirring from home. During the counseling sessions, scheduled at
your respective study centre, all your doubts will be clarified about the course and you will get
guidance from some experienced and expert professors. This guidance will not only be based on
lectures, but it will also include various techniques such as question-answers, doubt clarification.
We expect your active participation in the contact sessions at the study centre. Our emphasis is
on ‘self study’. If a student learns how to study, he will become independent in learning throughout
life. This course book has been written with the objective of helping in self-study and giving you
autonomy to learn at your convenience.
During this academic year, you have to give assignments and complete the Project work
wherever required. You have to opt for specialization as per programme structure. You will get
experience and joy in personally doing above activities. This will enable you to assess your own
progress and thereby achieve a larger educational objective.
We wish that you will enjoy the courses of Yashwantrao Chavan Maharashtra Open
University, emerge successful and very soon become a knowledgeable and honorable Master’s
degree holder of this university.
Best Wishes!
- Vice-Chancellor
Project Management (MMG 402)
SYLLABUS
Unit 1 Projects and Importance of Project Management

Introduction to project management, evolution and application, defining project, project management
approach, project life cycle, role of project manager, decision making, project integration
management.
Unit 2 Project Organization Structure

Traditional Functional Organization Structure, Ongoing Projects as Committed Teams, Organizing
the Projects within a Matrix Organization, Different Forms of Matrix, Right Project Management
Structure: Factors, Project Types, Organization Culture, Characteristics.
Unit 3 Market and Demand Analysis

Situation Based Analysis and Statement of Objectives, Collecting the Secondary Information,
Conducting Survey in the Market, Market Characterization, Forecasting the Demand, Technical
Analysis, Material Inputs and Utilities, Product Capacity, Factors Affecting Capacity Project
Diagrams and Layouts, Project Implementation Schedule.
Unit 4 Projected Cash Flow & Balance Sheet

Cost of Production, Working Capital Requirement, Profitability Projections, Projected Cash Flow
Statement, Projected Balance Sheet.
Unit 5 Organization Strategy & Product Portfolio Management

Need to Understand Organization Strategy, Role of Project Manager, Strategic Management
Process, Portfolio Management System, Portfolio Management Tools, Optimizing the Portfolio,
Portfolio Management Process, Criteria for Project Selection, Assessing Project Portfolio.
Unit 6 Project Selection Methods and Investment Criteria

Financial Feasibility of Projects, Calculating Cost of Capital, Categories of Investment Criteria,
Net Present Value (NPV), Return on Investment, Benefit Cost Ratio, Payback Period, Internal
Rate of Return (IRR), Accounting Rate of Return.
Unit 7 Defining the Project

Need of the Project, Defining the Project Scope, Project Scope Checklist, Project Charter,
Scope Creep, Establishing Project Priorities, Priority Matrix, Work Breakdown Structure,
Integrating WBS with the Organization – OBS, Tools.
Unit 8 Estimating Project Times and Costs

Estimating, Factors Influencing Quality of Estimates, Work Package Estimates, Top down Vs.
Bottom up Approach, Types of Costs, Developing Database for Estimating.
PROJECT MANAGEMENT
Unit 9 Project Quality Management
Quality Definition, Project Quality, Elements of Quality, Total Quality
Management, Elements Partnering For Competitiveness, Quality Planning,
NOTES
Quality Management Wheel of Quality, Steps for Identifying Customers,
Identifying and defining Requirements.
Unit 10 Developing Project Plan

Project Network; Develop a Network, Basic Rules in Developing Project
Networks, Activity on Node (AON) Diagram, Critical Activity, PERT.
Unit 11 Scheduling Resources and Cost

Type of resource constraints, scheduling programs, resource leveling, resource
allocation program, impact of resource constraint scheduling, advantages of
scheduling resources, tackling multiple project resource.
Unit 12 Reducing Project Duration

Introduction, accelerating project completion, project cost-duration graph,
constructing graph, cost reduction.
Unit 13 Progress, Performance Management and Evaluation

Project monitoring information system, project control process, control charts,
integrated cost schedule system, performance index, project percent complete
index, forecasting final project cost.
Unit 14 Project Audit and Closure

Project audits, project audit process, project closure process, creating the
final report, post-implementation evaluation, retrospectives.
Unit 15 Managing Risk

Risk management, risk in project life cycle, risk management process,
contingency planning, handling risk, opportunity management, risk response
control, control change management.
(8) PROJECT
MANAGEMENT
Projects and Importance
UNIT 1 of Project Management
PROJECTS AND IMPORTANCE OF
PROJECT MANAGEMENT NOTES
Structure
1.0 Introduction
1.1 Objectives
1.2 Evolution and Application
1.2 Defining Project
1.2.1 Project of Manufacturing
1.3 Project Management Approach
1.3.1 Understanding Need and Importance of Project Management
1.3.2 Functions of Project Management
1.4 Why Do Projects Fail?
1.5 Project Life Cycle
1.5.1 Product Life Cycle
1.5.2 Life Cycle Phases for Different Projects
1.6 Role of Project Manager
1.6.1 Categories of Interactions
1.6.2 Define Jurisdiction
1.6.3 Categorize Subordinates
1.6.4 Subordinate Problems are Ultimately Bosses’ Problems
1.6.5 Strive To Become Redundant
1.6.6 Train Supervisor to Take Your Place
1.6.7 Be Fair and Appear To Be Fair
1.7 Decision Making
1.8 Project Integration Management
1.9 Key Concepts
1.10 Summary
1.11 Exercise & Questions
1.12 Further Reading & References
PROJECT MANAGEMENT (9)

PROJECT MANAGEMENT
1.0 Introduction
This is a good time to be reading a book about project management. Busi-
ness leaders and experts have proclaimed that project management is a strategic
NOTES
imperative. Project management provides people with a powerful set of tools that
improves their ability to plan, implement, and manage activities to accomplish spe-
cific organizational objectives. But project management is more than just a set of
tools; it is a results-oriented management style that places a premium on building
CHECK YOUR
collaborative relationships among a diverse cast of characters. Exciting opportu-
PROGRESS
nities await people skilled in project management.
Give provisions of
The project approach has long been the style of doing business in the
applications of project
management and its construction industry, U.S. Department of Defense contracts, and Hollywood as
evolution. well as big consulting firms. Now project management has spread to all avenues
of work. Today, project teams carry out everything from port expansions to hospi-
tal restructuring to upgrading information systems. They are creating next genera-
tion, fuel efficient vehicles, developing sustainable sources of energy, and explor-
ing the farthest reaches of outer space. The impact of project management is
most profound in the electronics industry, where the new folk heroes are young
professionals whose Herculean efforts lead to the constant flow of new hardware
and software products.
Project management is not limited to the private sector. Project manage-

ment is also a vehicle for doing good deeds and solving social problems. Endeav-
ors such as providing emergency aid to the Gulf Coast devastated by hurricane
Katrina, devising a strategy for reducing crime and drug abuse within a city, or
organizing a community effort to renovate a public playground would and do ben-
efit from the application of modern project management skills and techniques.
1.1 Unit objectives

After reading this unit, you should be able to,
• Understanding what is project.
• Know about various project management approaches.
• Know about roles of a project manager.
1.2 Evolution and Application

• Developed in the late 1950’s to aid planning and scheduling of
large projects
• Construction industry
• Automakers – Toyota, Nissan, BMW
• Electronics
(10) PROJECT
MANAGEMENT • Information technology
• Steel Projects and Importance
of Project Management
• Fertilizer
• Oil and gas

NOTES
• Pharmaceutical
1.3 Defining Project

1. A project is a non-routine, time limited one-time effort, perfor-
mance, resources, and budget specifications designed to fulfill
the needs of customers
2. Examples CHECK YOUR

PROGRESS
• Introduction of a new kind of detergent in the market
• Enhancing the capacity of the plant Give provisions of

characteristics and ele-
• Reducing the downtime of the machines ments of project.
• Improving the quality of product
• Erection and commissioning of the power plant
• Preparation of documents for takeover of a firm
• Overhauling and turnaround of an oil refinery
3. Characteristics
a. A project encompasses series of tasks and activities that
b. Have a clearly defined objective to be completed within definite

specifications
c. Have a fixed beginning and ending dates
d. Have limited funding
e. It always consume resources
f. Meet and exceed customers’ needs
4. Elements
• Project selection
• Prioritization of project
• Scope of work
• Work breakdown structure
• Risk management
• Cost and time estimate
• Procurement

PROJECT MANAGEMENT • Allocation of resources
• Execution of jobs
• Subcontracting
NOTES
• Regular review
• Feedback
• Control
• Commissioning
• Final handing over to the client
• Evaluation of project manager and team
• Retrospective
5. Need
• Project: fulfilling the needs and requirements of the customer
• Successful project and path breaker for future projects
• Stakeholders: meeting the needs of stakeholders
• Organization: meeting the strategic needs of the organization
• Individuals: meets the goals and aspirations of both manager and

team members of the project.
6. Organization driven by project work
• Projects are the main driving force behind all work where each
project having its own cost center with unique statements of profit
and loss.
7. Organization driven by non-project work
• The product lines or functional lines are merely supported by

projects.
• Profit and loss are measured on vertical or horizontal lines
• Prime resources are allocated to revenue creating activities of

functional line and not for projects.
8. Limitations of organization driven by non-project work
• Projects may be few or far in numbers
• All projects do not require same type of project management.
• To manage projects sometimes executives don’t have adequate

time.
• Most of the time approvals follow vertical chain of command so

(12) PROJECT
projects tend to delay
MANAGEMENT
• Project staffing is on a local basis Projects and Importance
• Dependency of such organization upon outside agencies and sub-
contractors for experts in project management
NOTES
9. Types of projects
• Different sectors: public sector, private sector, service sector, joint

sector
• Industrial
• Software
• Service
• Infrastructure
• Construction
• Expansion
• Modernization
• Maintenance
• Plant shutdown and turnaround
• Diversification
• Integration
• Forward integration
• Backward integration
• Vertical integration
• Acquisition
• Rehabilitation
• Research and development
1.3.1 Project of Manufacturing

• Conceptualization of a product
• Feasibility study
• Market survey: product functionality, cost and reliability of com-

parative manufacturer
• Estimation of cost
• Technology assessment
• Product design and development: adaptability, maintainability and

reliability
• Financing
PROJECT MANAGEMENT • Process planning
• Quality specifications
• Personnel assignment and training

NOTES
• Operations planning
• Facilities layout
• System integration
• Production scheduling
• Production run
• Product shipment
1.4 Project Management Approach

Most of the people who excel at managing projects never have the title of
project manager. They include accountants, lawyers, administrators, scientists, con-
tractors, public health officials, teachers, and community advocates whose suc-
CHECK YOUR cess depends upon being able to lead and manage project work. For them project
PROGRESS management is not a title but a critical job requirement. It is hard to think of a
profession or a career path that would not benefit from being good at managing
Give provisions of
project management projects.
approach. Not only is project management critical to most careers, the skill set is
transferable across most businesses and professions. At its core, project manage-
ment fundamentals are universal. The same project management methodology
that is used to develop a new product can be adapted to create new services,
organize events, refurbish aging operations, and so forth. In a world where it is
estimated that each person is likely to experience three to four career changes,
managing projects is a talent worthy of development.
The significance of project management can also be seen in the class-

room. Twenty years ago major universities offered one or two classes in project
management, primarily for engineers. Today, most universities offer multiple sec-
tions of project management classes, with the core group of engineers being supple-
mented by business students majoring in marketing, management information sys-
tems (MIS), and finance, as well as students from other disciplines such as ocean-
ography, health sciences, computer sciences, and liberal arts. These students are
finding that their exposure to project management is providing them with distinct
advantages when it comes time to look for jobs. More and more employers are
looking for graduates with project management skills. The logical starting point for
developing these skills understands the uniqueness of a project and of project man-
agers.
• Driving forces
(14) PROJECT
− Capital projects
MANAGEMENT
− Expectations of customer Projects and Importance
− Market competitiveness
− Understanding of executives
NOTES
− Development of new project
− Effectiveness and efficiency
• Benefits
− Accomplishment of work with less people and in less time than

before
− Increment in profit
− Enhanced quality
− Better control of scope changes
− Customer focused
− Good decision making & reduced power struggle
1.4.1 Understanding Need and Importance of Project

Management
Project management is no longer a special-need management. It is rap-
idly becoming a standard way of doing business. See Snapshot from Practice:
Project Management in Action: 2009. An increasing percentage of the typical
firm’s effort is being devoted to projects. The future promises an increase in the
importance and the role of projects in contributing to the strategic direction of
organizations.
• Ability to plan, implement and manage activities
• Result-oriented management styles
• Shortening of product life cycles
• Competition at global level
• Explosion of knowledge
• Corporate downsizing
• Increased customer focus
• Multi-project environment
1.4.2 Functions of Project Management

• Project management encompasses
− Planning the project
− Scheduling the project

PROJECT MANAGEMENT − Monitoring & controlling the project
• Planning the project
− Defining the work requirements

NOTES
− Defining the work’s quantity
− Identifying the required resources
• Scheduling the project
− List of activities to be completed
− Activity relationships
− Gantt charts
− Critical, non-critical activities, milestones
− Resource loading, leveling, allocation
• Monitoring & controlling the project
− Tracking of progress
− Comparison with results
− Analyzing the impact
− Making the adjustments accordingly
− Time, cost, quality control
1.5 Why Do Projects Fail?

1. Pre-feasibility phase
2. Evaluation phase
3. Technology selection and engineering phase
4. Contracting and procurement phase
5. Construction phase
6. Startup phases
1. Pre-feasibility phase
• Unexpected delay in getting forest clearances, acquisition of land

and environment related clearance
• Unexpected delay in getting clearances from financial /regula-

tory bodies
• Lacking in infrastructural facilities for project
• Failure of plan made for essential resources, facilities, inputs re-

quired for on time construction and assigning into operation
(16) PROJECT
MANAGEMENT
• Selecting inept consultant Projects and Importance
2. Evaluation phase
• Insufficient study of project

NOTES
• Understating the scope
• Understanding resources and cost
• Seeking for successive changes in the scope
• Specifications’ non-freezing
• Revising the budget
• Influence of politicians during selection of site
• Scantiness of authorities and consultants of project, prone to in-

correct economic studies
• Misleading statements and projections of fund leading to financial

obstructions
3. Selection of technology and engineering phase
• Poor or outdated technology acquisition
• Technological tie-ups concerning credit offered by supplier more

than technical requirements
• Detailed engineering and preparation of procurement lists before

finalizing process flow sheets and line diagrams
• Making delay in finishing the work of detailed engineering
• Lacking in design data
• Lateness in deciding and fixing the specifications and design
• Lack of an proper engineering schedule resulting in delay in re-

lease of engineering drawings for the procurement process
• Inefficient procedures for inspecting, approving and transmitting

the specifications and drawings
4. Contracting and procurement phase
• Delays, slipshod preparations of bidding documents
• Improper selection of vendors/suppliers/manufacturers/fabrica-

tors and contractors and privileged treatment to public sector en-
terprises, on the basis of guidelines provided by the government
• Delayed placed orders
• The practice of accepting of lowest quotations of the vendor quality

and/or contractor’s competency

PROJECT MANAGEMENT • Delayed import license issuance, permits and various clearances
• Delay in the opening of letters of credit and issuance of various

guarantees to foreign suppliers
NOTES
• Time consuming procedures concerning the procurement of im-
ported raw materials and hi-tech components by indian manufac-
turers of equipment
• Inadequate expediting actions
• Lack of integrated action plans closely involving suppliers and

contractors
• Delay in the supply of critical and important equipment
• Lacking in proper quality control arrangements such as stage and

final, and consequent defects in equipment
• Changes and modifications without cost-benefit analysis
• Poor logistic planning
5. Construction phase
• Early starting of construction activities, before ensuring the avail-

ability of working drawings, storage and pre-assembly space,
materials and adequate infrastructure and sequential supply of
equipment
• Delay and/or inadequacy in contractors’ mobilization
• Poor planning by contractors
• Lack of close coordination and owner’s serious involvement
• In the project area failure to assure contractors of law and order
• Contractors’ financial problems and consequent low productivity
• Inefficient contractors, in both the private and public sectors
• Hold-up resulting from delays in activities which are intercon-

nected, because of the absence of integrated management
• Belated clearances
• Indecisions and delayed decision making
• Lack of a sound quality control program
• Lack of micro-level schedule control in relation with the macro

plan of the project
• Under treatment of contractors and suppliers
(18) PROJECT
MANAGEMENT
• Delay in payments, supply of owner’s free issues, provision of Projects and Importance
various infrastructural facilities, settlement of extras, changes and
claims
• Delay in replacement supplies NOTES
6. Startup phases
• Delay in inputs like special tools, manuals, services and feedstock
• Absence of proper commissioning specialists
• Failure of equipment or parts
• Design changes
• Delayed activities of process owners /suppliers of main equip-

ment/ commissioning contractors
• Defects in building and installations
• Correcting the troubles resulting from bad quality control during

erection and improper equipment testing
7. In all phases
• Weak project team
• Indecision
• Lack of managerial talents
• Discontinuity of efficient team members
• Absence of personal accountability and commitment
• Undue job security and resultant indiscipline
• Lack of awareness of the time value of money
• Inadequate controls and ignoring of warning signals
• Poor quality awareness
• Unwarranted cbi enquiries not oriented towards project objec-

tives and consequent working atmosphere of fear which depresses
the spirits of well-meaning decision makers
• General ignorance and non-implementation of sound project man-

agement practices
1.6 Project Life Cycle

• Project life cycle recognizes that every project has limited span
• Predictable changes in level of effort and focus over the entire

life of the project
• Stages:
PROJECT MANAGEMENT 1. Defining stage
2. Planning stage
3. Executing stage
NOTES
4. Delivery / closing stage
1. Defining
• Goals
• Specifications
• Task
• Responsibilities
2. Planning
CHECK YOUR
PROGRESS • Scheduling
• Budgets
Give provisions of
project life cycle. • Resources
• Risks
• Staffing
3. Executing
• Status reports
• Changes
• Quality
• Forecasts
4. Closing / delivery
• Train customer
• Transfer documents
• Release resources
• Evaluation
• Lessons learned
1.6.1 Product life cycle

• Research and development
• Market introduction
• Growth
• Maturity
(20) PROJECT
MANAGEMENT
• Deterioration Projects and Importance
• Death
1.6.2 Life cycle phases for different projects NOTES

• Engineering
− Start up
− Definition
− Main
− Termination
• Manufacturing
− Formation
− Building
− Production
− Phase-out
− Final audit
• Software development
− Conceptual
− Planning
− Definition and design
− Code
− Integration / testing
− Conversion
− Maintenance
• Construction
− Planning, data collection and procedures
− Studies and basic engineering
− Major review
− Detail engineering
− Construction
− Testing and commissioning

• Provide direction, coordination and integration to the project team

PROJECT MANAGEMENT • Manage temporary, non-repetitive activities to complete a fixed
life project
• Meet the challenges of each phase of the project life cycle

NOTES
• Manage the tension between customer expectations and what is
feasible or reasonable
• Work with vendors, suppliers, subcontractors
• Responsible for performance
• Ensure appropriate trade-offs between time, cost and performance

requirements
• Inducing the right people at the right time
• To address right issues and make right decisions
1.7.1 Categories of Interactions

• Superiors or bosses
• Colleagues or peers
CHECK YOUR
PROGRESS • Subordinates or juniors
Give provisions of Dealing with each category requires definite skills which have to be mastered
categories of if one is to rise in the organizational hierarchy.
interactions.
1. Interaction with superiors
i. Boss is always the boss, though he may not be always right
ii. There may be serious differences of opinion with the boss, but
ultimately, the will or opinion or decision of the boss will prevail
iii. Boss is more accountable than the subordinates and will have to
answer the consequences of his decisions and actions
iv. Rather than be a “yes man” and agree with everything the boss
says, the subordinate must definitely express his views and opin-
ions for the consideration of the boss
v. If the boss chooses to ignore suggestions or overrule decisions

taken by the subordinate, he does so at his own discretion and
risk
vi. Certain bosses who flatly refuses to accept any suggestions coming
from the subordinates, even though his suggestions are basically
sound and would be interest of the organization
vii. Such individuals suffer from a sense of insecurity and are afraid
that implementation of the suggestions would highlight their own
(22) PROJECT
MANAGEMENT
shortcomings and bring credit to the subordinates at their own Projects and Importance
expense
viii. What the boss forgets is that credit for achievement or good per-
formance first goes to the boss for his ability to get work done NOTES
ix. The subordinate only gets a part of the credit received by the
boss
Boss has greater access to information
i. By virtue of position in the organization, the boss has greater

access to vital information affecting the well-being of the
organization.
ii. Some of the decisions may appear to be ill-conceived or wrong,

however it is more likely that a particular decision may be based
on certain information not available to the subordinate.
Boss is busier
i. Responsibilities of the boss are considerably greater than those

of the subordinates.
ii. The time at his disposal for dealing with particular problem is
naturally less than the time available with the subordinate.
iii. Therefore it is the duty of subordinate to do his homework well,

work out options in any given situation and then put them for
consideration and final decision with his own recommendation.
Boss is under greater pressure
i. By virtue of his position and responsibility, boss is under greater

pressure to meet targets and deadlines
ii. Some pressure is bound to get transferred down to lower levels

resulting in firing
iii. Firing is a part of the game and has to be accepted as such
iv. One must not be too sensitive to such firings and must develop a
somewhat thick skin in such matters
v. On the other hand, the skin should not be so thick that firing has
no effect at all
vi. On occasion, unpleasant talk may appear to be entirely unreason-

able
vii. Outcome of firing of the juniors, who, in turn, may take it to out on
their wives and children
2. Interaction with colleagues

PROJECT MANAGEMENT i. Individuals who are more or less at the same level in the
hierarchy
ii. Engineers performing shift duty and reporting to manager

NOTES
iii. Department heads reporting to the production manager
iv. Functional heads reporting to unit head
v. Project engineers reporting to project managers
vi. Project managers reporting of head, projects
vii. Feeling of cordiality, cooperation, mutual trust and atmosphere of

healthy competition
viii. This is easier said than done
ix. Politics is an integral feature of any organization, as each indi-

vidual tries to catch the eye of the boss and advance his own
cause for promotion
x. If the competition leads to confrontation and undermining the po-

sition of others, working is bound to suffer
xi. Personal equations can lead to formation of groups that adversely

affect organizational working
3. Interaction with subordinates
i. An engineer in a supervisory position or a manager is responsible

not only for his own actions, but also for the actions of all those
working under his direction
ii. Delegation: a successful manager once said, “i never do anything

which i can get done by a subordinate”
iii. This is an excellent way to motivate subordinates and at the same

time freeing the boss from routine matters and giving him time to
concentrate on important issues
iv. Delegation does not imply that the boss is absolved of responsibil-
ity for that actions of his subordinates, he should keep a watchful
eye over their activities and issue necessary direction.
v. Earn the respect of subordinates
• It is easy to get work done if subordinates hold the boss

in esteem and respect
• Sound knowledge and thorough understanding of plant or

process are vitally important
• Boss should be capable of doing at least 80% of the work

(24) PROJECT done by each one of its subordinates
MANAGEMENT
• 20% of his own work should be such that none of his Projects and Importance
subordinates can do so effectively
vi. Issue clear instructions

NOTES
• Instructions have no meaning if they are vague and likely
to be misinterpreted
• Some managers are in the habit of deliberately leaving

instructions vague and then pulling juniors for not acting
one way or the other
vii. Descend to the level of subordinates
• Boss must express himself in a language which the

subordinates can understand
1.7.2 Define Jurisdiction

CHECK YOUR
• Areas wherein the subordinate is free to take his own decisions PROGRESS
according to established norms and guidelines
Give provisions of
• Boss will not be troubled with low level decisions jurisdiction.
• Subordinate must have clear idea about
− What he can do without informing the boss at all
− What he can do first and inform later
− What he can do only after getting approval
1.7.3 Categorize Subordinates

• Those who work on their own initiative
• Those who work only after receiving directives or guidelines
• Those who do not work even after receiving directives and guide-
lines
1.7.4 Subordinate Problems are Ultimately Bosses’ Problems

• Any deficiency in working have to be removed by concerted effort
• Boss cannot get away by saying that these problems have to be

tackled by junior staff alone
• Boss has to get involved and issue necessary directions to solve

the problems
• It is the boss who will have to answer for the working of all
sections under his charge
1.7.5 Strive to Become Redundant

• Every supervisor or manager must strive to make himself redun-
dant and superfluous.
PROJECT MANAGEMENT • Effort must be made to evolve systems and procedures, so that
working is not affected in the absence of supervisor / manager.
1.7.6 Train Supervisor to Take Your Place

