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UNIT - I
WHAT IS A PROJECT?
The various scholars and practitioners dealt with the concept of “Project”
in their own way. Simply stated, a project pre supposes commitment of task(s)
to be performed within well defined objectives, schedules and budget. Webster
New 20th Century Dictionary refers it as a scheme, a design, a proposal of
something intended or devised. The Dictionary refers it as a scheme, a design, a
proposal of something intended or devised. The Dictionary of Management regards
it as an investment project carried out according to a Plan in order to achieve
a definite objective within a certain time and which will cease when the
objective is achieved. Similarly, a project according to the Encyclopedia of
Management is ‘an organized until dedicated to the attainment of a goal the
successful completion of a development project on time, within budget, in
conformance with pre-determined programme specification.”
Another school of thought looks upon a project as a combination of
interrelated activities to achieve a specific objective. For instance, a project
according to Project Management Institute, USA, is a system involving the
co-ordination of a number of separate department entities throughout the
organization, and which must be completed within prescribed schedules and time
constraints. To Sinhas, a project is not a mere action or an activity or an
attempt towards a particular aim; it is rather in integrated effort, including
multifarious actions and activities, towards that aim.
One group of scholars emphasize that a project – a unique and
non-repetitive activity – aims at systematically co-ordinating inputs in the
direction of intended outputs. To quote Harrison, “a project can be defined as a
non-routine, non-repetitive one-off undertaking, normally with discrete time,
financial and technical performance goals. A development project, says
Hirschman, connotes purposefulness, some minimum size, a specific location, the
introduction of something qualitative, new, and the expectation that a sequence
of further development moves will be set in motion.
These are still others whose primary emphasis is on appraising investment
proposals form the economic Social profitability angles. According and to Little
and Merles, “We mean by a project any scheme, or part of a scheme, for investing
resources which can reasonably be analyzed and evaluated as an independent
unit”. The Manual on Economic Development Projects too defines a project as the
compilation of data which will enable an appraisal to be made of the economic
advantages and the disadvantages attendant upon the allocation of country’s
resources to the production of specific goods and services. All the above
definitions thus suggest that a project is an action – oriented enterprise.
Banks and financial institutions have to examine the viability of a
project before providing financial assistance. They have to ensure that the
project will generate sufficient return on the resources invested in it. With
the shift form security – oriented lending to purpose-oriented lending, the
study of viability of a project Disbursement of funds according to the
requirements of the project and close supervision and follow-up are also equally
essential to recover the financial assistance provided. In order to develop
proper co-ordination with the entrepreneurs, many banks and financial
institutions are not only providing financial assistance to viable projects but
also assist the entrepreneurs during all phases of a project viz.,
identification, selection, appraisal, implementation and follow-up. All the
phases are inter-related and the experience gained during appraisal and
supervision of projects helps the banks and financial institutions to guide the
entrepreneurs in identification and selection of new projects. The projects
which are coming to banks and financial institutions for financing may be
divided into following categories: -
New Projects – For setting up new units.
Expansion – For increasing the capacity of existing units.
Diversification Projects – For manufacturing new products by
existing units.
Backward Integration projects – For manufacturing certain products
which are being used as raw material by the existing unit.
Forward Integration Projects – For manufacturing certain products
which require the products of the existing unit as raw material.
Modernisation Projects. – It can be for any one or more than one of
the following objects –
Changing obsolete machinery
Enlarging the product mix product range to meet changing requirements of the
market.
Reducing the manufacturing cost or for improving the quality of the product
Changing the requirement of raw material (shifting from present raw material
to some other raw material)
Rehabilitation – For reviving sick units and making them viable to complete
with normal / healthy units.
DEFINITION OF PROJECT
A project is a one-shot, time limited, goal directed, major undertaking,
requiring the commitment of varied skills and resources. It has also been
described as a combination of human and non – human resources pooled together in
temporary organization to achieve a specific purpose.
The purpose and the set of activities which can achieve that purpose
distinguish one project from another.
Project Management Institute, U.S.A.
“We mean by a project any scheme, or part of a scheme, for investing
resources which can reasonably be analyzed and evaluated as an independent unit.
The definition in thus arbitrary. Almost any project could be broken down into
parts for separate consideration, each of these parts would then by definition a
project”
I.M.D. Little and J.A.Mirries.
“A specific activity with a specific starting point and a specific ending
point intended to accomplish a specific objective. It is something you draw a
boundary around at least a conceptual boundary and say this is the project”.
J. Price Gittinger.
“Compilation of data which will enable an appraisal to be made of the
economic advantages and disadvantages attendant upon the allocation of country’s
resources to the production of specific goods and services…
United Nations.
It may, therefore be summarized that a project in essentially a self
contained, independent entity.
FEATURES OF A PROJECT
A Project can be identified by its features. The special features of a project
that would differentiate from any other on going activity are given below :
A Project fixed set of objectives. Once the objectives have been achieved the
project ceases of exist.
It has a specific life span.
Project has a separate entity and normally entrusted to one responsibility
centre.
Project calls for a teamwork.
Project has a life cycle reflected by growth, maturity and decline.
Uniqueness is a salient feature of any project. No two projects are exactly
similar.
Change is an inherent feature in any project out its life.
 Project is based on successive principle and hence it is difficult to learn
fully the end results at any stage.
A project works for a specific set of goals with the complex set of
diversified activities.
High level of sub-contraction of work can be done in a project.
Every project has risk and uncertainty associated with it.
Project needs feasibility any appraisal studies. So that the sponsors sweet
dream becomes realizable.
TYPES OF PROJECTS
Much of what the project will comprise and consequently its management
will depend on the category it belongs to. The location , type. Technology,
size, scope and speed are normally the factors which determine the effort
needed in executing a project. Though the characteristics of all projects are
the same, they cannot be treated alike. Recognition of this distinction is
important for management. Classification of project helps in graphically
expressing and highlighting the essential features of the project.
Projects are often categorized in terms of their speed of implementation
as follows :
NORMAL PROJECTS
Adequate time is allowed for implementation.
All the phases in a project are allowed to take their normal time.
Minimum requirement of capital.
No sacrifices in terms of quality.
CRASH PROJECTS
Requires additional costs to gain time.
Maximum overlapping to phases in encouraged.
DISASTER PROJECTS
Anything needed to gain time is allowed in these projects. Round the
clock work is done at the construction site. Capital cost will go up very
high. Project time will get drastically reduced.
Besides that, projects in general are classified on several basis as
given in the following illustrative list.
United Nations Asian and Pacific Development Institute Categories of projects.