NOTES
• Advancement is easy if there is someone who can assume charge
of the vacated position
• Manager should train his subordinates adequately, not only to re-

duce his workload but also to facilitate his own advancement at
the appropriate time
• Some managers are unduly secretive and habitually conceal docu-

ments and information from subordinates
• Many organizations force their employee to avail due leave and

do not permit leave accumulation to a certain level
− Excellent practice and serves to motivate and train subordinates

for higher responsibilities
− Simultaneously, the boss returns refreshed after leave to do greater

justice to his responsibilities
1.7.7 Be Fair and Appear To Be Fair

• Justice must not only be done but seen to be done
• Boss must be fair, but also appear to be fair to his subordinates
• All subordinates should be treated on merits as far as distribution

of assignments and prospects for advancement are concerned
• It is natural to develop liking or dislike for various subordinates
• One must not get carried away by subjective criteria
• Friendship and personal relations with subordinates should not

act as obstacles to advancement
• The recommended person should reduce the workload of the boss

and make his life easier
1.8 Decision Making

• Most problems admit multiple solutions
• A conscious and deliberate decision has to be taken to pursue a

particular course of action
• It is unlikely that all decisions taken by a manager would prove to

be correct in the long run
• Successful managers are those with high percentage of correct

(26) PROJECT decisions
MANAGEMENT
• Once a decision is taken, the matter does not end Projects and Importance
• Decision should be monitored to ascertain whether the desired
results are being obtained or not
NOTES
• In case of deviations from the expected outcome, there should be
no hesitation in reversing the decision before the situation gets
out of hand
1. Problem solving
• Problem solving
• Real-life problem vs. paper problem
• Paper problem:
− Solve problems from course contents
− Entire data for solution are provided
2. Industrial problem
• Real-life problems are not always easily identified and a lot of

effort has to be expended simply for identifying the problems
• Data required not available
• May not be possible to collect all the required data due to lack of
resources or time
• A given problem may admit multiple solutions depending upon the

accuracy of data collected
• After arriving at various solutions, someone in the organization

has to choose one of the solutions for implementation
• The selection process is, once again, subjective and is influenced

by the attitude and approach of the responsible person
3. Scientific approach
• Identify the problem
• Define the problem as clearly as possible
• Search memories and records of identical problems which may

have been solved earlier
• Start compiling data required for solution
• Categorize the data into relevant and IRRelevant
• Discard the IRRelevant data before such data result in confusion

or side tracking
• Decide what additional data are required

PROJECT MANAGEMENT • Assess the resources of time, money and manpower required for
collecting the additional data
• Start collecting the additional data within the organizational

NOTES constraints of time, money and manpower
• Make reasonable assumptions wherever data are not reliable or

available
• Involve all concerned people in finding possible solutions
• Tabulate the possible solutions along with their pros and cons
• Select one solution for implementation
4. Mental attitude
• Problem must be regarded simply as a problem
• Problem is simply a problem requiring solution
• Solution exists but it has to be located
• No assignment should be refused on the ground that it does not

fall within one’s limited knowledge
1.9 Project Integration Management

• Focuses all project effort toward the strategic plan of the
organization
• Reinforces mastery of project management and inter-personal

skills
• May require re-engineering of business management process

CHECK YOUR − Integration of projects with strategic plan of the organization
PROGRESS
− Integration within the process of managing actual projects
Give provisions of
project integration 1. Current drivers of project management
management. • Compression of product life cycle
− Shortening of product life cycle
− Time to market for new product with shorter life cycles
− Six month project delay can result in 33% loss in product revenue
share
• Global competition
− Cheaper and better products and services
− Use of quality management practices and continuous improvement
• Knowledge explosion
(28) PROJECT
MANAGEMENT
− Increase complexity of projects because of advanced technologies Projects and Importance
− Complexity in materials, specifications, codes, aesthetics,
equipment and required specialists
NOTES
• Corporate downsizing
− Necessity of downsizing or rightsizing
− Necessity of core competencies for survival
− Project management replacing middle management
− Outsourcing of significant segments of project work
• Increased customer focus
− Customer : satisfaction, delight, surprise
− Needs customized products and services
• Multi-project environment
− Sharing and prioritizing resources
− Risk management
• Project management is best suited for businesses requiring

accountability, flexibility, innovation, speed and continuous
improvement
2. Alignment of projects with organizational strategy
• Need: strategic plans are made by one group of managers, projects

selected by other and implemented by another
• Independent decisions lead to conflicts, confusion etc. On

unsatisfied customers
Characteristics
• All the parts are inter-related. A change in one of the parts will
influence the whole
• Vision, mission, objectives and strategies need to be prepared

considering internal and external environmental factors
• External factors: political, social, economic and technological
• Internal factors: management, facilities, core competencies, fi-

nancial conditions
• Implementing strategies through projects
• Selecting proposals that make largest and most balanced contri-

bution to the objectives and strategies

PROJECT MANAGEMENT • Prioritizing projects so that resources are allocated to the right
projects
3. Integration within the process of managing actual

NOTES projects
• Technical side of the management process
− Planning, scheduling, controlling
• Socio-cultural side of the project management process
− Shaping a project culture that stimulates teamwork and high lev-

els of personal motivation
− Problem solving approach
− Effective communication sessions with stakeholders
1.10 Summary
• Understanding need and importance of project management.
• The functions of project management.
• Understanding of product life cycle and life cycle phases for

different projects.
• Subordinate problems are ultimately bosses’ problems.
1.11 Key Concepts

• Project management approach- project management enables
organisations to prevent or remove internal project constraints
and also adapt to unforeseen changes in project scope or goals.
An organisation can, depending on its requirements, either adopt
a standard project management approach or combine multiple
approaches.
• Project life cycle: the project life cycle refers to a series of

activities which are necessary to fulfil goals or objectives.
• Role of project manager- it includes the various functions and

decision making involved with the project manager to get the project
completed on time with best possible outcome.
• Project integration management- it includes managing all the

activities of the project and developing interrelationship within the
activities.
(30) PROJECT
MANAGEMENT
1.12 Exercises & Questions Projects and Importance
1. Define project with examples. Describe characteristics, elements
and need of the projects.
NOTES
2. What are the driving forces for project management? Describe
various functions of project management.
3. Why do project fail? Explain in detail.
4. What are the different stages in project life cycle?
5. Describe the role of project manager.
6. Define subordinate jurisdiction. How subordinate’s problem are

ultimate bosses’ problem?
7. Explain project integration management.
1.13 Further reading and References

• Trevor l young, “successful project management”, Kogan page
publishers.

PROJECT MANAGEMENT
UNIT 2
PROJECT ORGANIZATION STRUCTURE
NOTES
Structure
2.0 Introduction
2.1 Objectives
2.2 Traditional Functional Organization Structure
2.3 Ongoing Projects as Committed Teams
2.4 Organizing the Projects within a Matrix Organization
2.5 Different Forms of Matrix
2.5.1. Weak Matrix
2.5.2. Balanced Matrix
2.5.3. Strong Matrix
2.5.4. Strengths of Matrix Management
2.5.5. Weakness
2.6 Right Project Management Structure: Factors
2.6.1 Organization Considerations
2.6.2 Resource Availability
2.6.3 Project Considerations
2.7 Project Types
2.8 Organization Culture
2.9 Characteristics
2.10 Identifying Cultural Characteristics
2.11 Case Study: Moss & Mc Adams Accounting Firm (M& M)
2.12 Promotion System
2.13 Characters
2.14 Palmer Resentment
2.15 Sands Decision
2.16 Summary
2.17 Key Concepts

(32) PROJECT
MANAGEMENT
2.19 Further Readings and References Project Organization
Structure
2.0 Introduction
Once management approves a project then the question becomes, how NOTES
will the project be implemented? This chapter examines three different project
management structures used by firms to implement projects: functional organiza-
tion, dedicated project teams, and matrix structure. Although not exhaustive, these
structures and their variant forms represent the major approaches for organizing
projects. The advantages and disadvantages of each of these structures are dis-
cussed as well as some of the critical factors that might lead a firm to choose one
form over others.
Whether a firm chooses to complete projects within the traditional func-

tional organization or through some form of matrix arrangement is only part of the
story. Anyone who has worked for more than one organization realizes that there
are often considerable differences in how projects are managed within certain
firms with similar structures. Working in a matrix system at AT&T is different
from working in a matrix environment at Hewlett-Packard. Many researchers
attribute these differences to the organizational culture at AT&T and
HewlettPackard. A simple explanation of organizational culture is that it reflects
the “personality” of an organization. Just as each individual has a unique person-
ality, so each organization has a unique culture. Toward the end of this chapter, we
examine in more detail what organizational culture is and the impact that the cul-
ture of the parent organization has on organizing and managing projects.
Both the project management structure and the culture of the organiza-
tion constitute major elements of the environment in which projects are imple-
mented. It is important for project managers and participants to know the “lay of
the land” so that they can avoid obstacles and take advantage of pathways to
complete their projects.
2.1 Unit Objectives

• Understanding project organization structure.
• Know about different forms of matrix.
• Know about project management structure.
2.2 Traditional Functional Organization Structure

A project management system provides a framework for launching and
implementing project activities within a parent organization. A good system appro-
priately balances the needs of both the parent organization and the project by
defining the interface between the project and parent organization in terms of

PROJECT MANAGEMENT authority, allocation of resources, and eventual integration of project outcomes
into mainstream operations.
Many business organizations have struggled with creating a system for

NOTES organizing projects while managing ongoing operations. One of the major reasons
for this struggle is that projects contradict fundamental design principles associ-
ated with traditional organizations. Projects are unique, one-time efforts with a
distinct beginning and end. Most organizations are designed to efficiently manage
ongoing activities. Efficiency is achieved primarily by breaking down complex
tasks into simplified, repetitive processes, as symbolized by assembly-line produc-
tion methods.
CHECK YOUR
PROGRESS • To organize the projects within the current functional hierarchy
Make List of various • Various segments of projects are delegated to their relevant func-
advantages and disad- tional units
vantages of traditional
• Cooperation through general management channels
functional organization
structure. • Based on the given nature of project, a functional area takes leading
role
Advantages
• No change: projects get completed within the parent organisation’s

basic functional structure without any changes in the operation
and design
• Flexibility: flexibility in use of staff. Work can be assigned tempo-

rarily. Staff can be exchanged amongst various projects
• In-depth expertise: for a project with narrow scope, functional

areas can have in-depth study and knowledge
• Easy after-project transition: usual career paths within given func-

tional divisions are retained; specialists can make progress of their
advancement and professional growth
Disadvantages
• Lacking in focus: each of the functional units is associated with

core routine task and targets. Project responsibilities are filtered
and disregarded.
• Poor integration: functional specialists may be related only to part

of the project and not to what is best for the entire project
• Slow: takes more time to complete the tasks, lack of proper hori-
zontal and direct communication among functional groups causes
rework
• Lack of ownership: motivation is weak. Lack of ownership

(34) PROJECT
MANAGEMENT
dampens strong commitment towards the activities of project.
2.3 Ongoing Projects as Committed Teams Project Organization
Structure
• Independent project teams creation
• Project manager leads the specialized group of full time NOTES

workers
• For completing the project, marching orders are given to the teams
which are physically detached to the parent organization
Advantages
• Simple: functional organization is completely separated from project

teams working individually.
• Fast: project tends to get done on time and more quickly, response
time is faster due to the decisions made within the team
• Cohesive: cohesiveness and motivation are seen to be improved

within the project team because of the common goal and distinc-
tive responsibility in finishing the project
• Cross functional interaction: the project is optimized by including

experts from different areas working in a team
Disadvantages
• Expensive: effort duplication and lost EOS
• Internal strife: different committed project teams take on their

own entity and a disease comes into picture which is called
projectitis (we-they syndrome).
• Technological expertise limitation: creation of self- contained teams

restrains maximum technological proficiency
• Difficult after-project transition: allocating full-time staffs to a

project creates the problem of what to do with them after the
project’s completion.
2.4 Organizing the Projects within a Matrix

Organization
• A type of hybrid organizational form in which horizontal project
management overlays normal functional hierarchy
• Two chain of commands:
− Project lines
− Functional lines
• Participants of project report to project and functional manager

PROJECT MANAGEMENT Advantages
• Optimal utilization of resources by making individuals work on

several projects in addition to having the capability of performing
NOTES regular functional duties
• A project manager’s authority is created and legitimized to achieve

greater integration
2.5 Different Forms of Matrix

In practice there are really different kinds of matrix systems, depending
on the relative authority of the project and functional managers. Here is a thumb-
nail sketch of the three kinds of matrices:
1. Strong Matrix Structure
2. Balanced Matrix Structure
3. Weak Matrix Structure
2.5.1 Weak Matrix

• The segment of the project are managed by their responsible func-
tional managers
• The project manager assists staff by drawing the checklists and
schedules, collecting information about present work status and
helping in completion of project
CHECK YOUR • Functional manager calls the majority of the shots and decide
who will do what and when the work will be completed
PROGRESS
• Technical quality tends to improve as well as provide better sys-
What are different kinds tem is provided for managing any conflict throughout the projects
of matrix present in
• Functional control is usually maintained at the cost of poor inte-
project organization gration of the project
structure?
2.5.2 Balanced Matrix

• Project manager holds the responsibility of
− Identifying what needs to be achieved
− Establishment of comprehensive plan for completion of the project
− Integrating the contribution of various disciplines
− Sets schedules and monitors progress
• Functional managers have to worry about finding the ways of its
successful completion
− Allocating persons and executing their part of the project in ac-
cordance with standards and schedules which have been made
by the project manager
(36) PROJECT
MANAGEMENT
2.5.3 Strong Matrix Project Organization
Structure
• Creating the feeling of a project team inside the matrix domain
• Most portions of the project is controlled by project manager
including trade-offs of scope and allocation of functional workers NOTES
• Project manager checks at what time and what experts do and

has final declaration on the important project decisions
• Functional managers are consulted on a need
• About to augment project integration
• Reduce internal power efforts
• Improving the control over costs and activities of project
• Technical quality possibly will suffer
2.5.4 Strengths of Matrix Management

• Efficient: distribution of resources can be done in several projects
• Strong project focus: assigned project manager holds the respon-
sibility of coordination and integration of contributions of different
CHECK YOUR
divisions
PROGRESS
• Easier after-project transition: specialists play the role of main-
taining the ties with functional groups so they can return after What are strengths and
project completion weaknesses of matrix
• Flexible: flexibility in utilization of expertise and resources management?
2.5.5 Weakness
• Dysfunctional conflict: conflict between project and functional
managers
• Infighting: competition for scarce resources
• Stressful: project participants have two bosses: one project man-
ager and another functional manager
2.6 Right Project Management Structure: Factors

• Organization considerations
• Resource availability
• Project considerations
2.6.1 Organization Considerations

• If 75% of task consists of projects, then organization should
think of a entirely projectized structure
• Matrix organization will be appropriate when firm has both

standard projects and products
• Fewer formal arrangement is required for very a small number

of projects within an organization, committed teams could be
formed on an as - needed basis
PROJECT MANAGEMENT 2.6.2 Resource Availability
• If resources need to be shared amongst multiple projects then
matrix type is preferred
NOTES
• If critical personnel on individual projects cannot be afforded then
matrix type is preferred
• When resources are not available internally then form a commit-

ted team but contract out project work
• Shift from functional matrix to project matrix orgainisation. Begin

with a poor functional matrix
• Offices for project management are created to support efforts of

project management
2.6.3 Project Considerations

• Project size
• Strategic significance
• Newness and requirement for innovation
• Need of integrating the departments
• Complexity of environment
• Constraint of time and budget
• Strong availability of resources
• For higher levels of the above factors, the project manager and
team members need more authority and autonomy to be
successful
• Committed project teams are required for critical projects de-

manding people to work steadily from start to end
• Need of creating flexibility in management systems that can or-

ganize the project according to the requirements
2.7 Project Types

• Advanced development project: project with high risk: involves
formation of a breakthrough process/product
• Platform project: project with medium risk: involves up-gradation

of system yielding new processes and products
• Incremental project: project with low risk: involves minor changes

(38) PROJECT or modifications in current processes and products
MANAGEMENT
Project Organization
2.8 Organization Culture Structure
• Related to an organization of shared beliefs, values, norms and
assumptions which connects people together and hence creates
NOTES
shared meanings
• Culture is similar to the personality of an individual and reflects

an organization’s personality
2.9 Characteristics
• Identity of member: degree to which workers identify with the
organization altogether rather from their professional expertise or
working field.
• Team emphasis: degree to which functional activities are arranged

around groups in place of individuals.
• Focus of management: degree to which managerial decisions con-

sider the effects of outcome in persons of the organization.
• Integration of units: degree to which an organization’s units are

motivated to function in a synchronized or interdependent way.
• Control: degree to which direct supervision, policies and rules are

used to monitor and control behaviors of employees.
• Tolerance of risk: degree to which employees are motivated for

aggression in work , innovation, and being risk seeker.
• Criteria for reward: degree to which promotion and increment in

salary are decided on the basis of performance of employee rather
than favoritism, seniority or any other non-performance crite-
rion.
• Tolerance of conflict: degree to which workforce are motivated

to air criticisms and conflicts openly.
• Means vs. End orientation: degree to which results are focused

by the management rather processes and techniques used to ac-
complish the outcomes.
• Open system focus: degree to which a firm monitors and takes

action to any external environmental changes.
2.10 Identifying Cultural Characteristics

• Study the organization’s physical characteristics
− External architecture, uniform of employees, offices
• Knowing the organisation

PROJECT MANAGEMENT − Annual report, internal newsletters , press releases , mission state-
ments
− Concern for results, concern for people, bottom line

NOTES
• Observing the way of interaction of people within the firm
− Rituals, pace, values, beliefs
− Meetings, conversation
• Interpret stories and folklore surrounding the organization
2.11 Case Study: Moss & Mc Adams Accounting

Firm (M& M)
Organization profile:
• Corporate audits
• Tax preparation
CHECK YOUR • Consulting business
PROGRESS
• Result oriented management style
Give a brief description
of moss and Mc Adams • 160 employees: green bay. Minnesota, Wisconsin
accounting firm. Organization structure
• Matrix type
• A manager is assigned to a number of accounts based on work’s

scope and size
• Manager assigned to 8-12 clients: tax preparation
2.12 Promotion System

Promotion systems affect almost all aspects of organizational lives. This
section attempts to explore the organizational impact of a variety of important
promotion systems commonly practiced in organizations including up-or-out sys-
tems, absolute merit-based systems, relative merit-based systems, and seniority-
based systems.
Absolute and Relative Merit-Based Systems: The most common form of

promotion system is the merit-based system (MBS), which can be further sub-
divided into its relative and absolute forms. In an absolute MBS, the candidate
must perform above some arbitrary cutoff level in past, current or projected fu-
ture performance to become eligible for promotion. In a relative MBS, candidates
are ranked according to performance and the highest-ranked candidates are pro-
moted regardless of their absolute performance level while those at the bottom
tend to face some negative disciplinary actions. While it may seem that candi-
(40) PROJECT dates have an incentive to shirk and reduce their performance to a uniformly low
MANAGEMENT
level in a relative MBS, the opposite may actually be true. The desire for promo- Project Organization
Structure
tion and uncertainty over the final cutoff point creates an intense competition
between candidates that has been likened to a rat-race or sports tournament.
However, as we have elected to set aside incentive effects in the current study, NOTES
the issue becomes the relative ability of each system to select talented candidates
for higher-level positions.
Up-or-Out Systems: Up-or-out systems (UOS) are commonly found in universi-

ties, professional service firms, and the military. In the traditional UOS, candidates
are evaluated after a set period of time. The performers above certain perfor-
mance criteria in a cohort are promoted while those failing to make the grade are
dismissed from the organization. In theory, the system could also include a middle
group of candidates that are neither promoted nor dismissed but this is seldom
seen in practice. An up-or-out approach combines the rat-race-like incentive ef-
fects of merit-based approaches with the additional threat of job loss for inad-
equate results. Interestingly, UOS are mainly used for junior employees. Organi-
zations typically revert to a merit-based system after one or two rounds of up-or-
out pressure. Universities completely reverse their personnel policy by offering
tenure (i.e. lifetime employment) for those making the onerous transition from
assistant to associate professor. As a matching system, UOS combines the ben-
efits of a merit-based system with the ability to drop poor performers from the
candidate pool. As a result, an UOS samples more often from the candidate popu-
lation than a merit-based system. Increased sampling from the candidate popula-
tion improves the probability that a superior performer will be available for promo-
tion. Over time, this over-sampling may improve the performance of the organiza-
tion relative to a merit-based system.
Seniority-Based Systems: Seniority based systems promote the candidate (or

candidates) in a cohort with either: 1) the most experience in the job, 2) the most
experience in the organization, or 3) the most experience in the industry. For this
study we focus on the second category, i.e., the experience in the organization as
a criterion for seniority. Seniority-based systems offer clear career paths and
succession planning, low turnover, and objectivity in the promotion process. When
firm-specific human capital accumulates uniformly over time, and there is little
variation in the initial ability of employees, seniority acts as a useful proxy for
performance. However, if learning rates and ability are heterogeneous then a
seniority system cannot guarantee that the best performer will be promoted. In
this situation, seniority is a weak selection device. In the current model the ability
of all agents is held constant but differential learning is possible.
Random Promotion Systems: In order to compare the relative effectiveness of

the promotion systems, we also consider a promotion system that does not use
any of the promotion mechanisms mentioned above. This random promotion sys-
tem will serve as a baseline control and may not find its existence in the real
world. In this random promotion system, when there is a vacancy, lower level

PROJECT MANAGEMENT members are selected based on random chance rather than performance or se-
niority. We would expect that promotion systems that explicitly seek to promote
capable performers into higher-level positions should generally perform better than
NOTES a random promotion system.
2.13 Characters
• Mr. Bruce Palmer : account manager: leads audit to Johnsonville
truck
• Mr. Zeke Olds: double major in accounting and computer sci-

ence. Latest development in financial information systems, inno-
vative problem solving, interest in consulting
• Ms. Ruby Sands: office manager doing hr. Work. Allots staff to
various projects under same manager and sometimes to different
managers
• Mr. Ken Crosby: manage special consulting projects, assigned to

Springfield project
2.14 Palmer Resentment

• Crosby wanted olds to work full-time on Thursdays
• Crosby flatly refused palmer for any adjustments in lieu of above

CHECK YOUR
PROGRESS arrangement
• Olds reaching late in office by 30 – 60 minutes

What do you
understand by palmer • Olds received e-mails and telephones from Crosby in the after-
resentment? noon when he was supposed to work with palmer
• Olds badmouthing Johnsonville projects to Crosby during playing

golf and telling that the project is bored one
• Olds asked for leave on ne Friday to take his family to baseball

game by palmer did not allow him
• Sands visited palmer’s office to find a solution and explain olds

problems to palmer
• Olds have hard time working with palmer and Crosby’s projects
• Difficulty in concentrating on audit and consulting projects simul-

taneously
• Olds tried putting additional hours to complete both the projects

before their deadlines but resulted in tension at home
• Olds said nice things about palmer
• Consulting work was more enjoyed by the olds. They also found
(42) PROJECT the consulting work as more challenging
MANAGEMENT
2.15 Sands Decision Project Organization
Structure
• To pull out olds from Johnsonville project and put him in
Springfield’s project
NOTES
2.16 Summary
• Olds was working under palmer in Johnsonville trucks project.
Crosby was assigned a major consulting project with Springfield
metals. Crosby wants olds to work with him as he has the re-
quired expertise.
• Sands allowed olds to work in both projects: olds work in the

morning time with Crosby and afternoon time with palmer
2.17 Key Concepts

• Types of organization structures- there are three main types of
organizational structure: functional, divisional and matrix
structure.
• Factors of right project management structure- smart people,

smart planning, open communication, careful risk management,
strong project closure.
• Project types- advanced development project: project with high

risk: involves formation of a breakthrough process/product
• Platform project: project with medium risk: involves up-gradation

of system yielding new processes and products
• Incremental project: project with low risk: involves minor changes

or modifications in current processes and products
• Identifying cultural characteristics
2.18 Excercise & Questions

1. What are the different organization structures in project
organization structure?
2. Give a brief description of different types of projects?
3. What are the characteristics of project organization structure?
4. Assuming yourself as palmer when the case ends, what would be

your response?
5. What could have been done by palmer for avoiding the loss of
olds?
6. Make the list of advantages and disadvantages of matrix

organization.
PROJECT MANAGEMENT 7. What could m&m management do to manage the situations like
this in a more effective way?
NOTES
• Erik Larson and Clifford gray, “project management: the
managerial process”, McGraw-Hill higher education.
• Manoj Arora, Anuj Gupta and Neeti Gupta, “project planning &
control”, kalyani publishers.
(44) PROJECT
MANAGEMENT
Market and Demand
UNIT 3 Analysis
MARKET AND DEMAND ANALYSIS
Structure NOTES
3.0 Introduction
3.1 Objectives
3.2 Situation Based Analysis and Statement of Objectives
3.2.1 Example: Introduction of Air Cooler
3.3 Collecting the Secondary Information
3.3.1 Industry Specific Sources of Secondary Information
3.3.2 Evaluation of Secondary Information
3.4 Conducting Survey in the Market
3.4.1 Information Sought In a Market Survey
3.4.2 Steps of Sample Survey
3.5 Market Characterization
3.6 Forecasting the Demand
3.6.1 Executive Opinion Method
3.6.2 Delphi Method
3.6.3 Trend Projection Method
3.6.4 Price Elasticity of Demand
3.6.5 Income Elasticity of Demand
3.7 Market Plan
3.8 Technical Analysis
3.8.1 Manufacturing Process / Technology: Selection of Technology
3.8.2 Suitability of Technology
3.9 Material Inputs and Utilities
3.10 Product Capacity
3.11 Factors Affecting Capacity
3.12 Location
3.13 Equipment and Machinery
3.14 Structure and Civil Works
3.15 Environmental Factors