CLASSIFICATION OF PROJECT
The project can be classified on several bases. Major classifications of
the projects are given below :
1. On the basis of Expansion :
Project expanding the capacity.
Project expanding the supply of knowledge.
2. On the basis of Magnitude of the resources to be invested :
Giant projects affecting total economy
Big projects affecting at one sector of the economy.
Medium size projects
Small size projects (depending on size, investment & impact)
3. On the basis of Sector :
Industrial project
Agricultural Project
Educational Project
Health Project
Social Project
4. On the basis of objective :
Social objective project
Economic objective project.
5. On the basis of productivity :
Directivity productive project.
Indirectively productive project.
6. On the basis of nature of benefits :
Quantifiable project
Non-quantifiable project
7. On the basis of government priorities :
Project without specific priorities
Project with specific priorities
8. On the basis of dependency :
Independent project
Dependent project
9. On the basis of ownership :
Public sector project
Private sector project
Joint sector project
10. On the basis of location :
Project with determined location
Project where location is open.
11. On the basis of social time value of the project :
Project with present impact
Project with future impact
12. On the basis of National Policy :
Project determined by inward looking policy
Project determined by outward looking policy
13. On the basis of risk involved in the project?
High risks project
Normal risks project
Low risks project
14. On the basis of economic life of the projects :
Long term project
Medium term project
Short – team project
15. On the basis of technology involved in the project :
High sophisticated technology project
Advanced technology project
Foreign technology project
Indigenous technology project
16. On the basis of resources required by the projects :
Project with domestic resources
Project with foreign resources