PROJECT MANAGEMENT 3.16 Project Diagrams and Layouts
3.17 Project Implementation Schedule
3.18 Need for Considering Alternatives

NOTES
3.19 Summary
3.20 Key Concepts

3.21 Exercises and Questions
3.22 Further Readings and References
3.0 Introduction
Market and Demand analysis is conducted to know about the aggregate
demand for the product or service and the market share that the proposed project
will enjoy.
In the most cases, the first step in project analysis is to estimate the po-
tential size of the market for the product proposed to be manufactured and get an
idea about the market share that is likely to be captured. Given the importance of
market and demand analysis, it should be carried out in an orderly and systematic
manner.
The key steps involved in market and demand analysis are as follows:
• Situation based analysis and statement of objectives
• Collecting the secondary information
• Conducting survey in the market
• Market characterization
• Forecasting the demand
• Forecasting the market
3.1 Unit objectives

• Know about market analysis
• Understanding how demand is forecasted
• Know about production capacity
3.2 Situation based analysis and statement of

objectives
• Talking with competitors, middlemen, customers and other
industrial body
(46) PROJECT
MANAGEMENT
• Find out customer’s likings and purchasing capacity, competitor’s Market and Demand
Analysis
strategies and actions and middlemen’s practices
3.2.1 Example: introduction of air cooler

NOTES
• Who want to buy the air coolers?
• What is the present aggregate demand of these coolers?
• What is geographical and temporal distribution of demand?
• How is the aggregate demand divided for different size air

coolers?
• How much price can the customers pay for the air-cooler in
improved condition?
• What are the ways to convince the potential customers on new

superior cooler?
• What warranty and price can make it accepted?
• What distribution channels are appropriate for the air cooler?
• What can be the prospects of immediate sales?
3.3 Collecting the secondary information

• Census of India: population, size and composition of household,
demographic characteristics and maps CHECK YOUR
• Records of national sample survey (NSS): social and economic PROGRESS
aspects like consumption pattern, dispersal of households on the What are the problems
basis of size of expenses of consumer, dispersal of industries one can face in
• Plan reports: plan proposals, agricultural and industrial statistics collection of secondary
information?
• Statistical year book: world statistics regarding demography,
population, industrial production, international trade, GDP etc.
• Economic/financial survey: data on wholesale prices, production

in an industry, consumer prices, national income, exports,
agricultural production etc.
• Instructions to industries
• Yearly survey of industries: no. Of units and state-wise

distribution, employment etc.
• Annual reports of development wing: regarding products which is

manufacture first time
• Annual reports on statistics of exports and imports: data on

exports and imports for large number of items
• Techno-economic surveys

PROJECT MANAGEMENT • Industry potential surveys
• The stock exchange directory: statements related to performance

and finance of all companies in the list
NOTES
• Any other publications by advertising agency
3.3.1 Industry specific sources of secondary information

• Automobiles: annual reports of association of Indian automobile
manufacturers : Indian automobile manufacturers association
• Automobile ancillary industry: all-India automobile and ancillary

industries association
• Fertilizers: fertilizers association of industry
3.3.2 Evaluation of secondary information

• Information was collected by whom and with what objective?
• When was it gathered and published?
• How representative was the phase of information collection?
• What was target population?
• How had the sample been chosen?
• How typical was the information gathering process?
• How precisely had the information been edited, put into a table
and analyzed?
• Did they do statistical analysis appropriately?
3.4 Conduct of market survey

• Census survey: entire population is covered
• Sample survey: a population sample is approached or observed or

pertinent information is collected
3.4.1 Information sought in a market survey

• Aggregate demand and growth rate of demand
• Demand of different market segments
• Price and income elasticity’s of demand
• Purpose of buying
• Purchase plans and objectives
• Fulfillment of expectations and needs with current products
• Needs unfulfilled
(48) PROJECT • Feelings for various goods
MANAGEMENT
• Shared trade practices and priorities Market and Demand
Analysis
• Socio – economic characteristics of buyers
3.4.2 Steps of sample survey

NOTES
• Defining target population
• Selecting the size of sample and scheme for sampling
• Developing questionnaire for survey
• Recruiting and training the persons who will take part in

investigation
• Get information from a sample of responding population through

questionnaire
• Scrutinizing the gathered information
• Analyzing and interpreting the gathered information
• Statistical analysis of data
3.5 Market Characterization

• Defining target population
• Selecting the size of sample and scheme for sampling
• Developing questionnaire for survey
• Recruiting and training the persons who will take part in

investigation
• Get information from a sample of responding population through

questionnaire
• Scrutinizing the gathered information
• Analyzing and interpreting the gathered information
• Statistical analysis of data
• Effective demand: production + import – export – change in level

of stock
• Demand breakdown : product’s nature (rolled products, semi-

finished products), consumer groups (industrial /domestic),
geographical distribution
• Price: collection of price statistics must be done: free on board

(fob); cif (cost insurance and freight price) , mean wholesale price,
mean retail price, landed price of goods which are imported

PROJECT MANAGEMENT • Distribution methods and sales promotion methods: consumer
products, raw materials and capital goods are likely to have
different channels of distribution
NOTES • Product to product variation may be found in sales promotion
• Supply and competition: existing sources of supply: domestic or

foreign
• Government policy: government legislations, plans and policies

have effect on the product’s demand and market
3.6 Demand Forecasting

To estimate future demand using forecasting techniques
• Executive opinion method
• Delphi method
• Trend projection method

CHECK YOUR
PROGRESS • Exponential smoothing method
Define different types • Moving average method

of forecasting
3.6.1 Executive opinion method
techniques?
• Views of managers on forecasted sales are solicited and then
combined to make an estimate of sales
− Fast
− Consideration of a variety of factors like consumer preferences,

economic climate, technological developments, competitive envi-
ronment
− Subjective estimates
3.6.2 Delphi method

• Mail survey helps in drawing out the opinions of experts
• Questionnaire are sent to a group of experts by mail and requested

to put their views
• Responses are summed up without revealing any expert’s

identity and threw back to them
• Process is carried on for one or more than one rounds till a logical
consent emerges in their (experts) views
3.6.3 Trend projection method

• Consumption trend is determined by analysing the statistics of
past consumption
(50) PROJECT
MANAGEMENT
• The trend is extrapolated to project future consumption Market and Demand
Analysis
• Use of least square technique
• Exponential smoothing technique

NOTES
• Moving average technique
A) Least square method
• Linear relationship : yt = a + bt
T - time variable
Yt - demand for year t
Intercept: a
Slope: b
B=
A = (mean y) – b (mean t)
Other relationships
• Exponential relationship: y = a ebt
• Polynomial relationship
• Cobb Douglas relationship : y = a tb
• Logarithmic relationship : log y = log a + b log t
B) Exponential smoothing technique
• Forecasts are made by considering the errors observed
• Ft - forecasted value for the year t
• St - actual value for the year t
• If ft < st , ft+1 is put more than ft
• If ft > st , ft+1 is put less that ft
• Ft+1 = ft + á (st - ft )
C) Moving average technique
• Forecast for coming period is the mean of the sales for a number
of previous periods
• Ft+1 - forecast of coming period
• St - sales of existing period
• N - period of calculating the mean value

PROJECT MANAGEMENT 3.6.4 Price elasticity of demand
• It measures the receptiveness of demand to price variations
• EP =
NOTES
If P1 = Rs. 600, Q1= 10000, P2 = 800 and Q2= 9000
Then EP = = - 0.37
3.6.5 Income elasticity of demand

• Receptiveness of demand to income variations
• EI =
• If Q1 = 30, Q2=55, I1 = 1000 and I2 = 1020
• Then EI = 4.81
3.7 Market Plan

• Current marketing condition:
− Market condition: size, buying behavior , aspirations of consumer,

growth
− Competitive condition: main competitors-objectives, strengths and

strategies
− Distribution condition: competitor’s distribution capability
− Macro environment: consequence of political, social, technologi-

cal, economic and other exterior factors on market
• Analysis of opportunity and condition: swot analysis
• Objectives: unambiguous, definite and attainable
• Marketing policy: target segment, product line, positioning, cost,

delivery, sales force, promotion of sales and promoting products
through advertising
• Action program
3.8 Technical Analysis

• Ensuring technical feasibility of the project
• Facilitating best optimal formulation for the project regarding

technology, location, and size etc.
• To select the best technology available
3.8.1 Manufacturing process / technology: selection of technology

• Capacity of plant
(52) PROJECT
• Key inputs
MANAGEMENT
• Cost of production and investment expenses Market and Demand
Analysis
• Product mix
• Use in additional units

NOTES
• Recent developments
• Easiness in absorption
3.8.2 Suitability of technology

• Utilises local raw material
• Utilises local manpower
• Cater to basic needs of society
• Protects ecological balance
• Agreeable with cultural and social conditions
3.9 Material inputs and utilities

• Developing technical knowledge required for the manufacturing
process
• Kind of support which will be provided by collaborators
• Guarantees for performance and process regarding quality of

product, capacity of plant, consumption of utilities and use of raw
materials
• Collaboration agreement period
• Assistance to be provided and restrictions to be provided by the

collaborator
• Level of equity participation and the manner of sharing of

management control
• Assigning the agreement by each side in the case of any

ownership change
• Terminating the agreement or other remedies when any party

becomes failure in meeting its obligations
• Approach to be adopted in for majeure situations
3.10 Product capacity

• Level of equity participation and the manner of sharing of man-
agement control
• Assigning the agreement by each side in the case of any owner-

ship change

PROJECT MANAGEMENT • Terminating the agreement or other remedies when any party
becomes failure in meeting its obligations
• Approach to be adopted in for majeure situations

NOTES
3.11 Factors affecting capacity
• Requirement of technology
• Constraints as input
• Cost of investment
• Conditions of market
• Firm’s resources
• Government policy
3.12 Location
• Choice of location:
− Nearness to markets and raw materials
− Infrastructure’s availability
− Labor’s availability and condition
− Policies of government
− Land acquisiton
− Environmental issues
− Forest clearance
3.13 Equipment and machinery

• Determining the types of equipment and machinery to be used in
manufacturing process
− Estimating expected production levels over time
− Defining the different machining operations and additional opera-

tional functions
− Reckoning machine hours for each operation type
− Selecting equipment and machinery needed for each type of

function
3.14 Structure and civil works

• Preparing and developing the site
− Grading the site

(54) PROJECT
MANAGEMENT − Leveling the site
− Demolishing and removing present structures Market and Demand
Analysis
− Relocating the existing cables, pipelines etc.
• Buildings and structures

NOTES
− Factory or process buildings
− Stores and warehouses
− Maintenance services and utility supply centres
− Housing (residential houses)
• Outdoor works
− Supply of various utilities
− Distribution of various utilities
− Effluent handling
− Effluent treatment
− Transport and traffic signals
− Outdoor lightings etc.
3.15 Environmental factors

• Types of effluents and emissions
• Proper disposal of effluents and treatment emissions
• Environmental and forest clearances
3.16 Project diagrams and layouts

• Functional layout
• Diagram of material flow
• Diagram of production line
• Layout for transportation
• Layout for utility consumption
• Layout for communication
• Layout for organization
• Layout for plant

CHECK YOUR
PROGRESS
3.17 Project implementation schedule
What do you under-
• List of all possible activities
stand by scheduling of
• Activity relationship project implementation?
• Time required to perform various activities
PROJECT MANAGEMENT • Resource requirement
• Use of CPM/PERT/MS project
NOTES 3.18 Need for considering alternatives

• Project’s nature
• Production process
• Quality of product
• Operation’s scale and time phase
• Site or location
3.19 Summary
• Learn about customer’s liking and purchasing capacity,
competitor’s strategies and actions and middlemen’s practices
• Information sought in a market survey
• To estimate future demand using forecasting techniques
• Schedule of project implementation
• Need of facilitating best optimal formulation for the project regarding

technology, location, size etc.
3.20 Key Concepts

• Market analysis: new product introduction- the more accurate
the market study, the better will be the chances of the product
success.
• Situation based analysis and statements of objectives- analysis of

various situation and their dynamic nature and accordingly cope
up with them by modifying the objectives.
• Conducting survey in market – getting information from the cus-

tomer about the product expectation and features for its better
designing. Also could be used as feedback.
• Demand forecasting- forecasting about the market scenario for

upcoming production rates and planning structure.
• Market plan – a marketing plan is a comprehensive document or

blueprint that outlines a company’s advertising and marketing ef-
forts for the coming year.
• Technical analysis- a thorough analysis of the data obtained by

the latest technique.
(56) PROJECT
MANAGEMENT
Market and Demand
3.21 Exercise & Questions Analysis
1. What do you understand by market analysis?
2. What are the problems faced in collection of secondary information? NOTES

3. How to conduct market survey?
4. Give a brief description on technical analysis?
5. What are the needs for considering the alternatives?

• Erik Larson and Clifford Gray, “project management: the
managerial process”, McGraw-Hill higher education.

PROJECT MANAGEMENT
UNIT 4
PROJECTED CASH FLOW & BALANCE
NOTES SHEET
Structure
4.0 Introduction
4.1 Objectives
4.2 Cost of Production
4.3 Working Capital Requirement
4.4 Profitability Projections
4.5 Projected Cash Flow Statement
4.6 Disposition of Funds
4.7 Projected Balance Sheet
4.8 Case Study
4.9 Summary
4.10 Key Concepts
4.0 Introduction
The projected balance sheet shows the financial position of the business
as of a specific date, say, end of the fiscal or calendar year. The projected cash
flow statement, on the other hand, reports the estimated cash receipts and cash
payments for a business for a specific time period.
• Considerations for estimating sales revenue:
• Reasonable assumption with respect to capacity utilization
• Assume production equal to sales
• Selling price accomplishable by the firm’s net of excise duty, deal-

ers’ commission
• Changes in selling price mated by proportionate change in pro-

duction cost
4.1 Unit objectives

(58) PROJECT • Know about Projected Cash Flow.
MANAGEMENT
• Know about Projected balance sheet. Projected Cash Flow &
Balance Sheet
4.2 Cost of Production
The costs related to making or acquiring goods and services that directly gener- NOTES
ates revenue for a firm. It comprises of direct costs and indirect costs. Direct
costs are those that are traceable to the creation of a product and include costs for
materials and labor whereas indirect costs refer to those costs that cannot be
traced to the product such as overhead.
Type of costs
• Fixed Costs: These costs stay the same and do not change throughout the
project life cycle. Examples of fixed costs include setup costs, rental costs
etc.
• Variable Costs: Variable costs are costs that change with the amount of
work. Examples of variable costs are hourly labor, the cost of material,
the cost of supply, fuel for bulldozer etc.
• Direct Costs: Direct costs are expenses that are billed directly to the
project. Examples of direct costs are team travel expenses, team wages,
the cost of material used in a project, costs incurred for recognition and
awards materials used to construct a building.
• Indirect Costs: Indirect costs are costs that are shared and allocated among
several or all projects. Examples include fringe benefits and taxes. An-
other example of indirect costs could be the salary of an architect or a
project manager who is partially allocated across many projects. Their
team members’ salaries would be direct costs since each of them is di-
rectly working on a particular project and their salary is direct costs to the
project. But since the project manager is allocated to several projects, the
costs incurred on his salary are indirect costs to the project.
4.3 Working Capital Requirement

• Raw materials and components
• Work in progress
• Finished goods
• Debtors
• Operating expenses
• Consumable items
• Maximum allowable amount of bank finance for working capital

= current assets – non bank current liabilities (like trade credit
and provisions)

PROJECT MANAGEMENT − 25% of present assets must be braced by long term sources of
finance
− Current assets margin

NOTES
Work in process 20-40%
Raw materials 10-15%
Debtors 30-50%
Finished goods 30–50%
4.4 Profitability Projections

a. Production cost
b. Total sales expenses
c. Sum of administrative expenses
d. Royalty and know-how payable
e. Total production cost (sum of above)

CHECK YOUR
f. Gross profit before interest
PROGRESS
g. Anticipated sales
Identify various kind of
working capital h. Sum of financial expenses (interest payments)
requirement during the
i. Depreciation
execution of a project
j. Operating profit (g-h-i)
k. Other income
l. Preliminary expenses written off
m. Profit / loss before taxation (j + k –l)
n. Provision for taxation
o. Profit after tax (m – n)(less dividend on equity capital retained

profit, preferential capital)
p. Net cash accrual (p+i+l)
4.5 Projected Cash Flow Statement

• Flow of cash in and out of the company and its net effect on the
cash balance within the firm
• Sources of funds
− Share issue
− Sale of investments
(60) PROJECT − Depreciation provision for the year
MANAGEMENT
− Development rebate reserve Projected Cash Flow &
Balance Sheet
− Increase in secured, medium and long term borrowings for the
project
NOTES
− Other medium and long term loans
− Increase in liabilities for deferred payments to machinery

suppliers
− Increase in unsecured loans and deposits
− Increase in bank borrowings for working capital
− Other income
− Profit before taxation with interest added
− Sale of fixed assets
− Total (a)
4.6 Dispositions of Funds

• Gain in working capital
• Capital expenditure for the project
• Other normal capital expenditure CHECK YOUR

PROGRESS
• Decrease in unsecured deposits and loans
Give provisions of various
• Decrease in bank borrowings for working capital
sources of funds in a
• Decrease in secured medium and long term borrowings project.
• Decrease in liabilities for deferred payments to machinery suppli-

ers
• Enhancement in investments in other companies
• Taxation
• Interest on bank borrowings for working capital
• Dividends : preferential ,equity
• Interest on term loans
• Other expenditure
• Total (b)
• Opening amount of cash in hand and at bank
• Closing amount of cash in hand and at bank
• Net surplus / deficit (a – b)
Example
PROJECT MANAGEMENT Liabilities
Share capital 100

Provisions 20
NOTES
Current liabilities 90
Unsecured loans 50
Secured loans 80
Reserve and surplus 20
Assets
Current assets 180
Investments 0
Fixed assets 180
Cash 20
Inventories 80
Receivables 80
A. Projected income statement and distribution of earnings

Sales 400
Cost of goods sold 300
Retained earnings 20
Profit before taxes and interest 80
Interest 20
CHECK YOUR Profit before tax 60
PROGRESS
Profit after tax 30
Enlist various incomes Tax 30
from different sources
Dividends 10
and their distribution in a
project. Depreciation 20
B. Company plans
Raise secured term loan of 20
Repay previous term loan of 5
Increase in inventories by 10
Acquire fixed assets worth 30
Current liabilities and provisions
are expected to remain unchanged 30
Increase unsecured loans by 10
Receivables are expected to increase by 15
Other asset would remain unchanged
(62) PROJECT Dividend payment 10

MANAGEMENT
C. Projected cash flow statement for above problem Projected Cash Flow &
Balance Sheet
− Sources of funds
Profit before interest and tax 80

NOTES
Increase in unsecured loan 10
Increase in secured loan 15
Depreciation 20
Total 125
D. Disposition of funds
Capital expenditure 30
Taxation 30
Increase in working capital 25
Interest 20
Dividend – equity 10
Total 115
− Opening amount of cash in hand and at bank: 20

− Closing amount of cash in hand and at bank : 20 + 10 = 30
− Net surplus : 125 – 115 = 10
4.7 Projected Balance Sheet

• Balance sheet shows the balances in various liability accounts
and assets
• It reflects the financial state of the firm at a given point of time
Liabilities Assets CHECK YOUR

Share capital Fixed assets PROGRESS
Surplus and reserves Investments Prepare a balance sheet

Unsecured loans Losses and misc. Expenditure of liabilities and assets.
Secured loans Loans, advances and current assets
Current liabilities and provisions
a) Liabilities: shows origin of finance employed by the business
b) Share capital: consists of paid-up equity and preference capital
c) Surplus and reserves: pile up earnings as shown in different accounts

like debenture redemption reserve, general reserve

PROJECT MANAGEMENT d) Secured loans: borrowings of the firm against which protection has
been facilitated. Includes term loans, loans, debentures from com-
mercial banks
NOTES e) Unsecured loans: borrowings against which no specific protection has
been provided. Includes public deposits, loans from promoters
f) Current liabilities: payables from getting materials and supplies used

in production, accruals from salaries, wages and rentals
g) Provisions: tax provision, provision for provident fund, provision for

pension and gratuity, provision for proposed dividends
h) Asset side of balance sheet: shows the way funds are used in the
business
i) Fixed assets: concrete long fixed resources used for production of

goods and services. Shown at original cost less accumulated depre-
ciation
j) Investments: represent financial securities owned by the firm
k) Loans, current assets and advances: consist of debtors, inventories,

cash, loans and advances made by the firm
l) Losses and misc. Expenditures
m) Outlays uncovered above and accumulated losses
− Projected balance sheet for above problem
Category O.B. Changes C.b.
Liabilities
Share capital 100 - 100
Reserves & surplus 20 +20 40
Secured loans 80 +20 95
Unsecured loans 50 +10 60
Current liabilities 90 - 90
Provisions 20 - 20
Total 405
(64) PROJECT
MANAGEMENT
Projected Cash Flow &
Balance Sheet
Category O.B. Changes C.B.
Assets
Fixed assets 180 +30-20 190 NOTES
Investments 0 - 0
Current assets
Cash 20 - 30
Inventories 80 +10 90
Receivables 80 +15 95
Total 405
− Balance sheet of Swaraj ltd

Liabilities
Current liabilities 6
Share capital 5
Secured loans 4
Surplus & reserves 4
Unsecured loans 3
Provisions 1
Total 23
Investments 0.5
Fixed assets 11
Current assets 11.5
• Inventories 6.5
• Receivables 4
• Cash 1
Total 23
Projected income statement and distribution of earnings
Sales 25
Cost of goods sold 19
Depreciation 1.5
Profit before int. & tax 4.5
Interest 1.2
Profit before tax 3.3
Tax 1.8
Profit after tax 1.5
Dividends 1.0
Retained earnings 0.5
PROJECT MANAGEMENT − Plans for next year
− Increase in current liabilities
NOTES Increase in secured loans 1

Repay previous term loan 0.5
And provisions: 5% (6 + 1) 0.35
Acquire fixed assets 1.5
Increase inventories 0.5
Increase in receivables 5% (4) 0.2
4.8 Case Study

A constant cash flow is generated by a business. Cash is needed by every
business to pay for its current expenses and to clear up debts as they emerge.
Shortage of cash would not allow clearing these payments. It will lead a business
to liquidation. The Cash Flow Statement shows how cash has flown into and out
of the business over the previous year. It tells about the cash generated from
inside the business (e.g. sales) and obtained from outside (e.g. loans).
In addition to managers, the Cash Flow Statement is important to employ-

ees, creditors, and, shareholders. Excess cash is profligate and it needs to be
invested for the best returns. In contrast, scarcity of cash can cause the death of
business.
HALFORDS PLC
Statement of cash flows
Year ending 30 March 2016
(in thousands of rupees)
Operating activities 89.7
Investing activities (20.0)
Financing activities (54.2)
Increase/decrease in cash 15.5
4.9 Summary
• For the estimation of estimates for sales and production it is
assumed that production equal to sales and selling price realiz-
able by the company net of excise duty, dealers’ commission
• The sales budget is braced first because all other budgets depen-
dent on its information.
(66) PROJECT
MANAGEMENT
• The number of units forecasted by sales personnel based on that Projected Cash Flow &
Balance Sheet
information the production department manufactures products,
which shows its effect on the sales budget
• Cost of production mainly includes material cost, utility costs, labour NOTES
cost, overhead costs.
• A balance sheet must be prepared considering all the assets and

liabilities
4.10 Key Concepts

• Production cost -production cost refers to the cost incurred by a
business when manufacturing a good or providing a service.
• Profitability projections-estimates of the future financial perfor-

mance of a business. Planning out and working on your company’s
financial each year could be one of the most important things you
do for your business.
• Working capital requirement- working capital requirement is the

amount of money needed to finance the gap between disburse-
ments (payments to suppliers) and receipts (payments from cus-
tomers).
• Estimated cash flow statement- a statement used in balance sheet

to bring out the relation between asset and liability. It basically
shows the transfer of credit (cash) through the firm.

1. What are the various methods of estimation for sales and
production?
2. What are the various kinds of costs associated in production

and working capital requirements?
3. What are the various areas of capital expenditure in a project?
4. Prepare a balance sheet considering all the cash inflows and

expenditures.

• Abol Ardalan, “economic & financial analysis for engineering & project
management”, CRC press.
• http://businesscasestudies.co.uk/acca/interpreting-and-understanding-
accounts/the-cash-flow-statement.html

PROJECT MANAGEMENT
UNIT 5
ORGANIZATION STRATEGY & PROJECT
NOTES PORTFOLIO MANAGEMENT
Structure
5.0 Introduction
5.1 Objectives
5.2 Need to Understand Organization Strategy
5.4 Strategic Management Process
5.4.1 Mission Statement
5.4.2 Long Range Objectives
5.4.3 Analyze and Formulate Strategies to Reach Objectives
5.4.4 Implementing Strategies through Projects
5.4.5 Need for Project Portfolio Management System
5.4.6 Organization Politics
5.5 Portfolio Management System
5.5.1 Classification of the Project
5.5.2 Sources of Proposals
5.5.3 Evaluation of Proposals
5.6 Portfolio Management Tools
5.7 Optimizing the Portfolio
5.7.1 Optimizing the Portfolio by Time
5.7.2 Optimizing the Portfolio by Risk
5.8 Portfolio Management Process
5.9 Criteria for Project Selection
5.9.1 Financial Models
5.9.2 Non-Financial Criteria
5.9.3 Two Multi-Criteria Selection Models
5.11 Assessing Project Portfolio
5.12 Case Study

(68) PROJECT
MANAGEMENT
5.13 Summary Organization Strategy &
Project Portfolio
5.14 Key Concepts Management

NOTES
5.0 Introduction
Strategy is fundamentally deciding how the organization will compete. Organiza-
tions use projects to convert strategy into new products, services, and processes
needed for success. For example, Intel’s major strategy is one of differentiation.
Its projects target innovation and time to market. Currently, Intel is directing its
strategy toward specialty chips for products other than computers, such as autos,
security, cell phones, air controls. Another goal is to reduce project cycle times.
Intel, NEC, General Electric, and AT&T have reduced their cycle times by 20–50
percent. Projects and project management play the key role in supporting strate-
gic goals. It is vital for project managers to think and act strategically.
Aligning projects with the strategic goals of the organization is crucial for project
success. Today’s economic climate is unprecedented by rapid changes in technol-
ogy, global competition, and financial uncertainty. These conditions make strat-
egy/project alignment even more essential for success. Every major project needs
to have a strong linkage to the strategic plan. Ensuring a strong link between the
strategic plan and projects is a difficult task that demands constant attention from
top and middle management.
5.1 Unit objectives

• Understanding Organization Strategy.
• Know about Project portfolio management.
5.2 Need to Understand Organization Strategy

• Identify a project’s preferences and link with organizational
strategy
• Effective utilization of resources: man, equipment, money and core

competencies
• Clear organization process, best use of scare resources and

improved communication across projects using a process that is
open and transparent
A. Need
• How are projects brought to market quickly?

PROJECT MANAGEMENT
• How do we decide which projects are likely winners or losers?
• How can we avoid wasted expenditure on projects?
NOTES • What can be done to get best return on projects that make it to
the market?
• How do we organize ourselves to develop drugs effectively?
B. Good strategies
• Understand the inherent risks and risk management strategies in

product development
• Profitable to flourish in future
CHECK YOUR • Return on investment

PROGRESS
• Time to market
Give provisions of
Examples: pharmaceutical industry
evaluation of project
priority and linking it • Major players were companies operating in industrial chemicals,
with organisational retail healthcare, or foods
strategy of project.
• Glaxo’s original interests in baby food and other non-pharmaceu-
tical products, but now has rebuilt its business around pharma-
ceuticals with considerable success.
• Bayer and hoechst funded r& d through the cash generated by

other business
• Inefficiency of R&D process became evident and new regula-

tions introduced to promote safety result in further escalation of
costs and increased timescales
• Increasing competition with similar products reaching the market

meant significantly higher sales and marketing costs
• Improving the efficiency and effectiveness of r & d process is an

increasingly important objective of most companies
• Portfolio is a subject of effectiveness-picking the winners
• Project management is more about efficiency or ensuring that

the selected products are developed economically.
C. Benefits
• Provides a structure for decision making when multiple projects

are competing for common limited resources
• Allows common methods to be used for comparing the attrac-

tiveness of projects
(70) PROJECT
MANAGEMENT
• Creates a group of projects that has the potential to meet there Organization Strategy &
Project Portfolio
overall objectives of business.
Management
• Minimizes investment in projects that are judged unlikely to achieve
the technical profile required for commercial success NOTES

• Understand organization’s mission and strategy otherwise project
manager will tend to
− Concentrating on problems or solutions that have low priority

strategically
− Concentrating on the present customer rather than the whole

market place and value chain
− Overstress technology
− Solve every customer issue with product/ service
− Engaging in perfection for jobs which are not in priority
• Demonstrate senior authorities how the project bestow firm’s

mission
• Explain team members and other stake holders : objectives and

priorities
5.4 Strategic Management Process

• Analyze the organization mission
• Set distant aims and objectives
• Investigate and formulate strategies to reach
• Objectives
• Implementation of strategies through projects
5.4.1 Mission Statement

• Mission statements identify the scope of the organization in terms
of its product and service
• Everyone in the organization must be aware of mission
• It includes organization philosophy, public image, key technolo-

gies and contribution to society
Examples
• Facilitate with hospital design services
• Provide information technology services

PROJECT MANAGEMENT • Increase shareholder value
• Facilitate with voice/data design services
• Provide high value products to our customers

NOTES
5.4.2 Long Range Objectives
• Objectives translate mission into concrete, measurable, specific
terms
• Objectives cover products, innovation, finance, quality, markets,

CHECK YOUR profitability, productivity, consumers and employees
PROGRESS
• Smart goals (specific, assignable, measurable, time bound and
What are the long range realistic
objectives clearly define
• Specific : be specific in targeting an objective
them?
• Assignable: make the objective assignable to one person for
completion
• Measurable: establish a measurable indicators of progress
• Time related: state when the objective can be achieved
• Realistic: state what can realistically be done with available

resources
5.4.3 Analyze and Formulate Strategies to Reach

Objectives
• Evaluating an determining alternatives that support objectives
• Select the best alternative
• Assessment of internal and external environments
• SWOT analysis
• Tasks or objectives assigned to departments, divisions or

individuals
5.4.4 Implementing Strategies through Projects

• Implementation requires action and finishing tasks
• Allocation of resources: people, technological skills, funds,

equipment and management talents
• Requires informal and formal organization that supports and

complements projects and strategies
• Planning and control
• Motivating project contributors

(72) PROJECT • Prioritizing projects
MANAGEMENT
5.4.5 Need for Project Portfolio Management System Organization Strategy &
Project Portfolio
Implementation gap Management
− Clashes frequently occur amongst functional managers and leads

NOTES
to lack of trust
− Meetings are called in short intervals to establish or re-negotiate

priorities
− There is continues shifting of people from one project to another

project
− People are working on multiple projects and feel in-efficient
− Resources are not satisfactory
5.4.6 Organization Politics

• Politics prevail in every organization
• Influences funding and high priority
• Project selection may not be on facts and sound abstract thought

but on inducement and power of people advocating projects
• Top management should develop a system for selecting and

identifying projects that reduce the impact of interior politics and
fosters the selection of the superfine projects.
• Sacred cow: projects that powerful, high ranking official

advocates
• New baby: obsession with project
• Sponsored project : selection and implementation of product

innovative projects
Advantages
• Brings control and regulations into project selection process
• Associates project selection to strategic metrics
• Prioritize project proposals
• Allocate resources to projects that aline with strategic way
• Equipoise risk across all projects
• Improves supports and communication agreement on project goals
• Justify killing of projects that are not supporting organization

strategy

PROJECT MANAGEMENT • Ensure projects aline with strategic objectives and prioritized
appropriately
• Blueprint of portfolio management system

NOTES
− Categorization of the project
− Sources of proposals
− Evaluating proposals
5.5.1 Classification of The Project

CHECK YOUR • Compliance and emergency: “must do projects” to meet
PROGRESS restrictive status required to operate in a portion
Give provisions of clas- • Operational: to support current operations e.g. Reduce downtime,
sification of projects improve efficiency, enhance quality etc.
based on various
• Strategic: directly supports long run mission e.g. New product,
criteria’s and rank them.
research & development projects etc.
5.5.2 Sources of Proposals

• Motivate and keep solicitation unsealed to all sources:
− Internal sources
− External sources
• Tap ideas for projects when the knowledge essentials are not
acquirable in the organization
• Request for proposal
• Bid to build and design a modern operating room that uses

current technology
5.5.3 Evaluation of Proposals

• Ranking proposals
• Evaluate the scope of the proposed project to the organization

and for future backup
• Evaluation form to prioritize and select new projects
• Impact of project on meeting a particular objective
5.6 Portfolio Management Tools

• Project prioritization methods
Checklist method:
− A set of criteria is defined against which all projects are evalu-

ated. A project may only proceed when it satisfies all criteria
(74) PROJECT
MANAGEMENT
− It is simple, quick Organization Strategy &
Project Portfolio
Paired comparisons: Management
− Compare each project against all others, one at a time with the
NOTES
most favorable project scoring 1 and the other scoring 0.
− Projects then be ordered, based on total scores
− Dynamic rank - ordered lists
− A set of criteria is defined on the basis of which projects are

ranked
− For each project, the average criteria ranking is calculated and

used to rank it overall
− Weighted scoring models
− Financial measures
5.7 Optimizing the Portfolio

Objective:
• Maximize the value of the launched products
• Few products with high average value
• Large number of products with a lower average value
• Reducing expenditure on projects through efficiency measures

or concentrating on low risk product
5.7.1 Optimizing the Portfolio by Time

Analyze:
• Potential launches over time
• Number of launches * probability of their occurrences
• Monte Carlo simulation: reasonable range of possible outcomes
5.7.2 Optimizing the Portfolio By Risk
• Test key attributes of a product as early as possible
• Generate information that reduces future uncertainty
• Force early failure
• Minimize the damage from negative outcomes
• Maximize the return from positive outcomes
5.8 Portfolio management process

PROJECT MANAGEMENT Linking portfolio management to strategy
• In top - down approach, resources are allocated to areas of the

portfolio and projects are then prioritized within these
NOTES
• Define the allocation split between early stage and late stage de-
velopment projects and then prioritize these separately
• In bottom – up approach, projects are considered in detail and

prioritized at this level
• The strategic fit of projects is addressed by including criteria for

strategic fitness into the project scoring models
5.9 Criteria for Project Selection

5.9.1 Financial models: preferred methods to evaluate projects are
• Payback period (in years) : estimated project costs / annual
savings
• Return on investment (in %)
• Net present value (NPV) : uses time value of money, cash flows
and profitability
5.9.2 Non-Financial Criteria:

• Strategic
• Less tangible
CHECK YOUR • Restore corporate image
PROGRESS
• Enhance brand recognition
Give provisions of
selection of a project 5.9.3 Two Multi-Criteria Selection Models
based on financial and Checklist model:
non-financial criteria’s.
− List of questions to refresh potency projects
− Determine acceptance or rejection
− Flexibility in choosing different projects with some variations in

questions
− Fails to answer the value of potency project or relative

importance
− Fails to allow comparison with other potential projects
− Room for power play, politics, manipulation
Example
Criterion Weightage
(76) PROJECT
MANAGEMENT
Stay with core competencies 2 Organization Strategy &
Project Portfolio
Urgency 2 Management
Strategic fit 2
NOTES
25% of sales from new products 2.5
Improve customer loyalty 1
Reduce defects to less than 1% 1
Roi of 18% + 3
Project A B C D E F G Wt. Total
1 1 8 2 6 0 6 5 66
2 3 3 2 0 0 5 1 27
3 3 0 10 0 0 6 0 32
4 1 10 5 10 0 8 9 102
• Highest priority : project 4, then project 1
• Project screened out : project 2 and 3, if criterion is weighted total

should be more than 50
Applying a selection model
• Project classification: project’s fit to organization’s strategy
• Selecting a model: multiple criteria to select the project
• Optimized use of capital resources and human to increase return

on investment in the long run
• Researching new technologies, ethical position, core competen-

cies, protection of environment, public image, strategic fit
5.10 Assessing Project Portfolio

Daved and Matheson scheme
Bread and butter: improvements to services and current products
• Easy to accomplish
• Produce modest commercial value
Example:
1. Software upgrades
2. Manufacturing cost reduction
Pearls

PROJECT MANAGEMENT • Low risk development projects with high commercial payoffs
• Revolutionary commercial progress using proven technology
Examples:
NOTES
1. Future generation ic chip
2. Surface imaging to locate gas and oil
Oyesters:
• High risk and high value projects
• Technological breakthroughs with tremendous commercial

potential
Examples:
1. Embryonic dna treatments
2. New kind of metal alloys
White elephants:
• Projects that at one time showed promise but are no longer viable
Examples:
1. Products for a saturated market
2. A potent energy source with toxic side-effects
5.11 Case Study

R&D project choice and prioritization are a persistent issue of strategic
significance for Novartis. In the pharmaceutical firm, decisions regarding project
portfolio are vital to the feasibility and success of a firm, and need commitments
of huge investment.
The London Business School (LBS) case begins with a synopsis of the
pharmaceutical firm and the challenges in the development process of drug, along
with the huge requirement of R&D investments, risk of failure, and commercial
uncertainty. Next, the case talks about the work carried out by the project portfo-
lio team at Novartis. They gather the project data and requisites presented by the
areas of individual therapy and bring them together to analyze the portfolio of
global company. Novartis’s decision-process is reported by the case, concentrat-
ing on the role of the Innovation Management Board (IMB). Portfolio decisions
are taken by the IMB at Novartis Pharma. It also holds a widespread discussion
of project portfolio management issues.
5.12 Summary
Project portfolio management (PPM) is the centralized management of
(78) PROJECT the methods, processes and technologies used by project management offices
MANAGEMENT
(PMOS) and to analyse and project managers collectively manage current or Organization Strategy &
Project Portfolio
proposed projects based on numerous key characteristics. The objectives of PPM Management
is to determine the optimal resource mix for delivery and to schedule activities to
best achieve an organizations operational and financial goals while honouring NOTES
constraints imposed by customers, strategic objectives, or external real-world
factors.
5.13 Key Concepts

• Organizational strategy: An expression of how an organization
needs to evolve over time to meet its objectives along with a
detailed assessment of what needs to be done.
• Portfolio: Pool of investments, collection of samples of an artist

or other creative person, or group of complementary or supple-
mentary products marketed together.

1. What are the basic needs of a project?
2. What are the goals of project manager? Clearly define them.
3. What are the needs of good project portfolio?
4. What are the needs of a good project mission statement?

• Trevor l young, “successful project management”, kogan page
publishers.
• http://www.palisade.com/cases/lbs.asp

PROJECT MANAGEMENT
UNIT 6
PROJECT SELECTION METHODS AND
NOTES INVESTMENT CRITERIA
Structure
6.0 Introduction
6.1 Objectives
6.2 Financial Feasibility of Projects
6.3 Calculating Cost of Capital
6.4 Categories of Investment Criteria
6.5 Net Present Value (NPV)
6.5.1 Intermediate Cash Flows Are Invested At Cost of Capital
6.6 Modified Net Present Value
6.7 Return on Investment
6.8 Benefit Cost Ratio
6.9 Payback Period
6.10 Discounted Payback Period
6.11 Internal Rate of Return (IRR)
6.12 Modified Internal Rate of Return (MIRR)
6.13 Accounting Rate of Return
6.14 Summary
6.15 Key Concepts
6.0 Introduction
With a profusion of interesting, challenging projects to choose from, finding a
project that is the right fit for your team’s skillet, level of competence, and
affords the best chance of success is the first step in effective project man-
agement. Project Selection Methods offer a set of time-tested techniques based
on sound logical reasoning to arrive at a choice of project, and filter out unde-
sirable projects with very low likelihood of success.
• Financial feasibility of projects
• Calculating cost of capital

(80) PROJECT
MANAGEMENT
Project Selection Methods
• Categories of investment criteria and Investment Criteria
• Net present value (NPV)
• Modified net present value NOTES
• Return on investment
• Benefit cost ratio
• Payback period
• Discounted payback period
• Internal rate of return (IRR)
• Modified internal rate of return (MIRR)
• Accounting rate of return
6.1 Unit objectives

• Understanding calculation for cost of capital.
• Know about concepts like NPV, IRR, ROI, and MIRR.
• Know about payback period.
6.2 Financial Feasibility of Projects

• Estimate the costs and benefits of the project
• Assess the riskiness of the project
• Calculate the cost of capital
• Compute the criteria of merit
• Judge the project is good or bad
• Balancing the portfolio for risks and types of projects
− Risk level, high cost, key resources, non-revenue producing, long

duration
6.3 Calculating Cost of Capital

• It is the weighted average cost of various sources of finance for
the firm
Example:
Cost of equity = 16% proportion = 50%
Cost of preference = 12% proportion = 40%
Cost of debt = 8% proportion = 10%

PROJECT MANAGEMENT Cost of capital = (16x0.5) + (12x0.4) + (8x0.1) = 12.4
6.4 Categories of Investment Criteria

NOTES • Discounting criteria
− Net present value (NPV)
− Benefit cost ratio (BCR)
− Return on investment (ROI)
• Non-discounting criteria
− Payback period
6.5 Net Present Value (NPV)

• NPV is the sum of the present values of all the cash flows –
positive as well as negative- that are expected to occur over the
life of the project
NPV = “ct / (1 + r )n – investment
For the period t=1 to t=n
Where, ct = cash flow at the end of year t
N= life of the project
R= discount rate
• It is the net benefit over and above the compensation for time and
risk
• Accept the project if NPV is positive
• Reject the project if NPV is negative
• Properties
• Value of firm = “ present value of projects + “ net present value

of prospective projects
• When a firm terminates an existing project which has negative

NPV based on its expected future cash flows, the value of firm
increases by that amount
• When a firm divests itself of an existing project and the price is

greater/lesser than the present value of the anticipated cash flows
of the project, the value of firm will increase/decrease with the
divestiture
• When a firm takes on a new project with positive NPV, the value
of firm may drop if NPV is not in line with the high expectation of
(82) PROJECT investors
MANAGEMENT
• When a firm makes an acquisition and pays a price in excess of Project Selection Methods
and Investment Criteria
the present value of the expected cash flows from the acquisition
it is taking on a negative NPV project and hence will diminish the
value of the firm NOTES
6.5.1 Intermediate Cash Flows Are Invested At Cost of

Capital
• Cash flows that occur between the initiation and the termination
of the project are invested at a rate of return equal to the cost of
capital
• PV calculations permits time varying discount rates
Example 1
Year Cash flow
0 1000000
1 200000
2 200000
3 300000
4 300000
5 350000
Cost of capital (r) = 10%
NPV =
= Rs. 5272
Example 2
Year Cash flow Discount rate
0 12000 -
1 4000 14%
2 5000 15%
3 7000 16%
4 6000 18%
5 5000 20%
Solution
NPV =
= Rs. 5592

PROJECT MANAGEMENT
6.6 Modified Net Present Value
• Calculate the terminal value of the project’s cash inflows using
reinvestment rate that reflects profitability of investment
NOTES
tv = “ cfi (1 + r’)n-t
Where
tv is the terminal value of the project’s cash inflows, cfi is the cash inflow
at the end of year t and r’ is the reinvestment rate
NPV’ = tv / (1 + r)n - investment outlay
Project x Project y
Investment outlay 110000 110000
Year 1 31000 71000

CHECK YOUR
PROGRESS Year 2 40000 40000
Identify various kinds of Year 3 50000 40000

categories of investment Year 4 70000 20000
criteria and compare
them.
Re-investment rate = 14% and 20%
Project x
(tv) 14% = 224,911 NPV’ = 43,614
(tv) 20% = 241,168 NPV’ = 54,717
Project y
(tv) 14% = 222, 774 NPV’ = 42,158
(tv) 20% = 248, 288 NPV’ = 59,584
6.7 Return on Investment

Investment = 1million
Profit s before interest and taxes = 250000
Roi = 250000/1000000 * 100 = 25%
6.8 Benefit Cost Ratio

Cost/Benefit Ratio, as the name suggests, is the ratio between the
Present Value of Inflow or the cost invested in a project to the Present Value
of Outflow which is the value of return from the project. Projects that have a
higher Benefit Cost Ratio or lower Cost Benefit Ratio are generally chosen
over others.
(84) PROJECT
MANAGEMENT
Project Selection Methods
Benefit cost ratio (BCR) = (PVB) / i
PVB = present value of benefits

NOTES
I = initial investment
Net benefit cost ratio (NBCR) = BCR – 1
BCR NBCR rule
>1 >0 accept
=1 =0 indifferent
<1 <0 reject
Example 2
Initial investment (i): 100,000
Year 1 25,000
Year 1 40,000
Year 1 40,000
Year 1 50,000
BCR = PVB / i r = 12%
BCR = 1.145 NBCR = 0.14
6.9 Payback Period

The Payback Period is the ratio of the total cash to the average per
period cash. In simpler terms, it is the time necessary to recover the cost
invested in the project.
The Payback Period is a basic project selection method. As the name

suggests, the payback period takes into consideration the payback period of CHECK YOUR
an investment. It is the time frame that is required for the return on an invest- PROGRESS
ment to repay the original cost that was invested. The calculation for payback
List the advantages and
is pretty simple.
limitations of payback
When the Payback period is being used as the Project Selection period.
Method, the project that has the shortest Payback period is preferred since
the organization can regain the original investment faster.
Advantages
• It is simple both in concept and application
• It favors projects which generate substantial cash inflows in ear-

lier years and discriminates against projects which brings cash
inflows in later years

PROJECT MANAGEMENT • It is useful when company is pressed with problems of liquidity
Limitations
• It fails to consider the time value of money

NOTES
• It ignores cash flows beyond the payback period
• It is a measure of project’s capital recovery, not profitability
• It measures a project’s liquidity but does not indicate liquidity

position of the firm as a whole
6.10 Discounted Payback Period

• It takes into account time value of money
• Cash flows are converted to their present values by applying

discounting factors
• Find the cumulative net cash flow after discounting till we get
positive value
• The corresponding period shows the discounted payback period
Example: 3 discounted payback period
Year Cash flow Present value Cum.
0 -10,000 -10000 -10000
1 3000 2727 -7273
2 4000 2478 -4795
3 4000 3004 -1791
4 4000 2732 941
5 5000 3105
6 2000 1130
Assuming r = 10% discounted payback period = between 3 and 4 years,

say around 3.5 years
6.11 Internal Rate of Return (IRR)

• IRR is the discount rate which makes NPV equal to zero
• Investment = “ ct / (1 + r)t for t = 1 to t = n
• Accept : if the IRR is greater than the cost of capital
• Reject : if the IRR is less than the cost of capital
Example 4
(86) PROJECT Year Cash flow

MANAGEMENT
0 100,000 Project Selection Methods
1 30,000
2 30,000
NOTES
3 40,000
4 45,000
1, 00,000 = 30000/ (1+r) + 30000 / (1+r)2 + 40000/ (1+r)3 + 45000/ (1+r)4
• Find r using trial and error method.
• Determine the net present value of the two closest rates of return
• Find the sum of absolute values of the net present value
• Calculate the ratio of net positive value of the smaller discount

rate to the sum of absolute values
• Add the number obtained above to the smaller discount rate
R = 15% NPV = 802
R= 16% NPV = -1359
Sum of absolute values = 2161
Ratio = 802 / 2161 = 0.37
IRR = 15 + 0.37 = 15.37%
If cost of capital is say 10%, then accept the project
6.12 Modified Internal Rate of Return (MIRR)

• Calculate the present value of the costs (pvc) using the cost of
capital as the discount rate
• PVC = “ cash outflow / (1+r)t
• Calculate the terminal value of the cash inflows expected from

the project
• tv = “ cash inflow (1 + r)n-t
• PVC = tv / (1+MIRR)n
Example 5
Year Cash flow
0 -120
1 -80
2 20
3 60
4 80

PROJECT MANAGEMENT 5 100
6 120
Cost of capital = 15%

NOTES
Solution
Pvc = 120 + 80/ (1.15) = 189.6
Tv = 20(1.15)4 + 60 (1.15)3+ 80 (1.15)2 + 100 (1.15) + 120 = 467
189.6 = 467 / (1 + MIRR) 6
MIRR = 16.2%
6.13 Accounting Rate of Return

• It is the average rate of return on investment and is a measure of
profitability
• Average income after tax / initial investment
• Average income after tax / average investment
• Average income after tax but before interest / initial investment
• Average income after tax before interest / average investment
• Average income before interest and tax / initial investment
• Average income before interest and tax / average investment
• (total income after tax but before depreciation – initial investment)

/ (initial investment/2 * year
• Higher the accounting rate of return, the better the project
Problem 1
Year Cash flow
0 -1000,000
1 100,000
2 200,000
3 300,000
4 600,000
5 300,000
Part a: taking r = 14%
Part b: taking r=12% and then 1% increase every year
Part a
NPV = -1000000 + 100000/(1.14) + 200000/(1.14)2 + 300000/(1.14)3

+ 600000/(1.14)4 + 300000/(1.14)5
(88) PROJECT
MANAGEMENT
= - Rs. 44837 Project Selection Methods
Part b
NPV = -1000000 + 100000/(1.12) + 200000/(1.12)(1.13) + 300000/

NOTES
(1.12)(1.13)(1.14) + 600000/(1.12)(1.13)(1.14)(1.15) + 300000/
(1.12)(1.13)(1.14)(1.15)(1.16)
= - Rs. 27265
Problem 2
• Current outlay = 300000
• Annual cash flow of rs. 60000 for 7 years
300000 = 60000/(1+r) + 60000/(1+r)2 + 60000/(1+r)3 + 60000/(1+r)4 +

60000/(1+r)5 + 60000/(1+r)6 + 60000/ (1+r)7
Trial and error method
Take r = 10 292105 -7895
R=9 304165 4165
Sum of absolute values = 12060
Ratio = 4165/12060 = 0.345
IRR = 9 + 0.345 = 9.345
6.14 Summary
• A feasibility study is conducted on the very first stages of project
development, before financing is secured and a go/no-go decision
has been made. The purpose of the study is to reveal whether or
not the project is viable from all aspects, such as financial, tech-
nological, market, etc.
• The important factors affecting the financial feasibility of the

project are
− Technical feasibility
− Economic feasibility
− Legal feasibility
− Operational feasibility
− Schedule feasibility
− Resource feasibility
6.15 Key Concepts

• Financial feasibility of projects- a feasibility study is an analysis
of how successfully a project can be completed, accounting for
PROJECT MANAGEMENT factors that affect it such as economic, technological, legal and
scheduling factors.
• Net present value (NPV) - the value in the present of a sum of

NOTES money, in contrast to some future value it will have when it has
been invested at compound interest.
• Modified net present value
• Return on investment- roi is usually expressed as a percentage

and is typically used for personal financial decisions, to compare
a company’s profitability or to compare the efficiency of different
investment. The return on investment formula is: roi = (net profit
/ cost of investment) x 100.
• Internal rate of return (IRR)- internal rate of return (IRR) is the

interest rate at which the net present value of all the cash flows
(both positive and negative) from a project or investment equal
zero. Internal rate of return is used to evaluate the attractiveness
of a project or investment.
• Modified internal rate of return (MIRR)

1. What are the important criteria of checking financial feasibility of
a project?
2. Why modified internal rate of return (MIRR) is a better method

than rate of return?
3. What are the important factors affecting the financial feasibility

of the project?

• Prasanna chandra, “projects: planning, analysis, selection, financing,
implementation, and review”, tata mcgraw-hill publishing company
limited.
(90) PROJECT
MANAGEMENT
Defining the Project
UNIT 7
DEFINING THE PROJECT
Structure NOTES
7.0 Introduction
7.1 Objectives
7.2 Need of the Project
7.3 Defining the Project Scope
7.4 Project Scope Checklist
7.4.1 Project Objective
7.4.2 Milestone
7.4.3 Technical Requirements
7.4.4 Reviews with Customer
7.5 Project Charter
7.6 Scope Creep
7.7 Establishing Project Priorities
7.8 Priority Matrix
7.9 Creating the Work Breakdown Structure
7.10 Hierarchical Breakdown of WBS
7.11 Work Package
7.12 Integrating WBS with the Organization - OBS
7.13 Tools
7.13.1 Process Breakdown Structure
7.13.2 Responsibility Matrix
7.13.3 Communication Plan
7.14 Steps
7.15 Summary
7.16 Key Concepts
7.0 Introduction

PROJECT MANAGEMENT Project managers in charge of a single small project can plan and sched-
ule the project tasks without much formal planning and information. However,
when the project manager must manage several small projects or a large complex
NOTES project, a threshold is quickly reached in which the project manager can no longer
cope with the detail.
This chapter describes a disciplined, structured method for selectively

collecting information to use through all phases of the project life cycle, to meet
the needs of all stakeholders (e.g., customer, project manager), and to measure
performance against the strategic plan of the organization. The method suggested
is a selective outline of the project called the work breakdown structure. The
early stages of developing the outline serve to ensure that all tasks are identified
and that participants of the project have an understanding of what is to be done.
Once the outline and its detail are defined, an integrated information system can
be developed to schedule work and allocate budgets. This baseline information is
later used for control. With the work of the project defined through the work
breakdown structure, the chapter concludes with the process of creating a com-
munication plan used to help coordinate project activities and follow progress.
The five generic steps described herein provide a structured approach for
collecting the project information necessary for developing a work breakdown
structure. These steps and the development of project networks found in the next
chapters all take place concurrently, and several iterations are typically required
to develop dates and budgets that can be used to manage the project. The old
saying “We can control only what we have planned” is true; therefore, defining
the project is the first step
7.1 Unit objectives

• Understanding project scope definition.
• Understanding project priorities.
• Know about Work Breakdown Structure Concept
7.2 Need of the Project

• A disciplined, structured method for selectively collecting
information to use through all phases of the project life cycle to
meet the needs of all stakeholders
• To measure performance against the strategic
• Plan of the organization
• Ensure all tasks are identified
• Participants have full understanding of the work

(92) PROJECT
MANAGEMENT
• Integrated information system to schedule work and allocate Defining the Project
budgets
• Monitoring and control of projects

NOTES
7.3 Defining the Project Scope
• It is a definition of the end result or mission of
• The project in specific, tangible and measurable terms
• Define possible deliverables for the end user and to focus project
plans
• Focus on project purpose throughout the life cycle of the project
• Scope should be developed under the direction of the project

manager and the customer
7.4 Project Scope Checklist

• Project objective
• Deliverables
• Milestones
• Technical requirements
• Limits and exclusions
• Reviews with customer
7.4.1 Project Objective

• Define the overall objective to meet customer’s needs
• The project objective answers the questions of what, when and

how much
7.4.2 Milestone
• A significant event in a project that occurs at a point in time
• Major segments of work: estimates of time, cost and resources

for the project
• It should be natural, important control points and easy to

recognize for all project participants
7.4.3 Technical Requirements

• To ensure required performance
• Speed
• Mileage
• Capacity
PROJECT MANAGEMENT • Limits and exclusions
• Maintenance and repair will be done only up to one month after
final inspection
NOTES • Exclusions define the boundary of the project by stating what is
not included
7.4.4 Reviews with Customer
• Understanding and agreement of expectations
CHECK YOUR
• Both for internal and external customers
PROGRESS
• Scope description should be as brief as possible
• Who is a customer?
• Prepare a check list of • But complete
customer needs. • Develop unique checklists and templates to fit their needs
• And specific kinds of projects
• Prepare statement of work (sow) / project charter
7.5 Project Charter

• Expanded version of the scope statement
• Is a document that authorizes project manager to initiate and lead
• The project using organizational resources for project activities
• Includes risk limits, customer needs, spending limits, team

composition
7.6 Scope Creep
• It is the tendency for the project scope to extend over time by
changing requirements, specifications and priorities
• It means added costs/ cost overrun and possible project delays
• If project scope needs to change, then
• Change control
• Record change
• Keep a log of all project changes
• Log identifies the change, impact and those responsible for

accepting or rejecting proposed change
7.7 Establishing Project Priorities

Quality and the ultimate success of a project are traditionally defined as
meeting and/or exceeding the expectations of the customer and/or upper manage-
ment in terms of cost (budget), time (schedule), and performance (scope) of the
(94) PROJECT
MANAGEMENT
project. The interrelationship among these criteria varies. For example, some-
times it is necessary to compromise the performance and scope of the project to Defining the Project
get the project done quickly or less expensively. Often the longer a project takes,
the more expensive it becomes. However, a positive correlation between cost and
schedule may not always be true. Other times project costs can be reduced by NOTES
using cheaper, less efficient labor or equipment that extends the duration of the
project. Project managers are often forced to expedite or “crash” certain key
activities by adding additional labor, thereby raising the original cost of the project.
• Tradeoffs among time, cost and performance
• Define and understand the nature of the
• Priorities of the project
• Establish relative importance of each criteria
7.8 Priority Matrix

• Constrain: project manager must meet the completion date,
specifications and scope of the project, or budget
• Enhance: reduce costs or shorten the schedule, adding value to

the project
• Accept: when tradeoffs have to be made, is it permissible for the

schedule to slip, reduce scope and performance or go for over-
budget
Project priority matrix
Time performance cost
Constrain o
Enhance o
Accept o
7.9 Creating the Work Breakdown Structure

• Project sub-divided into smaller and smaller work elements
• It is the map of the project and is an outline of the project with

different levels of detail
• It begins with the project as final deliverable
• Identify major project deliverables/ systems
7.10 Hierarchical Breakdown of WBS

• Project : complete project
• Deliverables : major deliverables
• Sub-deliverables : supporting deliverables

PROJECT MANAGEMENT • Lowest deliverables: lowest management responsibility level
• Cost account: grouping of work packages for monitoring progress

and responsibility
NOTES
• Work packages: identifiable work activities
• Defines communication channels and assist in understanding and

coordinating many parts of the project
• WBS follows the organization structure – its functions and

processes rather than project output or deliverables
• WBS records costs by function
• It should be made output oriented
• Define sub-deliverables necessary to accomplish the larger

deliverables
• Sub-deliverable detail should be small so that one person can

manage
• Sub-deliverable is further divided into work packages
• Work packages integrates the work and the organization -

organization breakdown structure
7.11 Work Package

• Defines the work
• Identifies time to complete a work package
• Identifies a time-phased budget to complete a work package
• Identifies resources needed to complete a work package
• Identifies a single person responsible for units of work
• Identifies monitoring points for measuring progress
7.12 Integrating WBS with the Organization - OBS

The WBS is used to link the organizational units responsible for perform-
ing the work. In practice, the outcome of this process is the organization break-
down structure (OBS). The OBS depicts how the firm has organized to discharge
work responsibility. The purposes of the OBS are to provide a framework to
summarize organization unit work performance, identify organization units respon-
sible for work packages, and tie the organizational unit to cost control accounts.
Recall, cost accounts group similar work packages (usually under the purview of
a department). The OBS defines the organization sub-deliverables in a hierarchi-
cal pattern in successively smaller and smaller units. Frequently, the traditional
(96) PROJECT organization structure can be used. Even if the project is completely performed by
MANAGEMENT
a team, it is necessary to break down the team structure for assigning responsibil- Defining the Project
ity for budgets, time, and technical performance.
• To provide a framework to summarize organization unit work
performance NOTES
• Identify organization units responsible for work packages
• Defines organization sub-deliveries in a hierarchical pattern
7.13 Tools
• Process breakdown structure
• Responsibility matrix
• Communication plan
7.13.1 Process Breakdown Structure

• Process oriented projects : final outcome is a product of a series
of steps or phases
• Process projects are driven by performance requirements , not

by plans / blue prints
• Quality checkpoints to ensure deliverables are complete and

accurate
7.13.2 Responsibility Matrix

• Linear responsibility chart : tasks / project team member :
responsible, support/assists
• Summarizes the tasks to be accomplished and who is responsible

for what on a project
• It consists of a chart listing all the project activities and the

participants responsible for each activity
• Useful for organizing and assigning responsibilities for small

projects / subprojects of large, more complex projects
• It is a means for all participants in a project to view their

responsibilities and agree on their assignments
• It also helps to clarify the extent or type of authority exercised by

each participant in performing an activity in which two or more
parties have overlapping involvement
Responsibility matrix 1
Task person(s) responsible
Categories into
Responsible

PROJECT MANAGEMENT Supporting
Responsibility matrix 2
Deliverables departments
NOTES
1 Responsible
2 Support
3 Consult
4 Notification
5 Approval
7.13.3 Project Communication Plan

• It is usually created by a project manager and or project team in
the early stage of project planning
• Coordinating and tracking project schedules, issues and action

items
• Maps out flow of information to different stakeholders
• To express what, who, how and when information will be trans-

mitted to project stakeholders
• What information needs to be collected and when?
• Who will receive the information?
• What methods will be used to gather and store information?
• What are the limits, if any, on who has access to certain kinds of
information?
• When will the information be communicated?
• How will it be communicated?
7.14 Steps
• Stakeholder analysis: identify the target groups : customer, sponsor,
project team, project office
• Information needs: schedules, task lists, specifications, project

status reports, change in scope, action items, deliverable issues,
team status meetings, accepted request changes, milestone reports
• Source of information: where the information reside, how will it

be collected
• Dissemination modes: e-mail, teleconferencing, etc., create virtual

project office to store project information
(98) PROJECT
MANAGEMENT
• Responsibility and timing: determine who will send out the Defining the Project
information, minutes of meeting, frequency of meetings, timing
etc.
NOTES
7.15 Summary
• To define a project scope, you must first identify the following
things:
− Project objectives.
− Goals.
− Sub-phases.
− Tasks.
− Resources.
− Budget.
− Schedule
• Defining what is needed is the first step toward establishing a

project timeline, setting of project goals and allocating project
resources. These steps will help you to define the work that needs
to be done - or in other words, define the scope of the project.
Once this is defined, you’ll be able to allocate tasks and give your
team the direction they need to deliver the project on time and on
budget
• The scope can be broken down and refined by using a variety of

break down structures:
− Product breakdown structure (PBS)
− Work breakdown structure (WBS)
− Organisational breakdown structure (OBS)
− Cost breakdown structure (CBS)
− Responsibility assignment matrix (RAM)
7.16 Key Concepts

• Stakeholder: A person, group or organization that has interest or
concern in an organization.

1. What is a project scope? Give clear definition of project scope.
2. What is a work breakdown structure?
3. What do you understand by scope creep?

PROJECT MANAGEMENT 4. What are the major technical requirements for the successful
execution of a project?
5. What are the important project priorities? List them and describe
NOTES a priority matrix.

• Https://www.oxforddictionaries.com/definition/english/project
• “What is a project? Definition and meaning”.

Businessdictionary.com. Retrieved 2016-04-19.
• “SSRN-embedding projects in multiple contexts: a structuration

perspective by Stephan manning”. Papers.ssrn.com
• A guide to the project management body of knowledge (PMBOK

guide), third edition, project management institute
(100) PROJECT
MANAGEMENT
Estimating Project Times
UNIT 8 and Costs
ESTIMATING PROJECT TIMES AND
COSTS NOTES
Structure
8.0 Introduction
8.1 Objectives
8.2 Need
8.3 Estimating
8.4 Factors Influencing Quality of Estimates
8.4.1 Planning Horizon
8.4.2 Project Duration
8.4.3 People
8.4.4 Project Structure and Organization
8.4.5 Padding Estimates
8.4.6 Organization Culture
8.5.7 Other Factors
8.5 Work Package Estimates
8.6 Top down Vs. Bottom up Approach
8.6.1 Top – Down Estimating
8.6.2 Bottom-Up Approach
8.7 A Hybrid: Phase Estimating
8.8 Level of Detail
8.9 Types of Costs
8.9.1 Direct Costs
8.9.2 Project Overhead Costs
8.9.3 General and Administrative Overhead Costs
8.10 Refining Estimates
8.11 Developing Database for Estimating
8.12 Summary
8.13 Key Concepts

PROJECT MANAGEMENT 8.15 Further Readings and References
8.0 Introduction
NOTES Estimating is the process of forecasting or approximating the time and
cost of completing project deliverables. Estimating processes are frequently clas-
sified as top-down and bottom-up. Top-down estimates are usually done by senior
management. Management will often derive estimates from analogy, group con-
sensus, or mathematical relationships. Bottom-up estimates are typically performed
by the people who are doing the work. Their estimates are based on estimates of
elements found in the work breakdown structure.
All project stakeholders prefer accurate cost and time estimates, but they
also understand the inherent uncertainty in all projects. Inaccurate estimates lead
to false expectations and consumer dissatisfaction. Accuracy is improved with
greater effort, but is it worth the time and cost—estimating costs money! Project
estimating becomes a trade-off, balancing the benefits of better accuracy against
the costs for securing increased accuracy.
Cost, time, and budget estimates are the lifeline for control; they serve as
the standard for comparison of actual and plan throughout the life of the project.
Project status reports depend on reliable estimates as the major input for measur-
ing variances and taking corrective action. Ideally, the project manager, and in
most cases the customer, would prefer to have a database of detailed schedule
and cost estimates for every work package in the project. Regrettably, such de-
tailed data gathering is not always possible or practical and other methods are
used to develop project estimates.
8.1 Unit objectives

• Know about estimation of project parameters.
• Understanding various cost associated with project.
• Understanding database development of project.
CHECK YOUR 8.2 Need

PROGRESS
• To support good decisions
Justify the needs of es-
timating project times • To schedule work
and costs. • To determine how long the project should take and its cost
• To determine whether the project is worth doing
• To develop cash flow needs
• To determine how well the project is progressing

(102) PROJECT
MANAGEMENT • To develop time-phased budgets and establish the project baseline
8.3 Estimating and Costs
• Estimating is the process of forecasting the time and cost of
completing project deliverables
NOTES
− Top-down estimates: estimates from analogy, group consensus or
mathematical relationships
− Bottom-up estimates: estimates of elements found in WBS.
8.4 Factors Influencing Quality of Estimates

8.4.1 Planning Horizon
• Estimates of current events are close to 100%
• Time and cost estimates should improve from conceptual phase

to individual work packages
8.4.2 Project Duration

• Time to implement new technology takes increasing, non-linear
fashion
• Poorly written scope specification
• Long duration project
8.4.3 People
• Skill of people
• Staff turnover
• Adding new people increases time spent communicating

CHECK YOUR
• Available working hours PROGRESS
8.4.4 Project Structure and Organization List all the factors

influencing quality of
• Type of organization structure
estimates
− Dedicated project team : more speed but costs more due to hiring
of personnel full time
− Matrix may reduce cost by more efficiently sharing personnel

across projects but may take longer time
8.4.5 Padding Estimates

• To increase the probability and reducing the risk
• Project duration and cost are overstated
8.4.6 Organization Culture

• Padding estimates are tolerated and encouraged

PROJECT MANAGEMENT • Premium on accuracy and strongly discourage gamesmanship
• Detailed estimating takes too much time or not worth
• Accurate estimates are bedrock of effective project management

NOTES
8.4.7 Other Factors
• Equipment downtime can alter the time estimate
• National holidays, vacations, strikes influence project estimates
• Project priority influences resource assignments and impact time

and cost
8.5 Work Package Estimates

1. Responsibility
• Estimates should be made by the person most familiar with the

task
• First line supervisors or technicians
• Estimate based on experience and judgment
• Estimate materializes when they implement the work package
2. Use several people to estimate
• Several people with relevant experience and or knowledge of the

task
• Individual differences in their estimate leads to consensus and

tends to eliminate extreme estimate errors
• This approach is similar to Delphi estimating method
3. Normal conditions:
• Estimates should be based on normal conditions, efficient methods

and a normal level of resources
4. Time units
• All task time estimates need consistent time units
• Calendar days, weekdays, man-hours, Mondays, single shift etc.
5. Independence:
• Estimates should treat each task as independent of other tasks

that might be integrated by WBS
6. Contingencies:
• Work package estimates should not include allowances for

contingencies
(104) PROJECT
MANAGEMENT
• Extra fund should be created to meet contingencies Estimating Project Times
and Costs
7. Adding risk assessment
• Identifying degree of risk lets stakeholders consider alternative

NOTES
methods and alter process decisions
8.6 Top down Vs. Bottom up Approach

1. Top down approach
• Strategic decision making
• High uncertainty
• Internal, small project
• Unstable scope
2. Bottom up approach
• Cost and time important
• Fixed – price contract
• Customer wants details
8.6.1 Top down Estimating

• Estimates are based on experience and/or information to
determine the project duration and total cost
• Used to evaluate the project proposal
• Occur in conceptual stage of the project
• Estimate does not consider single task but a group of tasks
• Consensus method
− Uses the pooled experience of senior and or middle managers CHECK YOUR
PROGRESS
− Meetings are held to reach a decision as to their best guess esti-
mate Give full comparison
between top down
− Use of Delphi method &bottom up approach.
• Ratio methods:
− Used in concept or need phase to get an initial duration and cost

estimate for the project
− Construction : use of square foot to estimate the cost of building
− Cost of new plant estimated by capacity size
• Apportion methods:
− Used when projects closely follow past projects in features and

costs
PROJECT MANAGEMENT − Commonly used when projects are relatively standard but have
small variation or customization
− Costs are apportioned as a percentage of the total cost by comple-

NOTES tion of specific segments of the project
• Function point method
− Estimation using weighted macro variables called function points

or major parameters
• Number of inputs
• Number of outputs
• Number of inquiries
• Number of data files
• Number of interfaces
• Learning curves
− Same task or group of tasks are repeated to reduce the cycle

time through improvement
− Used for tasks that are labor-intensive
• Disadvantages
− Time and cost for a specific task are not considered
− Grouping tasks encourage errors of omission and use of imposed

time and costs
8.6.2 Bottom-Up Approach

a. Template method
− If the project is similar to past projects, the costs from past projects
can be used for the new project
− Differences are noted and past times and costs adjusted to re-
flect these differences
− Enables firm to develop a potential schedule, estimate costs and

develop a budget in a very short time span
− Reduction in estimate errors
b. Parametric procedure applied to specific tasks
− Can be applied for specific tasks also
c. Detailed estimate for WBS work packages
− One time estimate

(106) PROJECT − Three-time estimate
MANAGEMENT
8.7 A Hybrid: Phase Estimating and Costs
• Used when there is uncertainty and difficulty in estimating time
and cost
NOTES
• Used in aerospace, it, new technology an construction projects
where design is incomplete
• Begins with top down estimate
• Refines estimates for phases as it is implemented
• Two-estimate system: detailed estimate for the immediate phase

and macro estimate for remaining phases of the project
8.8 Level of Detail

• Different for different level of management
• Top management centers on the total project and major milestone

events
• Middle level management center on one segment or one milestone
• Lower level management on one task or work package
• More detailing results in departmentalization and increase in paper

work
• Focuses on department output rather than deliverable outcomes
8.9 Types of Costs

• Direct costs
− Labor
− Material
− Equipment CHECK YOUR

PROGRESS
− Others
Give full list of costs
• Project overhead costs associated with project
• General and administrative overhead costs implementation
8.9.1 Direct Cost

• Chargeable to specific work package
• Represents real cash outflows and must be paid as the project

progresses
8.9.2 Project Overhead Costs

• Salary of project manager

PROJECT MANAGEMENT • Rental space for the project team
• Rates are usually ratio of dollar value of the resources used
NOTES
8.9.3 General and Administrative Overhead Costs
• Organization cost that are not directly linked to a specific project
• These costs are carried for the duration of the project
• Like advertising, accounting
• Allocated as a percent of total direct cost
8.10 Refining Estimates

• Detailed work package estimates are aggregated and rolled up
by deliverable to estimate total direct cost of the project
• Reasons:
− Interaction costs are hidden to estimate
− Normal conditions do not apply
− Things go wrong on projects
− Changes in project scope and plans
8.11 Developing Database for Estimating

• Collect and archive data on past project estimates and actuals
• Project estimate database
− Operation processes
− Risk analysis
− Hardware
− Product production
− Programming
8.12 Summary
Two key features of a project are on-time and on-budget delivery. The
project manager can only fulfil these objectives if the estimates leading to
the project schedule and budget are accurate. Methods for estimating
project times and costs focus on simplifying the process and breaking it
down into little steps.
8.13 Key Concepts
(108) PROJECT
MANAGEMENT
• Cost estimate: An approximation of the probable cost of a Estimating Project Times
and Costs
product, program, or project, computed on the basis of available
information.
NOTES
8.14 Exercise and Questions
1. What are the important needs of estimating project times and
costs?
2. What are the important factors influencing quality of estimates?

List them
3. What are the various work package estimates?
4. What are the major differences between top down and bottom up
approach?
5. What are the various types of costs occurred in a project?

• Erik larson and clifford gray, “project management: the
managerial process”, mcgraw-hill higher education.
• http://journals.sagepub.com/doi/abs/10.1177/097324701100700207

PROJECT MANAGEMENT
UNIT 9
PROJECT QUALITY MANAGEMENT
NOTES Structure
9.0 Introduction
9.1 Objectives
9.2 Quality Definition
9.3 Customers’ Quality
9.4 Quality of Restaurant
9.5 Project Quality
9.6 Elements of Quality
9.7 Total Quality Management
9.8 Total Quality: Definition
9.9 Elements Partnering For Competitiveness
9.10 Partnering
9.11 Internal Of Total Quality
9.12 External Partnering
9.13 Quality Planning
9.14 Quality Management Wheel of Quality
9.14.1 Customer Focus
9.14.2 Role of Customer
9.14.3 Variation
9.15 Identifying Customers
9.16 Steps for Identifying Customers
9.16.1 Analyze the Contract
9.16.2 Analyze the Project Team and Organization
9.16.3 Analyze Product Use
9.16.4 Analyze the Means of Production
9.17 Prioritizing Customers
9.18 Identifying Requirements
9.19 Defining Requirements
9.20 Metrics
(110) PROJECT
MANAGEMENT
9.21 Case Study Project Quality
Management
9.22 Summary
9.23 Key Concepts

NOTES
9.0 Introduction
Quality management is the process for ensuring that all project activities
necessary to design, plan and implement a project are effective and efficient with
respect to the purpose of the objective and its performance.
Project quality management (QM) is not a separate, independent process

that occurs at the end of an activity to measure the level of quality of the output.
It is not purchasing the most expensive material or services available on the mar-
ket. Quality and grade are not the same, grade are characteristics of a material or
service such as additional features. A product may be of good quality (no defects)
and be of low grade (few or no extra features).
Quality management is a continuous process that starts and ends with the
project. It is more about preventing and avoiding than measuring and fixing poor
quality outputs. It is part of every project management processes from the mo-
ment the project initiates to the final steps in the project closure phase.
QM focuses on improving stakeholder’s satisfaction through continuous

and incremental improvements to processes, including removing unnecessary ac-
tivities; it achieves that by the continuous improvement of the quality of material
and services provided to the beneficiaries. It is not about finding and fixing errors
after the fact, quality management is the continuous monitoring and application of
quality processes in all aspects of the project.
9.1 Unit objectives

• Understanding what is quality.
• Know about Project quality.
• Know about Total quality management philosophy.

CHECK YOUR
9.2 Quality Definition PROGRESS
• Performance to the standards expected by the customer Define what is quality?
• Meeting the customer needs the first time and every time
• Providing our customers with products and services that

consistently meet their needs and expectations

PROJECT MANAGEMENT • Doing the right thing right the first time, always striving for
improvement and always satisfying the customer
• Fitness for use

NOTES
• Conformance to requirements or specifications
9.3 Customers’ Quality

• Products: features or attributes
• Defects: free of defects
• Processes: users focus more on product and how it performs

CHECK YOUR
PROGRESS rather than on how it was produced
• For project managers: what you do may keep a smile on

Define what are the
customer ’s require- customer’s face, but how you do it will keep him on schedule and
ments as quality? budget
• Customers: product focused, make products that are superior

to those of competitors and always strive for the best, quality is
defined by customers, needs and their expectations
• Systems: a group of things that work together
9.4 Quality of Restaurant

• Service
• Response time
• Food preparation
• Environment / atmosphere
• Price
• Selection : menu
• Number of customers
9.5 Project Quality

• When an organization develops and defines its quality strategy, it
is important to share a common definition of quality so that each
department within a company can work towards a common
objective.
• The product quality should contain defined attributes of both

numeric specifications and perceived dimensions. The process
quality, whether it relates to manufacturing or service operations,
should also contain some defined criteria of acceptable service
(112) PROJECT
MANAGEMENT
level so that the conformity of the output can be validated against Project Quality
Management
these criteria.
• Perhaps the most important determinant of how we perceive

sustainable quality is the functional and holistic role we fulfill within NOTES
the organization. It is only when an organization begins to change
its approach to a holistic culture, emphasizing a single set of
numbers based on transparent measurement with senior
management commitment, that the ‘organization quality’
germinates.
9.6 Elements of Quality

• It involves in meeting or exceeding customer’s expectations
• Applies to products, services, people, processes and environments
• It is an ever changing state - dynamic
9.7 Total Quality Management

• It consists of continuous improvement activities involving everyone
in the organization – managers and workers at every level
• Improved performance is directed towards satisfying cross

functional goals as quality, cost, schedule, mission, need and
suitability
• It integrates fundamental management techniques, existing

improvement efforts and technical tools under a disciplined
approach focused on continued process improvement
9.8 Total Quality: Definition
• It is an approach to doing business that attempts to maximize the
competitiveness of an organization through the continual
improvement of the quality of product, services, people, processes
and environment
9.9 Elements Partnering For Competitiveness

• Customer focus
• Obsession with quality
• Scientific approach to decision making and problem solving
• Long term commitment
• Team work
• Continual process improvement
• Education and training

PROJECT MANAGEMENT • Freedom through control
• Unity of purpose
• Employee involvement and empowerment

NOTES
9.10 Partnering
• Partnering : working together for mutual benefit
− Suppliers, fellow employees, customers, businesses that are

potential competitors
• Partnering model
− Develop partnering briefing
− Identify potential partners
− Identify key decision makers
− Conduct partnering briefings
− Determine the level of commitment
− If satisfactory, identify key personnel
− Form the key partnering team
− Develop vision and mission statement
− Develop objectives
− Prioritize objective and begin
9.11 Internal of Total Quality

• Management to employee partnership
• Team to team partnership
• Employee to employee partnership
• It is creating an environment and establishing mechanism within

it that brings managers and employees, teams and individual
employees together in mutually supportive alliances that maximizes
the human resources of an organization
9.12 External Partnering

• Partnering with suppliers
− Supplier personnel should interact with employees who actually

use their products
− Price only criteria in the buyer-supplier relationship should be

eliminated
(114) PROJECT
MANAGEMENT
− Quality of products delivered should be guaranteed by the supplier Project Quality
Management
− Supplier should be proficient in jit
− Both parties should share information electronically

NOTES
• Partnering with customers
• Customer satisfaction
− To involve customers as partners in the product development

process
− Customer friendly quality
• Partnering with potential competitors
− Mutual need and interdependence
− Joint production
− Education and training
− Marketing
− Product development
− Technology transfer
− Purchasing
9.13 Quality Planning

• Identifying standards that are relevant to the project and determine
how to satisfy them
• Project manager need not and must not depend on inspection and
correction to achieve project quality
• Should use conformance and prevention to achieve quality
Quality management plan
• Quality policy: this expresses the intended direction of a perform-

ing organization with regard to quality
• Who is in charge: project manager?? Address project and organi-

zational infrastructure and describe participants, reporting chains
and responsibilities
• Where are we going?: performance targets
• Goals provide broad descriptions of what the project is expected

to achieve
• Requirements provide more detailed descriptions
• Operational definitions describe what something is and how it is

measured – means for understanding goals and requirements
PROJECT MANAGEMENT How are we going to get there?
• Processes: the things project team will do to meet requirements

and achieve project goals
NOTES
• Resources: people available, participating organizational elements,
tools to be used, budget
• Standards: identifying and applying relevant standards like iso 9000,

iso 14000, iso 18000, sa 8000
9.14 Quality Management Wheel of Quality

• Customer focus
• Role of customer
• Variation
9.14.1 Customer Focus

CHECK YOUR • Projects have more than one customer
PROGRESS
• External customers
Give full comparison
− Those outside the organization or project team
between External and
Internal customer − Client: pays the bill and verifies project completion
− Suppliers: understands the requirement of project team in order

to supply goods and services
• Internal customer
− Collaborating elements within the organization
− Supplier – customer relationships
− Hidden customers
− Stakeholders
9.14.2 Role of Customer

• Provide needs and requirements
• Define standards: how well a product performs; provide

measurable targets
• Evaluate products: accept or reject products based on the degree

to which the product meets specifications
• Provide feedback: customers will comment, complain, recommend

or purchase a product again
9.14.3 Variation
(116) PROJECT • Characteristic of any production process
MANAGEMENT
• Determine what tasks within a project or between projects in- Project Quality
Management
volve repeatable work
• Identify sources of variations and understand the variation, why it

occurs and what its effects are NOTES
• Control and reduce the variations to some degree
• Deming’s 85/15 rule: 85% of workers’ performance is determined

by the system they work within and 15% is determined by their
own individual efforts
• Project managers should analyze and fix the problem rather than
blame workers
9.15 Identifying Customers

• External : paying client, suppliers and end users
• Internal: elements in the supplier – process – customer chain
• Hidden: stakeholder, government, shareholders
9.16 Steps for Identifying Customers

Following are the steps to identify potential customers
9.16.1 Analyze the Contract

• Identify external customer – paying client
• End users
• Suppliers, subcontractors
9.16.2 Analyze the Project Team And Organization

• Identifies internal customer
• How work will proceed
• What project team or organizational elements will participate and

how they will be linked to supplier – process – customer chain
9.16.3 Analyze Product Use

• Starts with end user
• Who will use the product and how will they use it
• Care about environment, aesthetics, ergonomics and local

community
9.16.4 Analyze the Means of Production

• It takes a process view

PROJECT MANAGEMENT • May clarify or conform internal customers
9.17 Prioritizing Customers

NOTES • Understanding relative importance of the many customers
• L-shaped matrix
− Build the matrix by entering the names of the elements to be

prioritized along both the vertical and horizontal axes
− Compare the elements to each other on a one-to-one basis to

determine importance
• A and b are of equal importance – 1
• A is more important than b – 5
• A is much more important than b – 10
• Take row total and find relative decimal value
9.18 Identifying Requirements

• Customers are sources of requirements that must be set for project
success
• Contract terms and conditions
• Suppliers and subcontractors
• Users and affected groups
• Government agencies and other regulatory agencies
9.19 Defining Requirements

• Essential and dynamic process
• Research
• Interviews
• Analysis
• Customers can change the minds
• New technologies may arise that allow new performance

capabilities
• Laws may change
• New groups of concerned citizens may surface
9.20 Metrics
• Metrics are a means of measurement to determine the degree of
(118) PROJECT
conformance to specifications
MANAGEMENT
• Requirement: responsive telephone hotline service Project Quality
Management
• Specifications: answer 99% of hotline service calls within one
ring
NOTES
• Assurance activity: determine percentage of calls answered on
one ring during 48 hr. Period
• Metrics: percentage of calls answered on the ring
9.21 Case Study

This case study has been based on implementation of TQM in an auto
company. The ABC auto company produces auto parts and components for large
scale automotive vehicle manufacturers. ABC is the most preferred and first tier
supplier to about three automotive manufacturers and their branches at different
locations. ABC, which holds the certification of ISO 9000, is planning to imple-
ment the TQM and practicing the tools and techniques of TQM in the best way
possible. The top management has already built a quality team consisting of emi-
nent members from the different departments inclusive of marketing, design, pro-
duction, HR, suppliers, industrial engineering, quality, and purchase etc; the group
is known as ‘TQM implementation team’. Anticipated results after implementa-
tion of TQM are improvement in quality of processes, improvement in quality of
supplies, improved level of customer satisfaction, and improvement in employee
satisfaction. It has been found that need of TQM training is very crucial for the
employees in the firm to understand and involve in the TQM implementation pro-
cess.
9.22 Summary
Total quality management
• The way of managing organization to achieve excellence
• Total – everything
• Quality – degree of excellence
• Management – art, act or way of organizing, controlling, plan-

ning, directing to achieve certain goals
TQM is a management philosophy embracing all activities through which the

needs and expectations of the customer and community, and the objectives of the
organization are satisfied in the most efficient and cost effective manner by
maximising the potential of all employees in a continuing drive for improvement.”
9.23 Key Concepts

• Quality definition: the totality of features and characteristics of
a product or service that bears its ability to satisfy stated or
implied needs.
PROJECT MANAGEMENT • Total quality management: a system of management based on
the principle that every member of staff must be committed to
maintaining high standards of work in every aspect of a
NOTES company’s operations.
• Defining customer requirements

1. Define what is quality?
2. What are the important requirements of quality?
3. Define what are the customer’s requirements as quality?
4. What are the important factors influencing quality? List them.
5. What are the various matrices of quality measurement?
(120) PROJECT
MANAGEMENT
Developing Project Plan
UNIT 10
DEVELOPING PROJECT PLAN
Structure NOTES
10.0 Introduction
10.1 Objectives
10.2 Project Network
10.3 Develop a Network
10.4 Terminology
10.5 Two Approaches
10.6 Basic Rules in Developing Project Networks
10.7 Activity on Node (AON) Diagram
10.7.1 Network Computation Process
10.7.2 Slack or Float
10.7.3 Free Slack
10.7.4 Interfering Slack
10.7.5 Independent Slack
10.8 Super-Critical Activities
10.9 Critical Activity
10.10 Sub-Critical Activity
10.11 Use of Lags
10.12 PERT
10.12.1 Calculations
10.12.2 Problem
10.12.3 Calculate
10.12.4 Solution
10.12.5 Time Scale Network
10.13 Summary
10.14 Key Concepts

PROJECT MANAGEMENT
10.0 Introduction
A project plan takes into account the approach the team will take and
helps the team and stakeholders document decisions made regarding the objec-
NOTES
tive, scope, schedule, resources, and deliverables. Project contains precise collec-
tion of jobs or activities which after completion marks project end. Job should
begin and end independently of each other in a specified order. Tasks must be
performed according to technical order : foundation of the home should be made
before the walls are set up.
10.1 Unit objectives

• Understanding project network definition and development.
• Know about the two approaches for network development.
10.2 Project Network

• It is tool for planning, scheduling and monitoring task growth.
• This is a graphic flow chart of the project job plan
• It depicts activities in the project that should be completed, logical

CHECK YOUR orders, the mutual dependence of the activities that are supposed
PROGRESS to be completed
What do you under- • Uses the information from work breakdown structure
stand by project net-
• Helps in taking decisions regarding project time, cost and
work?
performance
• This gives basis for scheduling manpower and equipment
• It improves communication which melds all managers and groups

together in achieving time, cost and performance targets of the
project
• Identifies critical as well as non-critical activities
10.3 Develop a Network

• Activity: it is part of the project that utilizes time: working or
waiting
• Activities are arranged in order which makes systematic

completion of the project
• Nodes and arrows are used to build networks.
• Node represents an activity and the arrow represents dependence

and project stream
(122) PROJECT
MANAGEMENT
Developing Project Plan
10.4 Terminology
• Activity: an activity is part of the project that utilizes time, may
consume resources or may not
NOTES
• Merge activities: this is activity which has more than one activity
just before it
• Parallel activities: activities occurring simultaneously.
• Path: an arrangement of linked, dependent activities
• Event: it is moment in time when an activity begins or ends. It

requires zero time.
• Burst event: this is activity which has more than one activity just
next to it
• Dummy : it shows only relationships between two jobs and does

not consume time or resources
10.5 Two Approaches

AOA diagram: activity on arrow diagram
AON diagram: activity on node diagram
• EST of start node is taken as 0
• EFT = EST + duration
• LFT of end node is same as ej of final node
• LST = LFT – duration
• Earliest achievement time = maximum of EFTs of all merged

CHECK YOUR
activities PROGRESS
− Maximum of EFTs of all merging arrow heads
What do you mean by
− Latest achievement time = minimum of LSTs of all burst activi- AOA and AON
ties diagram?
• For activity i à j
• Ei = earliest achievement time of node i
• Ej = earliest achievement time of node j
• Li = latest achievement time of node i

PROJECT MANAGEMENT • Lj = latest achievement time of node j
10.6 Basic Rules in Developing Project Networks

NOTES • Network usually flows from leftward to rightward
• All preceding linked activities of any activity must be completed

to start it.
• Arrows over networks show precedence and movement
• Arrow can cross over each other
• A unique identification number for an each activity is required.
• An activity identification number should be greater than that of

any activities that occur before it
• Circling is not permitted: recycling through a set of activities cannot

occur when there are numerous starts; a common node is used to
specify a perfect project start on the network.
• The network should have a single start node and a single end
node
10.7 Activity on Node (AON) Diagram

• Node (boxes) shows an activity.
• Node is represented by a rectangle (box)
• Arrows between the rectangles (boxes) shows interdependence

of activities
• Predecessor activity: activity that must be completed immediately

before the activity
• Successor activity: activity that immediately follow the said activity
• Concurrent or parallel activity: activities that may occur while the

activity is happening
• Dummy jobs are not needed
10.7.1 Network Computation Process

• Forward pass calculation:
− Earliest start time (EST)
− Earliest finish time (EFT)
− Earliest achievement time
− Expected time to complete the project
(124) PROJECT • Backward pass calculation

MANAGEMENT
− Latest start time (LST) Developing Project Plan
− Latest finish time (LFT)
− Latest achievement time

NOTES
• Critical path: this is lengthiest path of the network when delayed
will delay the project
• Slack or float time: duration for which an activity may be delayed

so that it won’t affect the project duration
10.7.2 Slack or Float

• Total slack: it is the duration for which an activity may be delayed
so that it won’t affect the project duration
• Ts = lst – est or lft – eft
• Ts = lj – (ei + dij)
10.7.3 Free Slack

• It is period of time for which job may be delayed deprived of
affecting the early start time of succeeding activities.
• Fs = ej – (ei + dij)
• Fs = ts – head slack
10.7.4 Interfering Slack

• It is the difference between its total slack and free slack
• Interfering slack = total slack – free slack
• Interfering slack = head slack
10.7.5 Independent Slack

• It is the excess time between finishing and starting of two suc-
cessive activities if the preceding activity ends as late as possible
and the succeeding activity starts as early as possible
• Independent slack = free slack – tail slack
• Independent slack = ( ej – li ) – dij
10.8 Super-Critical Activities

An activity that is behind scheduled. It has been delayed to a point where
its float is calculated to be a negative value. The negative float is representative of
the number of schedules units by which an activity is behind scheduled. If the
maximum available time that activity can consume is less than the activity period
then for this activity the total slack will have negative value. Activity whose total
slack is negative is known as supercritical activity.

PROJECT MANAGEMENT
10.9 Critical Activity
A critical activity has zero or negative float. This activity has no allow-
ance for work slippage. It must be finished on time or the whole project will fall
NOTES
behind schedule. (Non-critical activities have float or slack time and are not in the
critical path. Super-critical activities have negative float.) If the maximum avail-
able time that activity requires is equal to the activity period then for this activity
total slack is zero. Activity for which the total slack is zero is called critical activity
10.10 Sub-Critical Activity

Sub critical path means the second longest path in the network. It is shorter
than the critical path but longer than all other paths in the1 network. All activities
on the sub critical path are not critical. Some of the activities may be critical.
An activity that has a float threshold value assigned to it by the project

manager. When the activity reaches its float threshold, it is identified as being
critical. Since this type of criticality is artificial, it normally does not impact the
project’s end date. If the maximum available time that activity requires is more
than the activity period then for this activity the total slack will have positive value.
An activity for which total slack is positive is known as sub-critical activity.
10.11Use of Lags
• Finish to start (fs = n) : job b cannot start until n days after job a is
finished
• Start to start (ss = n): job b cannot start until n days after job a is
started
• Finish to finish (ff = n): job b cannot finish until n days after job a
is finished
• Start to finish (sf = n): job b cannot finish until n days after job a is
started
10.12 PERT
• Programme evaluation and review technique
− Used in research & development
− Technology is rapidly changing
− Products are non-standard
• Use of aon diagram
• Uses three time estimate
− Optimistic time (to)

(126) PROJECT − Most likely time (tm)
MANAGEMENT
− Pessimistic time (tp) Developing Project Plan
• Variability of activity times
10.12.1 Calculations NOTES

• Calculate the expected activity duration using three time estimate
• Te = (to + 4tm + tp) / 6
1. Draw the project network using AON diagram
2. Calculate the critical path and expected project duration (te) using
forward pass and backward pass calculations
CHECK YOUR
3. Find the variances of each of the activities in the critical path
PROGRESS
Variance of activity = {( tp - to) / 6 }2
What are different time
4. Find the sum of all the variances of the activities in the critical estimates used in
path and take the square root to give the standard deviation (st) PERT?
for the project duration which follows a normal probability distri-
bution
5. Find z = (d – te) / st
Where d is the due time of completion
• Using normal distribution table, find the probability of complet-

ing the project by due date using z values.
10.12.2 Problem
I J To Tm Tp
1 6 2 5 14
2 3 6 12 30
2 4 2 5 8
3 5 5 11 17
4 5 3 6 15
6 7 3 9 27
5 8 1 4 7
7 8 4 19 28
10.12.3 Calculate
• Expected project length and variation of the critical path
• Possibility that jobs on the critical path shall be done with in the
due date of 41 days
• Probability that the jobs on the next critical path shall be done
within the due date

PROJECT MANAGEMENT • Estimate the possibility that the entire project shall be done by
due date
NOTES
10.12.4 Solution
Length = 36 days, variance = 25
Critical path = 1-2-3-5-8
0.84 path 1-6-7-8
0.84*0.84 = 0.71
10.12.5 Time Scale Network
(128) PROJECT
MANAGEMENT
10.13 Summary Developing Project Plan
Project management is the discipline of starting, planning, performing,

governing, and closing the work of a team to complete specific goals and meet
NOTES
precise success standards. A project is an impermanent endeavour designed to
produce a exclusive product, service or result with a defined beginning and end
(usually time-constrained, and often constrained by funding or deliverables) com-
menced to meet unique goals and purposes, typically to bring about valuable change
or added value. The impermanent nature of projects stands in contrast with busi-
ness as usual (or operations). Which are repetitive, permanent, or semi-perma-
nent functional activities to manufacture products or services, in practice, the
administration of these two systems is often quite dissimilar, and as such needs the
progress of distinct technological skills and management approaches.
10.14 Key Concepts

• Slack: Hours or days by which a job is ahead of schedule and will
be completed early if continued.
• Float: Time for which an activity can be delayed without delaying

the entire project.

1. What are the difference between CPM and PERT?
2. What do you mean by critical activity? What are the different types of
critical activity?
3. What are the two approaches you have encountered in this unit?
4. What are the major attributes of developing a network?
5. What are the basic rules in developing project networks?

• www.businessdictionary.com/

PROJECT MANAGEMENT
UNIT 11
SCHEDULING RESOURCES AND COSTS
NOTES Structure
11.0 Introduction
11.1 Objectives
11.2 Type of Resource Constraints
11.3 Classification of Scheduling Program
11.4 Scheduling Programs
11.5 Resource Leveling
11.6 Resource Allocation Program
11.6.1 Resource Distribution Procedures
11.6.2 Time Controlled Projects
11.6.3 Resource Controlled Projects
11.6.4 Methods
11.6.5 Parallel Method
11.7 Impact of Resource Constraint Scheduling
11.8 Splitting Activities
11.9 Advantages of Scheduling Resources
11.10 Allocating Project Work
11.11 Multiple Source Scheduling
11.12 Limitations
11.13 Tackling Multiple Project Resource
11.14 Problem: Resource Scheduling, Leveling & Allocation
11.15 Summary
11.16 Key Concepts
11.0 Introduction
Usage and availability of resources are major problem areas for project
managers. Attention to these areas in developing a project schedule can point out
resource bottlenecks before the project begins. Project managers should under-
(130) PROJECT stand the ramifications of failing to schedule resources. The results of resource
MANAGEMENT
scheduling are frequently significantly different from the results of the standard Scheduling Resources
and Costs
CPM method.
The project resource schedule is important because it serves as your time baseline,
which is used for measuring time differences between plan and actual. The re- NOTES
source schedule serves as the basis for developing your time-phased project cost
budget baseline. The baseline (planned value, PV) is the sum of the cost accounts,
and each cost account is the sum of the work packages in the cost account.
Remember, if your budgeted costs are not time-phased, you really have no reliable
way to measure performance. Although there are several types of project costs,
the cost baseline is usually limited to direct costs (such as labor, materials, equip-
ment) that are under the control of the project manager; other indirect costs can
be added to project costs separately.

• Understanding project scheduling program.
• Know about resource leveling.
• Know about resource constraint scheduling.
11.2 Type of Resource Constraints

• People: differing skills add to the complexity of the projects
CHECK YOUR
• Materials: material availability and shortages PROGRESS
− Materials must be added in the project plan and schedule What are the different
• Criteria: type, size and quantity types of resource
constraints?
− Interchanged to improve schedules
− Use of common resource pool and reserve equipment

for specific project needs
11.3 Classification Of Scheduling Program

• Time controlled project (time stands fixed): one that should be
done before imposed date. Resources can be included to confirm
project completion in time
• Resource controlled (resource stands fixed): one that assumes

exceeding level of available resources is not possible. If resources
are insufficient, it will be allowable to delay the project.
11.4 Scheduling Programs

PROJECT MANAGEMENT • Resource scheduling program: for each resource, the program
calculates a total resource requirements profile by summing period
by period, requirements for that resource of all activities as they
NOTES occur in an early start (or any other) schedule
• No resource leveling is involved
11.5 Resource Leveling

• In project management, resource leveling is “A technique in which
start and finish dates are adjusted based on resource constraints
with the goal of balancing demand for resources with the avail-
able supply.”
• Using the resource requirements profile of the early start schedule,

the program attempts to reduce peak requirements by shifting
slack jobs to non-peak periods
• Resource limits are not specified, but peak requirements are leveled
as much as possible without delaying the specified due date
11.6 Resource Allocation Program

• Fixed amounts of resources are allocated to available jobs according
to certain scheduling heuristics that determine which jobs will be
postponed if total requirements for a given period exceed resources
available
• The completion date of the project may be pushed ahead to keep

within specified resource limits
11.6.1 Resource Distribution Procedures

Conventions
• Breaking of actions are not permissible: after the action is started

on schedule, it will be functioned uninterruptedly until it is over
• Amount of resources consumed by an activity cannot be changed
11.6.2 Time Controlled Projects

• Draw time-scale network
• Perform resource loading
• Calculate the resource requirement period-by-period
• Use slack periods to adjust the resources of non-critical activities
• Smoothing is done to achieve more or less uniform resource without

changing the project duration
(132) PROJECT Benefits

MANAGEMENT
• Level of requirement for the resource gets down Scheduling Resources
and Costs
• Resources during the lifespan of the project gets down
• Variations in resource requirement get minimized

NOTES
• Efficient and effective utilization of resources
11.6.3 Resource Controlled Projects CHECK YOUR

PROGRESS
• When the number of people and/or equipment is not adequate to
meet peak demand requirements and it is impossible to obtain What is project audit?
more, the project manager faces a resource-constrained prob- What are the different
lem. Something has to give. The trick is to prioritize and allocate types of project audit?
resources to minimize project delay without exceeding the re-
source limit or altering the technical network relationships.
• Number of individuals / equipment are not sufficient to achieve

peak demand and it is not possible to get more
• Arrange and assign resources to minimize project delay without

exceeding the resource level or shifting the technological net-
work associations
11.6.4 Methods
Use of heuristic programs for resource allocation CHECK YOUR
PROGRESS
• It allocates resources to minimize project delay
What do you
• Arrange which activities are assigned resources and which ac-
understand by resource
tivities are late when resources are insufficient
constrained projects?
• Priority
• Least slack
• Least duration
• Lowermost activity identification number
11.6.5 Parallel Method

• An iterative process that begins in the first time interval of the
project and schedules interval by interval any activity eligible to
begin
• Slack interval are utilized and gets reduced
• Technological constraint along with resource constraint may de-

lay the project
11.7 Impact of Resource Constraint Scheduling

Like leveling schedules, the limited resource schedule usually reduces
slack, reduces flexibility by using slack to ensure delay is minimized, and increases
PROJECT MANAGEMENT the number of critical and near-critical activities. Scheduling complexity is
increased because resource constraints are added to technical constraints; start
times may now have two constraints. The traditional critical path concept of
NOTES sequential activities from the start to the end of the project is no longer meaning-
ful. The resource constraints can break the sequence and leave the network with
a set of disjointed critical activities. Conversely, parallel activities can become
sequential. Activities with slack on a time-constrained network can change from
critical to noncritical.
11.8 Splitting Activities

• Split the continuous work involved in an activity by interrupting
the task and sending the resources to another activity for a interval
of time and then having the resource continues work on original
activity
• Useful, if start up and shut down costs are low
• Planner should avoid splitting as much as possible
11.9 Advantages of Scheduling Resources

• Resource timetables provide data desirable to prepare time phased
work package budgets along with dates
• Project manager can measure the impact of unexpected actions

such as turnover, equipment breakdowns, transfer of project
personnel
11.10 Allocating Project Work

• Match the demands and requirements of particular work with the
qualifications and experience of present participants
• Assigning best people to toughest assignments
• Less experienced person resent about not getting opportunity to

expand their skill / knowledge base
• Balance mix is proposed with team work and good culture

CHECK YOUR
PROGRESS 11.11Multiple Source Scheduling
What are the limitations • Efficiently assigning and planning resources across some projects
of multiple resource with different priorities, resource demands, sets of activities and
scheduling? hazards
• System should be vibrant
• Capable of accommodating fresh projects as well as reassigning

(134) PROJECT
resources once project work is done
MANAGEMENT
11.12 Limitations Scheduling Resources
and Costs
• Overall schedule slippage: project share resources, delays on one
project can have wrinkle effect and make other projects late
NOTES
• Ineffective resource use: different projects have different
timetables, peaks and valleys in total resource demand
• Resource bottlenecks: delays and plans are stretched as a result

of shortages of critical resources that are needed by multiple
projects
11.13 Tackling Multiple Project Resource

• Creating project workplaces or departments to supervise the
planning of resources across many projects
• Use first come first serve rule: project queue system
• To rise the capacity of the organization to start projects
• Resource allocated according to priority of projects for the

organization
• Use of centralized project scheduling
• Outsourcing : segment of project or complete project
Hire temporary workers during peak periods
11.14 Problem: Resource Scheduling, Leveling &

Allocation
A housing project consists of activities as listed in the table. Compute the
cement requirement based on early start and late start times. Also prepare a graph
for cumulative cement requirement. What is the minimum and maximum require-
ment of cement up to the 8th week?

PROJECT MANAGEMENT
Activity Duration in weeks Total cement required

in tons per activity
NOTES 1-2 4 20
2-3 4 24
2-4 6 18
2-5 2 10
3-6 2 20
4-6 8 24
5-6 4 20
5-7 6 30
6-7 8 40
• Level the resources
• Allocate the resources if there is a constraint of 10 t of cement

available per week and also find the duration of the project?
(136) PROJECT
MANAGEMENT
Scheduling Resources
and Costs
NOTES

PROJECT MANAGEMENT
11.15 Summary
The time constraint talks about the amount of time available to finish a
project. The cost constraint talks about the planned amount available for
NOTES
the project. The scope constraint talks about what must be done to make
the project’s end result. These three constraints are usually competing
constraints: improved scope typically means increased time and increased
cost, a close time constraint could mean increased costs and decreased
scope, and a close budget could mean increased time and decreased scope.
11.16 Key Concepts

• Resources: a stock or supply of money, materials, staff, and other
assets that can be drawn on by a person or organization in order
to function effectively.
• Resource Constraints: Resource constraints refer to the limita-

tions on staffing, equipment and other resources that are neces-
sary to complete a project. Examples of resource constraints in-
clude limited staff and equipment availability because of other
ongoing projects in a company.
• Scheduling: Scheduling is the process of arranging, controlling and

optimizing work and workloads in a production process or manu-
facturing process. Scheduling is used to allocate plant and
machinery resources, plan human resources, plan production
processes and purchase materials.

1. What is the need for scheduling resources and costs?
2. What are the different classifications of scheduling program?
3. What are the benefits of scheduling resources?
4. What do you understand by tackling multiple project resource?
5. Describe resource allocation program?

• Reid Hastle “Wiser getting Beyond Groupthink to Make Groups
Smarter” Carlson Publication.
• Neil Ritson” Strategic Management” Edition 2015 Pearson

Publication
(138) PROJECT
MANAGEMENT
Reducing Project
UNIT 12 Duration
REDUCING PROJECT DURATION
Structure NOTES
12.0 Introduction
12.1 Objectives
12.2 Accelerating Project Completion with Unlimited Resources
12.3 Accelerating Project Completion under Limited Resources
12.4 Project Cost-Duration Graph
12.5 Constructing Graph
12.5.1 Assumptions
12.5.2 Cost Slope
12.5.3 Limitations
12.6 Cost Reduction
12.7 Summary
12.8 Key Concepts
12.0 Introduction
There are many good reasons for attempting to reduce the duration of a
project. One of the more important reasons today is time to market. Intense global
competition and rapid technological advances have made speed a competitive
advantage. To succeed, companies have to spot new opportunities, launch project
CHECK YOUR
teams, and bring new products or services to the marketplace in a flash. Perhaps PROGRESS
in no industry does speed matter as much as in the electronics industry.
What are the reasons
Business survival depends not only upon rapid innovation but also adapt-
for reducing the
ability. Global recession and energy crises have stunned the business world, and duration of a project?
those companies that survive will be those that can quickly adapt to new chal-
lenges. This requires speedy project management! For example, the fate of U.S.
auto industry depends in part on how quickly they shift their efforts to develop fuel
efficient, alternative forms of transportation.
Another common reason for reducing project time occurs when unfore-
seen delays—for example, adverse weather, design flaws, and equipment break-
down— cause substantial delays midway in the project. Getting back on schedule
usually requires compressing the time on some of the remaining critical activities.

PROJECT MANAGEMENT The additional costs of getting back on schedule need to be compared with the
consequences of being late. This is especially true when time is a top priority.
“Imposed deadlines” is another reason for accelerating project comple-

NOTES tion. For example, a politician makes a public statement that a new law building
will be available in two years. Or the president of a software company remarks in
a speech that new advanced software will be available in one year. Such state-
ments too often become imposed project duration dates—without any consider-
ation of the problems or cost of meeting such a date.

• Understanding project acceleration.
• Know about project duration reduction method
• Know about project cost reduction method
12.2 Accelerating Project Completion with Unlimited

Resources
• Adding resources
− Additional staff and equipment
− Tasks are partitioned so minimal communication is needed be-

tween workers
− Additional manpower increases communication,
− Co-ordination and efforts
• Reassign key equipment and / or people
CHECK YOUR − Cost of oppressing vs. Cost of releasing key equipment and /or
PROGRESS people
How do you accelerate • Outsourcing project work

the project completion
− Subcontract an activity
with unlimited re-
sources? − Access to superior technology, skilled manpower and expertise
− Frees up resources that can be assigned to a critical activity
• Scheduling overtime
− Increase working time
− Avoid additional costs of coordination and communication
− If salaried, no real additional cost for extra work
− Fewer distraction when people work outside normal hours

(140) PROJECT
MANAGEMENT
• Establish a core project team Reducing Project
Duration
− A dedicated core team is to be created to complete a project to
speed
NOTES
− Avoids hidden cost of multi-tasking
• Do it twice – fast and correctly
− Do right things at right time
− Temporary arrangements only adds costs and doing the work

again
12.3 Accelerating Project Completion under Limited

Resources
• Fast tracking
− Critical activities are done concurrently / parallel rather than

subsequently
− From finish to start approach to start to start approach. CHECK YOUR

• Critical chain PROGRESS
− Requires considerable training and a shift in habits and perspective How do you accelerate
that take time to adopt the project completion
with limited resources?
− Long term management commitment is necessary
• Reducing project scope
− To reduce or scale back the scope
§ Tasks, deliverables can be reduced/eliminated
− Reduction in functionality of the project
− Leads to big savings in both time and money
− Reduced value of the project
− Calculating the savings of reduced project scope
• Compromise quality
− Reducing quality is rarely accepted
12.4 Project Cost-Duration Graph

• Direct costs:
− Labor
− Material
− Equipment

PROJECT MANAGEMENT − Subcontractors
• Assigned to work package and activity
• Normal cost : low cost efficient method

NOTES
• Direct costs increase with reduction in project duration
• Indirect costs
− Overhead costs
§ Supervision
§ Administration
§ Consultants
§ Interest
• Can be assigned to work package and activity
• Reduction in time results in reduction in indirect costs
12.5 Constructing Graph

• Evaluate the direct costs for project duration which is selected.
• Find total indirect costs for project durations which are selected.
• Add direct and indirect costs for these selected duration to get
total costs
• Normal time: efficient, realistic methods, low cost by which the

activity can be completed under normal conditions.
• Normal cost: the direct cost for accomplishing an activity in its

normal time
• Crash time: the minimum possible time an activity can be realisti-

cally completed
• Crash cost: the direct cost for accomplishing an activity in its

crash time
12.5.1 Assumptions
• The relationship between cost and time is linear
• Assumes low-cost efficient methods to complete the activity in

normal time
• A limit is denoted by crash time
• Slope shows cost per unit time
• All accelerations should take place within the normal and crash
times
(142) PROJECT
MANAGEMENT
12.5.2 Cost Slope Reducing Project
Duration
Crash slope =
12.5.3 Limitations NOTES

• Crash times
• Assumption of linearity
• Choice of activities to crash revisited
12.6 Cost Reduction

• Reduce scope of project
• More responsibility to be taken by the owner
• Outsourcing the entire project or project activities
• Brainstorming of cost savings option

Problem 1.
Activity Predecessor Normal Normal Crash Crash Max crash Cost slope
time cost time cost time
A - 3 50 2 70 1 20
B A 6 80 4 160 2 40
C A 10 60 9 90 1 30
D A 11 50 7 150 4 25
E B 8 100 6 160 2 30
F C,D 5 40 4 70 1 30
G E, F 6 70 6 70 0 0
Find the least cost schedule if indirect costs are as give below. CHECK YOUR
PROGRESS
Project duration Indirect cost What can be done to

reduce project cost?
25 400
24 350
23 300
22 250
21 200
Solution:
• Draw the project network as per the given predecessor relationship
• Draw either AOA or AON diagram
• Carryout forward pass and backward pass calculations
• Identify the critical path and project duration

PROJECT MANAGEMENT
NOTES
• Critical path : a – d – f – g duration: 25 days
• Total cost = 450 + 400 = 850
• Minimum cost slope
− Activity g = 0 cannot be crashed
− Activity a = 20 crash by one day
• Critical path a-d-f-g duration = 24
• Total cost = 450 + 20 + 350 = 820
• Minimum cost slope
− Activity d = 25 crash activity by one day
• Critical activities : a d- f- g and a-c-f-g
• Duration: 23 days
• Total cost = 470 + 25 + 300 = 795
• Crash activity f by one day as it is common for both the critical path
• Critical activity = a-d-f-g; a-c-f-g; a-b-e-g
• Duration= 22 days
CHECK YOUR
PROGRESS • Total cost = 495 + 30 + 250 = 775
What are the major risk • Crash activity c. D. And e by one day
response development? • Duration = 21 days
• Total cost = 525 + 30 + 25 + 30 + 200 = 810
• Hence optimal schedule:
• Duration = 22 days cost = 775
Problem 2.
(144) PROJECT
MANAGEMENT
Reducing Project
Activity Normal time Crash time Normal cost Crash cost Duration
1-2 5 3 3000 5400

1-3 7 - 9800 - NOTES
2-4 10 6 12000 15000

2-5 9 - 9720
3-5 6 5 4320 7500
4-5 4 3 3040 6000
4-6 8 4 3200 4800
5-6 12 10 11520 17100
6-7 8 6 5120 24000
Indirect cost = 1000/day
Critical path – 1-2-4-5-6-7 duration: 39 days
Cost of project = 1,00,720
Crash Duration Direct cost Indirect cost Total cost
Initial 39 100720
2-4 by 4days 35 100720 + 4*750 -4000 99720
1-2 by 2 days 33 99720 + 2*1200 -2000 100120
5-6 by 2 days 31 100120 + 2* 2790 -2000 103700
4-5 and 3-5 by 103700 + 1* 2960

1 day 30 + 1* 3180 -1000 108840
6-7 by 2 days 28 108840 + 2* 9440 -2000 125720
12.7 Summary
• The factors responsible for reducing duration of project are time
to market, unforeseen delay, contracts of incentives, imposed dead-
lines and very high overhead costs.
• The factors required for accelerating project completion with un-

limited resources are adding resources, reassign key equipment
and / or people, outsourcing of project work, scheduling overtime
and establish a core project team.

PROJECT MANAGEMENT • The factors required for accelerating project completion with lim-
ited resources are critical chain, reducing project scope, fast track-
ing compromise quality.
NOTES
12.8 Key Concepts
• Need for reducing project duration
• Accelerating project completion with unlimited resources
• Accelerating project completion under limited resources
• Project cost-duration graph
• Constructing graph
12.9 Excrcise & Questions

1. When do we need to reduce the duration of a project?
2. How project completion can be accelerated with (a) unlimited

resources and (b) limited resources?
3. How do you reduce the cost of a project?

• Erik w. Larson, clifford f. Gray, “project management: the
managerial process”, the mcgraw-hill/irwin series.
(146) PROJECT
MANAGEMENT
Progress, Performance
UNIT 13 Management and
Evaluation
PROGRESS, PERFORMANCE
MANAGEMENT AND EVALUATION NOTES
Structure
13.0 Introduction
13.1 Objectives
13.2 Project Monitoring Information System
13.3 Collection of Data and Its Analysis
13.4 Project Control Process
13.5 Checking Time Performance
13.6 Control Charts
13.7 Earned Value Cost/Schedule System
13.8 Integrated Cost Schedule System
13.9 Time Phased Budget
13.10 Ways to Calculate Percent Completion
13.11 Terminology
13.12 Variance Analysis
13.13 Developing a Status Report
13.14 Performance Index
13.15 Project Percent Complete Index
13.16 Forecasting Final Project Cost
13.17 Case Study
13.18 Summary
13.19 Key Concepts
13.0 Introduction
Evaluation and control are part of every project manager’s job. Control
by “wandering around” and/or “involvement” can overcome most problems in
small projects. But large projects need some form of formal control. Control holds
people accountable, prevents small problems from mushrooming into large prob-
lems, and keeps focus. Except for accounting controls, project control is not per-

PROJECT MANAGEMENT formed well in most organizations. Control is one of the most neglected areas of
project management. Unfortunately, it is not uncommon to find resistance to con-
trol processes. In essence, those who minimize the importance of control are
NOTES passing up a great opportunity to be effective managers and, perhaps, allow the
organization to gain a competitive edge. Neglecting control in organizations with
multiple projects is even more serious. For effective control, the project manager
needs a single information system to collect data and report progress on cost,
schedule, and specifications.
13.1 Unit Objectives

• Understanding project monitoring information system.
• Know about project performance management.
• Know about project performance evaluation.
13.2 Project Monitoring Information System

• Determining the relevant data to be collected
• When, how and who will collect the data
• Data analysis
• Reporting current progress
13.3 Collection of Data and Its Analysis

• Actual duration of activities
• Usage of resources and its rates
• Actual costs
• Compare :
CHECK YOUR − Planned vs. Actual
PROGRESS
− Scheduled vs. Actual
Give provisions for data
• Data to be collected by
collection and analysis.
− Project team members of project team
− Individual cost engineers
− Project manager
• Sources
− Cash flow
− Machine hours
(148) PROJECT
MANAGEMENT − Labor hours
− Materials in place Progress, Performance
Management and
• Reports and reporting Evaluation
− Progress since last report

NOTES
− Current status of project
ü Schedule
ü Cost
ü Scope
− Cumulative trends
− Issues and problems since last report
ü Action and resolution of earlier problems encountered
ü New problems and variances identified
ü Corrective measures planned
13.4 Project Control Process

Control is the process of comparing actual performance against plan to
identify deviations, evaluate possible alternative courses of actions, and take ap-
propriate corrective action. The project control steps for measuring and evaluat-
ing project performance are presented below.
1. Setting a baseline plan.
2. Measuring progress and performance.
3. Comparing plan against actual.
4. Taking action.
13.5 Checking Time Performance

• Preparing gantt chart CHECK YOUR
PROGRESS
− List the activities with duration
How does a Gantt chart
− Predecessor relationship
help in monitoring per-
− Critical path formance?
− Tracking gantt chart
ü Progress
ü Slippages
ü Slack
13.6 Control Charts

• Monitor past project schedule performance
PROJECT MANAGEMENT • Current performance
• Estimate future schedule trends
• The difference between scheduled time on the critical path at the

NOTES
report date with the actual point on the critical path is plotted
• Warning signals for potential problems
13.7 Earned Value Cost/Schedule System

• Time phased budget baseline
• Comparisons with actual and planned schedule and cost
• Ev-earned value
• Pv-planned value
• Ac- actual cost
• Cv- cost variance
• Sv-schedule variance
• Bac- budgeted cost at completion
• Etc- estimated cost to complete remaining work
• Eac- estimated cost at completion
• Vac- cost variance at completion
13.8 Integrated Cost Schedule System

• Define the work using WBS
− Scope
− Work progress
CHECK YOUR − Deliverables

PROGRESS
− Organization units
What do you under-
− Resources
stand by WBS, Planned
budgeted cost, Actual − Budgets for each work package
cost of work performed
• Develop work and resource schedule
and Earned value.
− Schedule resources to activities
− Time-phase work packages into network
• Develop time phased budget using work packages and determine

planned budgeted cost of the work scheduled
• At work package level, collect actual costs for the work performed.
(150) PROJECT
MANAGEMENT
• Collect percent completion and compute budgeted cost of work per- Progress, Performance
formed : earned value Management and
Evaluation
13.9 Time Phased Budge NOTES
• To measure overall performance by using aggregate performance
measure called earned value
• To compare the actual and scheduled cost with planned
• Earned value is calculated by multiplying the estimated percent

physical completion of work for each task by the planned cost for
those tasks
13.10 Ways to Calculate Percent Completion

• The 50-50 estimate: fifty percent completion is assumed when
the task is begun and remaining fifty percent when the work is
complete CHECK YOUR
PROGRESS
• The 0-100 percent rule: this rule allows
What are the different
• The credit of work until the task is complete
rules to calculate
• Critical input use: this rule assigns task progress percent completion?
• According to the amount of critical input that has been used
• The proportionality rule: this rule divides actual task time to date
by total scheduled task time to calculate percent complete
13.11Terminology
• Bcwp / ev: budgeted cost of work performed = earned value
• Acwp/ ac: actual cost of work performed
• Bcws / pv: budgeted cost of work scheduled
• Bac : budget at completion
• Etc: estimated cost to complete
• Eac = estimated cost at completion
• Cost variance cv = ev – ac
• Schedule variance sv = ev – pv
• Time variance tv = st – at
• Cv: if negative : overrun
• Sv: if negative : behind schedule
• Tv: delay is negative
• Compute schedule variance (ev-pv), cost variance (ev-ac)

PROJECT MANAGEMENT • Percent complete
− 50-50 estimate
− 0 – 100 estimate
NOTES
− Proportionality rule
13.12 Variance Analysis

• Comparing earned value with the expected
CHECK YOUR
• Schedule value
PROGRESS
• Comparing earned value with the actual costs
What are the conditions
for a project ‘over run’ • Cv = ev- ac if negative, over run
and ‘behind schedule’? • Sv = ev – pv if negative, behind schedule
13.13 Developing a Status Report

• Baseline development
• Development of status report
− Not yet started
− Finished
− In process or partially complete
13.14 Performance Index

• Cpi = ev / ac
• Spi = ev / pv
Index Cpi Spi
>1.00 Under run Ahead of schedule
=1.00 On cost On schedule
<1.00 Over run Behind schedule
13.15 Project Percent Complete Index

CHECK YOUR • Percent complete index pcib = ev / bac
PROGRESS • Pcib represents the work accomplished as
How are PCIB and • Percent of the total budgeted dollars to date
PCIC different from
each other? • Percent complete index pcic = ac / eac
• Pcic represents percent complete in terms of actual dollars spent

to accomplish work to date and the actual expected dollars for
(152) PROJECT the completed project
MANAGEMENT
13.16 Forecasting Final Project Cost Progress, Performance
Management and
Evaluation
Eac = ac + etc
Etc = work remaining / cpi NOTES

= (bac – ev) / ev/ac
Tcpi : to complete performance index (tcpi)
Tcpi = (bac – ev) / (bac – ac)
It measures the amount of value each remaining dollar in the budget must
earn to stay within budget
Problem 1.
A project to develop a country park has an actual cost in month 17 of

$350,000, a planned cost of $450,000, and a value completed of $300,000.
Find the cost and schedule variances and the three indices.
Solution -
• Given : ac = 350,000
Pv = 450,000
Ev = 300,000
• Cost variance = ev – ac = 300,000 – 350,000 = -50,000 overrun
• Schedule variance = ev – pv = 300,000 – 450,000 = -150,000

behind schedule
• Cpi = ev/ ac = 300,000/350,000 = 0.857
• Spi = ev / pv = 300,000 / 450,000 = 0.666
• Csi = cpi x spi = 0.857 x 0.666 = 0.571
Problem 2.
A project to develop technology training seminars is 5 days behind sched-

ule at day 65. It had a planned cost of $735,000 for this point in time, but
the actual cost is only $550,000. Estimate the schedule and cost vari-
ances.
Solution -
• Given pv = 735,000
Ac = 550,000
Ev = 60/65 * 735,000 = 678,462
• Cost variance = ev – ac = 678,462 – 550,000 = 128,462 underrun
• Schedule variance = ev – pv = 678,462 – 735,000 = - 56,538

behind schedule
PROJECT MANAGEMENT Problem 3.
For the following test marketing project at week 6, calculate the cost
schedule and time variances. Also calculate the cpi, spi, csi, etc.
NOTES
Activity Predecessor Duration Budget Actual cost %
complete
A - 2 300 400 100
B - 3 200 180 100
C A 2 250 300 100
D A 5 600 400 20
E B,c 4 400 200 20
Solution –
A pv 150 150
Ev 150 150
B 100 100
100 100
C 125 125
125 125
D 300 300
300
E 200 200
200
Total: pv 250 150 525 125 200 0 300 200
Cum. 250 400 925 1050 1250 1250 1550 1750
Ac 0 400 180 300 0 0 400 200
Cum. 0 400 580 880 880 880 1280 1480
Ev 250 150 525 125 200 0
Cum. 250 400 925 1050 1250 1250
• On day 6
− Ev = 1250
− Pv = 1250
− Ac = 880
• Cost variance : ev – ac = 1250 – 880 = 370 under run
• Schedule variance = ev – pv = 1250 – 1250 = 0 on schedule
• Cpi = ev/ac = 1250 / 880 = 1.42
• Spi = ev/pv = 1250 / 1250 = 1.00

(154) PROJECT • Csi = 1.42 x 1.00 = 1.42
MANAGEMENT
• Bac = 1750 ev = 1250 cpi = 1.42 Progress, Performance
Management and
• Etc = (bac – ev) / cpi = (1750 – 1250) / 1.42 = 352 Evaluation
• Eac = etc + ac = 352 + 880 = 1232

NOTES
13.17 Case Study

Paul involves in estimating cost for the Manufacturing department of Percy
Company during first five years out of college. Percy provides estimation of fixed
cost for its projects, as suggested by the costly and lengthy procedure to be used
in generating accurate quotes. Paul got promotion in the project office. He was
supposed to manage all estimates for all departments of Percy. He didn’t estimate
any cost estimating during this time.
Paul was sent to a small division of projects after one year. Paul created
accurate first five estimates. But an exorbitant cost overrun was caused due to an
off estimation of $20,000 in the sixth estimate.
Enough detail was not provided to know the actual cause of the cost-overrun.
Though, the case study indicates a costly and lengthy procedure for generating
exact quotes of fixed price. The case study also shows that lengthy procedure of
cost estimation cannot be afforded by the small projects division. From Paul’s
viewpoint, it was necessary to follow the procedure of estimation to generate
correct cost estimates.
It might be possible that first five projects were similar to earlier projects
and earlier cost estimates could be used by Paul to create new estimates. But
sixth project could have been dissimilar and needed a more careful procedure for
cost estimation. Additionally, because of elapsed duration since his prior role in the
Manufacturing department, labor or materials cost could have changed and Paul
might have been unmindful of the change. Despite the cause, problem can be
solved by Percy.
Kerzner suggested “only consider fixed bid contracts if the manufactur-

ing requirements are known exactly” (2003, p. 820). Projects of small cost are not
able to “withstand the expenses needed for formal divisional cost estimates” (2003,
p. 146). To tackle this problem, Percy should think about format of cost-plus con-
tract for the small projects department.
13.18 Summary
This unit gives us answer about need of progress and performance man-
agement & evaluation. We came to know about requirements of project monitor-
ing. We study, what types of data are to be collected, who should collect it and
from where it would be collected. We knew how we can control the project. This
unit helps in understanding the role of control chart and Gantt chart in monitoring
the performance of project. We studied mathematical aspect of project evaluation
and found the opportunity to learn about various important terms. We also knew
PROJECT MANAGEMENT the significance of CPI and SPI while deciding ‘under-run’ or, ‘over-run’ and
‘ahead of schedule’ or, ‘behind the schedule’ status of project.
NOTES
13.19 Key concepts
• Project management- project management is the application of
processes, methods, knowledge, skills and experience to achieve
the project objectives.
• Project evaluation-project evaluation is a systematic and objective

assessment of an on-going or completed project.
• Project monitoring- monitoring is the regular observation and

recording of activities taking place in a project or programme.
• Project control-project controls are the data gathering,

management and analytical processes used to predict, understand
and constructively influence the time and cost outcomes of a project
or program; through the communication of information in formats
that assist effective management and decision making.
• Project performance

1. Why do we need progress & performance management and
evaluation?
2. What do you understand by project control? Suggest steps to

control a project?
3. What types of chart are used in monitoring project performance?

Explain in brief each of them?
4. Write short notes on
a. WBS,
b. Planned budgeted cost,
c. Actual cost of work performed,
d. Earned value,
e. Cost variance,
f. Schedule variance,
g. Time variance,
h. PCIB,
i. PCIC &
j. TCPI.
(156) PROJECT
MANAGEMENT
5. What do you understand by Progress, Performance
Management and
i. Project overrun & Evaluation
ii. Project’s behind schedule?

NOTES
6. What are the significance of cpi and spi?

1. Erik larson and clifford gray, “project management: the managerial
process”, mcgraw-hill higher education.
2. Manoj arora, anuj gupta and neeti gupta, “project planning &
control”, kalyani publishers.

PROJECT MANAGEMENT
UNIT 14
PROJECT AUDIT AND CLOSURE
NOTES Structure
14.0 Introduction
14.1 Objectives
14.2 Project Audits
14.3 Kinds of Project Audit
14.4 Factors Influencing Audit Depth and Detail
14.5 Project Audit Process
14.6 Data Collection and Analysis
14.7 Reporting
14.8 Project Closure
14.9 Signals for Continuing or Early Project Closure
14.10 Closure Decision
14.11 Project Closure Process
14.12 Typical Close-Out Plan
14.13 Creating the Final Report
14.14 Post-Implementation Evaluation
14.15 Retrospectives
14.16 Summary
14.17 Key Concepts
14.0 Introduction
Every project comes to an end eventually. But how many project partici-
pants get excited about closing out a project? The deliverables are complete.
Ownership is ready to be transferred. Everyone’s focus is what’s next-hopefully
a new, exciting project. Carefully managing the closure phase is as important as
any other phase of the project. Observation tells us that organizations that manage
closure and review well prosper. Those who don’t tend to have projects that drag
on forever and repeat the same mistakes over and over.
Closing out a project includes a daunting number of tasks. In the past and
(158) PROJECT on small projects the project manager was responsible for seeing all tasks and
MANAGEMENT
loose ends were completed and signed off. This is no longer true. In today’s project Project Audit and Closure
driven organizations that have many projects occurring simultaneously, the re-
sponsibility for completing closure tasks has been parsed among the project man-
ager, project teams, project office, an oversight “review committee,” and an inde- NOTES
pendent retrospective facilitator. Many tasks overlap, occur simultaneously, and
require coordination and cooperation among these stakeholders.

• Understanding project audit process.
• Understanding project closure process.
14.2 Project Audits

• Reviews project selection
• Checks on project performance
• Project’s role reassessment in organization’s strategic needs
• Check organization culture
• Functioning of project team
• Checks external factors that can affect projects
• Review of all relevant factors and managing future projects
14.3 Kinds of Project Audit

• In process project audit
− Project progress and its performance
− Checks whether conditions have changed
• Post-project audits
− Audit of projects which are completed
− Improving management related to future projects
− Oriented for long term
− Check on project performance
− Project’s role in meeting strategic needs
14.4 Factors Influencing Audit Depth and Detail

• Size of organization
• Importance of project
• Type of project
PROJECT MANAGEMENT • Risk related to project
• Project size of project
• Problems of project
NOTES
14.5 Project Audit Process

• Initiating and staffing
− Small size organ.: face to face interaction, informal audit
− Medium sized organ.: formal project review group, projects au-

dited at specific stages in the life cycle of project
− Large sized organ.: audit planned for major milestones
14.6 Data Collection and Analysis

• Data collection depends on
− Industry
− Project size
− Newness of technology
CHECK YOUR
PROGRESS − Project experience
Give provisions of data • Organization view

collection and analysis. − Supportive organization culture
− Top management commitment
− Meeting organ strategic needs and objectives
− Risk, contingency plans
− Right people and talents
• Project team view
− Project planning and control
− Interfaces and communications
− Adequacy of staff
− Adequate access to organ. Resources
14.7 Reporting
• Audit report should be tailored to specific project and organ
environment
• Improves the way future projects are to be managed
• Development of audit database

(160) PROJECT
MANAGEMENT
• Classification Project Audit and Closure
− Project type
− Size
NOTES
− Number of staff
− Level of technology
− Strategic/support
• Analysis
− Project missions and objectives
− Systems used and procedures
− Organization resources used
• Recommendations
− Corrective actions
• Lessons learnt
− Mistakes avoidable
− Action taken to ensure success
• Appendix
− Backup data
− Details of analysis
14.8 Project Closure

• Every project comes to an end
• Well-defined project ending
• Conditions
• Normal
− Simply a completed project
− Transfer of ownership to the customer
− final design handed to production unit
− New service line or product creation
• Premature
− Project may be accomplished early with some parts of the project

eliminated
• Perpetual
− Projects never seem to finish

PROJECT MANAGEMENT − Delayed projects
− Constant add-ons
− Redefine the project end or scope so that closure is forced

NOTES
• Failed project
− Developing a prototype of new technology product: concept not

workable
− Development of a new pharmaceutical drugs, project needs to be

abandoned due to side effects of the drug
• Changed priority
− Shift in priorities
− Project may be canceled or altered
14.9 Signals for Continuing or Early Project Closure

• Identify Success barriers of project
• Problems or success factors existence
• Planning stage
− Unclear scope definition
− Poor decision making
− Incorrect information
− Changes
• Scheduling stage
− Strict schedule
− Schedule is not met
− Schedule is not managed
• Organizing stage
− Lack of delegation and responsibility
− Weak project manager
− Interference of top management
• Staffing
− Deficient personnel
− Inefficient project manager
− Project member departure
(162) PROJECT − Feeble staffing process

MANAGEMENT
• Directing Project Audit and Closure
− Weak coordination
− Weak communication
NOTES
− Inefficient leadership
− Commitment level low
• Controlling
− Faulty follow-up
− Faulty monitoring
− Absence of control systems
− No identification of problems
14.10 Closure Decision

• Project continue or close down decision
• Organizational resource allotment problem
• Cost factors
• Audit reports should focus on organizational goals, changing condi-

tions and changing priorities
• Announcement done by top management regarding closure
14.11 Project Closure Process

• Major tasks of project manager and team members are over.
• Accounting for equipment and completing final reports.
14.12 Typical Close-Out Plan

• Develop a plan
− Tasks required to close the project CHECK YOUR

− Responsibility PROGRESS
− Closure begin and end times Give provisions for

typical close-out plan.
− Delivery of project to customer
• Staffing
− Project manager does the closing for successful projects
− Projects canceled early : someone other than project manager

does the closing
• Communicating termination plan and schedule

PROJECT MANAGEMENT − Psychical fact that the project will terminate
− Adapt to move on to other projects
• Implementing the closure plan

NOTES
− Wrap up activities
− Lengthy list for closing projects
• Getting acceptance of delivery from the customer
• Shutting data resources and delivering for new uses
• Reassigning of team members of project
• Ceasing accounts and seeing all bills are paid
• Examining the project team, team members and the project manager
• Evaluating the vendors, subcontractors
14.13 Creating the Final Report

• Executive summary
• Review and analysis
• Recommendations
• Lessons learned
14.14 Post-Implementation Evaluation

• Team evaluation
− Evaluation of individuals
− Measures of team achievement center
− Individual, team member and project manager achievements re-

views
14.15 Retrospectives
• Lessons learned:
− Examinations carried out during and shortly after the project life
cycle
− Acquire positive and negative project learning
• Retrospective
− An approach that analyses a past project event to determine what

worked for us and what didn’t
− Develop lessons learned and formulate an action plan

(164) PROJECT
MANAGEMENT
− Ensures lessons learned are used to enhance managing upcom- Project Audit and Closure
ing projects
14.16 Summary NOTES

• Identify changes to improve delivery of future projects.
• Analysis of project’s role in organization’s strategic needs
• Review of all relevant factors and managing future projects
• Audit report should be tailored to specific project and organiza-

tion environment.
• Project may be accomplished early with some parts of the project

eliminated.
• Identify barriers to project success.
• Retrospectives analyses a past project event to examine what

worked and what didn’t.
14.17 Key Concepts

• Audit: Periodic (usually every six months) onsite-verification (by
a certification authority) to ascertain whether or not a documented
quality system is being effectively implemented.
• Audit report: Document prepared by the auditors appointed to

examine and certify the accounting records and financial position
of a firm. It must be filed every year by an incorporated or regis-
tered firm (along with its audited financial statements) with the
appropriate regulatory authority.
• Retrospectives: looking back on or dealing with past events or

situations.

1. What is project audit and why it is needed?
2. What are the different types of project audit?
3. Explain data collection and analysis in project audit process.
4. Describe audit reporting and project closure.
5. What is typical close-out plan? Explain in detail.

1. Abol ardalan, “economic & financial analysis for engineering &
project management”, crc press.

PROJECT MANAGEMENT
UNIT 15
MANAGING RISK
NOTES Structure
15.0 Introduction
15.1 Objectives
15.2 Risk Management
15.3 Risk In Project Life Cycle
15.4 Risk Management Process
15.5 Risk Identification
15.5.1 Identifying Specific Risks
15.6 Risk Assessment
15.6.1 Probability of Occurrence
15.6.2 Detection Difficulty
15.6.3 Zones
15.7 Risk Response Development
15.7.1 Mitigation Risk
15.7.2 Avoiding Risk
15.7.3 Transferring Risk
15.7.4 Sharing Risk
15.7.5 Retaining Risk
15.8 Contingency Planning
15.8.1 Implementation of Contingency Plan
15.9 Handling Risk
15.9.1 Technical Risk
15.9.2 Schedule Risk
15.9.3 Cost Risk
15.9.4 Funding Risk
15.10 Opportunity Management
15.11 Responses to Opportunity
15.12 Contingency Funding
15.13 Budget Reserves

(166) PROJECT
MANAGEMENT
15.14 Management Reserves Managing Risk
15.15 Time Buffers
15.16 Risk Response Control

NOTES
15.17 Control Change Management
15.18 Benefits
15.19 Summary
15.20 Key Concepts
15.0 Introduction
Every project manager understands risks are inherent in projects. No
amount of planning can overcome risk, or the inability to control chance events. In
the context of projects, risk is an uncertain event or condition that, if it occurs, has
a positive or negative effect on project objectives. A risk has a cause and, if it
occurs, a consequence. For example, a cause may be a flu virus or change in
scope requirements. The event is that team members get stricken with the flu or
the product has to be redesigned. If either of these uncertain events occurs, it will
impact the cost, schedule, and quality of the project.
While risks can have positive consequences such as unexpected price

reduction in materials, the focus of this chapter is on what can go wrong and the
risk management process.
Risk management attempts to recognize and manage potential and un-

foreseen trouble spots that may occur when the project is implemented. Risk
management identifies as many risk events as possible (what can go wrong),
minimizes their impact (what can be done about the event before the project be-
gins), manages responses to those events that do materialize (contingency plans),
and provides contingency funds to cover risk events that actually materialize.

• Understanding risk management process.
• Understanding risk handling.
• Know about risk response control.
15.2 Risk Management

• To identify and manage potential and unpredicted trouble spots
that may occur when the project is performed
PROJECT MANAGEMENT • Recognizes as much risks as possible from concept
• To delivery stage
• Contingency plans and funds to insurance risk events

NOTES
• Change management to control and monitor risks
CHECK YOUR
15.3 Risk In Project Life Cycle
PROGRESS • Probabilities of risk event happening are highest in the concept,
What do you planning and start-up phases
understand by risk
• Cost impact of a risk is less if the event occurs at the early stage
management?
of project
• As the project crosses halfway the cost of a risk event happening

rises quickly
15.4 Risk Management Process

• Risk management is proactive rather than reactive. The steps are -
1. hazard identification : analyze the project to recognize the causes

of hazard
2. hazard assessment: measure risk in terms of level of impact, like-

lihood of occurring and controllability
3. hazard response improvement: develop a plan to reduce probable

damage, develop contingency plans
4. hazard response control: apply risk strategy, observe and change

plan for new hazards, change management
15.5 Risk Identification

• Risk breakdown structure
• Technological : necessities, technology, difficulty and interfaces,

performance and trustworthiness, quality, maintainability
• External : subcontractors and suppliers, regulatory, market, buyer,

climate
• Organizational: project dependences, resources, funding,

ordering
• Project management: estimating, planning, governing,

communication
15.5.1 Identifying Specific Risks

• Work breakdown structure
(168) PROJECT
MANAGEMENT • Risk profile
• Historical records Managing Risk
• Input from customers, sponsors, sub-contractors, vendors,

stakeholders
NOTES
15.6 Risk Assessment
• Scenario analysis: team members measure the importance of each
risk in terms of
− Chance of the event
− Effect of the event
− Detection difficulty
• Component failure: may cause slight delay in project plan but a

major rise in project cost.
• If controlling cost has a higher significance, then the effect would

be severe, and if time is more critical, then the effect will be
insignificant
15.6.1 Probability of Occurrence

• Very unlikely to almost certainly
• Probability values: 0.1, 0.3, 0.5
• Scale : 1 – 10
15.6.2 Detection Difficulty

It is an assessment of how easy it would be to perceive that the event was
going to happen in time to take moderating action
• Red zone : major risk : high impact and high likelihood
• Yellow zone : moderate risk
• Green zone : low risk: low impact and low likelihood
• Risk value = probability of occurrence × impact × detection

difficulty
15.7 Risk Response Development

• Moderating risk
• Avoiding risk
• Shifting risk
• Sharing risk
• Retaining risk

PROJECT MANAGEMENT 15.7.1 Mitigation Risk
• Reducing the probability that the event will take place
• Reduce the effect that the contrary event would have on the
NOTES
project
• Tools:
− Testing and prototyping
− Identifying the root causes of the event
15.7.2 Avoiding Risk

• Avoiding risk is altering the project plan to remove the risk or
state
− Accepting established technology instead of experimental

technology can remove technological failure
15.7.3 Transferring Risk

• Passing risk to another party does not change the risk
− Fixed price contracts: transferring risk from owner to contrac-

tor
CHECK YOUR
PROGRESS • Insurance, performance ties, warranties, guarantees are used to
transmit risks
What are the steps
you are going to take
15.7.4 Sharing Risk
for mitigating a risk?
• Risk sharing assigns extents of risk to various parties
• Build – own – operate – transfer : boot
• Used to reduce project costs and inspire innovation
• Partnering
15.7.5 Retaining Risk

• Accept the risk of an event occurring
• Natural disaster : earthquake, flood
CHECK YOUR 15.8 Contingency Planning

PROGRESS
15.8.1 Implementation of Contingency Plan
What do you under-
stand by contingency • Contingency plan must be pre-decided and recorded
planning? • Should contain cost estimate and sources of finance
• All parties should accept the contingency plans
• Should be communicated to all team members

(170) PROJECT
MANAGEMENT
15.9 Handling Risk Managing Risk
• Technical risks
• Schedule risks NOTES

• Cost risks
• Funding risks
15.9.1 Technical Risk

• If the system or process fails to work
• Results in shut down
• Recognize the high risk technical zones
• Create model or prototype
• Develop methods to quickly assess and decide technical

uncertainties
15.9.2 Schedule Risk

• If the project tends to get delayed
• Contingency funds are kept aside to expedite
• Crashing activities in the critical path
• Use start to start lag relationship
• Use best people for high risk tasks
15.9.3 Cost Risk

• Long duration projects CHECK YOUR
• Charge variations : inflation PROGRESS
• Don’t use lump sum to insurance price risk What are technical
risk you have encoun-
• Price risk must be assessed item by item
tered at your working
• Certain purchases or agreements may remain unchanged over place?
the entire project lifespan
15.9.4 Funding Risk

• Funding is cut
• Projection of higher costs exceeding available finds on

completion
• Project cancelled before completion
• evaluation of funding supply
• Scale back the range of project

PROJECT MANAGEMENT
15.10 Opportunity Management
• An opportunity is an event that can have optimistic effect on project
purposes
NOTES
• Opportunities are recognized, assessed in terms of probability and
influence responses are determined
• Establish contingency plans and funds to get benefit of the oppor-

tunity
15.11 Responses to Opportunity

• Exploit: to remove uncertainty linked with an chance
− Assigning best personnel to critical burst activity to decrease time

of accomplishment
• Share: allocate some or all ownership to another party
− Continuous improvement incentives for external contractors
• Enhance: increase the probability of optimistic effect of an

opportunity
− Choosing spot position based on favorable climate patterns
• Accept: accepting an chance of being willing to take benefit of it,

if it happens, but not take action to pursue it
15.12 Contingency Funding

• To insurance identified and unknown project risks
CHECK YOUR
• uncertainty due to newness of the project, inexact cost and time
PROGRESS
estimates, technical unknowns, unstable scope and complications
What do you mean by not anticipated
contingency funding?
• Recorded risk identification
• Contingency plans
• Plan for when and how funds will be expended
15.13 Budget Reserves

• To insurance recognized risks
• Allocated to particular segments or deliverables of the project
• Responsibility of project managers and team members
• If risk does not materialize, funds are taken from budget reserve,
thus decreasing the budget stock.
(172) PROJECT
MANAGEMENT
15.14 Management Reserves Managing Risk
• To cover unidentified risk
• Assigned to risks associated with the whole project NOTES

• Established after budget reserves are recognized and funds
established
• Governed by project manager and owner
• Technological contingencies are placed in the management

reserves
15.15 Time Buffers

• To tackle project delays
• More inexact the project, more time must be reserved for the
plan
• Assign extra time in critical moments
− Actions with higher risks
− Combine actions which are prone to delays
− Non critical activities to reduce the probability that they will

make other critical path
− Actions which require active resources to ensure that re-

sources are available when desirable
15.16 Risk Response Control

• Performing the risk reaction strategy
• Checking triggering events
• Starting contingency plans
• Inspection for new risks
• Inspecting/tracking change in scope, schedule and budget
• Build an environment in which members raise concerns and

admit mistakes
• Review risk profiles and take corrective actions
• Documenting responsibilities
• Checking potential risks and recognize new land mines that may
derail the project

PROJECT MANAGEMENT
15.17 Control Change Management
• scope variations
NOTES • Execution of contingency plans
• Improvement Variations
• Change control systems
− Reporting
− Controlling
− Recording
• Recognize proposed changes
• List probable effects of proposed variations on plan and budget
• Review, evaluate and approve or disapprove changes formally
• Negotiate and resolve clashes of change. Conditions and cost
• Converse variations to parties affected
• Allocate responsibility for executing change
• Regulate master plan and budget
• Track all variations that are to be executed
15.18 Benefits
• Inconsequential variations are discouraged by the formal procedure
• Costs of variations are maintained in a log
CHECK YOUR • Integrity of the WBS and performance standards are maintained
PROGRESS
• Assignment and use of budget and management reserve funds are
What are the major tracked
change control
• Responsibility for execution is clarified
systems?
• Effect of variations is visible to all parties involved
• Execution of change is checked
• Scope changes will be rapidly reflected to baseline and performance

standards
15.19 Summary
In perfect risk management, an ordering process is followed whereby the
risks with the highest loss (or impact) and the highest probability of hap-
pening are handled first, and risks with lower probability of happening and
lower loss are handled in descending order. In practice the process of
(174) PROJECT
MANAGEMENT
measuring overall risk can be challenging, and balancing resources used Managing Risk
to moderate between risks with a high probability of happening but lower
loss versus a risk with high loss but lower probability of happening can
often be mismanaged. NOTES
15.20 Key Concepts

• Risk: A probability or threat of damage, injury, liability, loss, or any
other negative occurrence that is caused by external or internal
vulnerabilities, and that may be avoided through preemptive ac-
tion.
• Risk Management: The identification, analysis, assessment,

control, avoidance, minimization, or elimination of unacceptable
risks.

1. What are the risks involved in project life cycle?
2. What do you understand by risk assessment?
3. Explain different types of handling risk?
4. What do you understand by control change management?
5. Define risk response control?
6. What are the responses to opportunities you have learned?

• http://www.businessdictionary.com

MMG402 Project Management

Uploaded by

Document Information

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

MMG402 Project Management

Uploaded by

Copyright:

Available Formats

Yashwantrao MMG 402

MBA : SECOND YEAR

Unit 2 Project Organization Structure 32

Unit 3 Market and Demand Analysis 45

Unit 4 Projected Cash Flow & Balance Sheet 58

Unit 5 Organization Strategy & Product Portfolio Management 68

Unit 6 Project Selection Methods and Investment Criteria 80

Unit 7 Defining the Project 91

Unit 8 Estimating Project Times and Costs 101

Unit 9 Project Quality Management 110

Unit 10 Developing Project Plan 121

Unit 11 Scheduling Resources and Cost 130

Unit 12 Reducing Project Duration 139

Unit 13 Progress, Performance Management and Evaluation 147

Unit 14 Project Audit and Closure 158

Unit 15 Managing Risk 166

Prof. Vinay. K. Nangia

Instructional Technology Editing & Programme Co-ordinator

© 2018 Yashwantrao Chavan Maharashtra Open University, Nashik.

ISBN : 978-81-8055-457-5 MMG 402

Any suggestions will be appreciated.

I am confident, that students will welcome new edition of this book.

All The Best!

Unit 1 Projects and Importance of Project Management

Unit 2 Project Organization Structure

Unit 3 Market and Demand Analysis

Unit 4 Projected Cash Flow & Balance Sheet

Unit 5 Organization Strategy & Product Portfolio Management

Unit 6 Project Selection Methods and Investment Criteria

Unit 7 Defining the Project

Unit 8 Estimating Project Times and Costs

Unit 10 Developing Project Plan

Unit 11 Scheduling Resources and Cost

Unit 12 Reducing Project Duration

Unit 13 Progress, Performance Management and Evaluation

Unit 14 Project Audit and Closure

Unit 15 Managing Risk

1.2 Evolution and Application

1.2 Defining Project

1.2.1 Project of Manufacturing

1.3 Project Management Approach

1.3.1 Understanding Need and Importance of Project Management

1.3.2 Functions of Project Management

1.4 Why Do Projects Fail?

1.5 Project Life Cycle

1.5.1 Product Life Cycle

1.5.2 Life Cycle Phases for Different Projects

1.6 Role of Project Manager

1.6.1 Categories of Interactions

1.6.2 Define Jurisdiction

1.6.3 Categorize Subordinates

1.6.4 Subordinate Problems are Ultimately Bosses’ Problems

1.6.5 Strive To Become Redundant

1.6.6 Train Supervisor to Take Your Place

1.6.7 Be Fair and Appear To Be Fair

1.7 Decision Making

1.8 Project Integration Management

1.9 Key Concepts

1.11 Exercise & Questions

1.12 Further Reading & References

PROJECT MANAGEMENT (9)

Project management is not limited to the private sector. Project manage-

1.1 Unit objectives

• Understanding what is project.