17. On the basis of employment opportunities available in the project :

Capital intensive project
Labour intensive project
18. On the basis of management of project :
High degree of decision making attitude
Normal degree of decision making attitude
Low degree of decision making attitude
19. On the basis of sources of finance :
Project with domestic financing
Project with foreign financing
Project with mixed financing
Project with financial institutions
20. On the basis of legal entity :
Project with their own legal entity
Project without their own legal entity
21. On the basis of role played by the project :
Pilot project
Demonstration project
22. On the basis of speed required for execution of the projects :
Normal projectCrash project
 Disaster project
PROJECT LIFE CYCLE
Every programme, project or product has certain phases of development. The
different phase of development in an investment proposal or project is called
project life cycle. A clear understanding of these phases permits entrepreneurs,
managers and executives to have better control over existing and potential
resources in the achievement of the desired goals.
PHASES OF PROJECT LIFE CYCLE
Project life cycle is a complex process consisting of different steps
arranged in a sequential order. Different authors have described these steps in
different sequential manner but the concept of the cycle is almost similar in
each case.
According to United Nations Guidelines for Rural Centre Planning, there
are 7 steps in the project life cycle such as project identification and
appraisal, pre-feasibility study, feasibility study, detailed design project
implementation, operation maintenance, monitoring and evaluation.
Rondineli, Dennis & Apsy Palia in their book “Project Planning and
implementation in Developing countries” identified the following 12 steps in the
project life cycle. Project identification and definition, project formation.
Preparation and feasibility analysis, project design, project analysis, project
selection, project activation and organization, project implementation and
operation. Project supervision (monitoring and control) project completion or
termination, output diffusion and transition to normal administration, projects,
evaluation, follow-up and action.
World Bank Guidelines reveals the following six major steps in the project
life cycle. Conception (identification). Formation (preparation). Analysis
(appraisal). Implementation (Supervision), operation and evaluation.
All the steps given in different studies can be grouped into three main phases
viz.,
Pre-investment phase
Implementation phase and
Operational phase
A brief description of each of these phases if given below :
PRE-INVESTMENT PHASE
The first phase of the cycle describes the preliminary evaluation of an
idea. It consists of identification of investment opportunities, preliminary
project analysis, feasibility study and decision-making. Project idea emanates
from the priorities when planning is done by the government demand and supply
projection of various goods and services; Pattern of imports and exports over a
period of time; natural resource which can serve as the base for potential
manufacturing activity; scope of extending existing lines of activity
consumption pattern in other countries at comparable stages of economic stage of
economic development.
On the basis of the investment opportunities, it is possible to conceive a
number of projects out of which a particular project may be consistent with
development objectives of the area. During this phase, the following aspects of
the project must be carefully designed so as to enabling services
Project infrastructure and enabling services
System design and basis engineering package
Organisation and manpower
Schedules and budgets
Licensing and governmental clearances
Finance
Systems and procedure
 Identification of project manager
Design basis, general condition for purchase and contracts
Construction resources and materials.
Work packaging
This phase is involved with preparation for the project to take out
smoothly.
Once a project opportunity is conceived, it needs to be examined.
Preliminary project analysis concerns with marketing, technical financial and
economic aspects of the project. It seeks to determine whether the project is
prima facie worth wide to justify a feasibility study and what aspects of the
projects are critical to its viability and hence call for an in depth
investigation.
More details, through and complete feasibility study results in a
reasonably adequate formulation of the projects in terms of location, production
capacity production technology and material inputs. The feasibility study
contains fairly specific estimates of project cost, means of financing sales
revenues, production costs, financial profitability and social profitability.
Based on the thorough feasibility study the project owner or sponsors of
financiers can decide whether to accept or reject a particular project. In other
words, the decisions whether investment on the project should be made or not has

to be made at this stage.

IMPLEMENTATION PHASE
The implementation phase of an industrial project involves setting up of
manufacturing facilities. After judging the worthiness, project needs to be
designed for implementation. Drawings, blue prints and the sequences in which
the various activities concerning the project need to be carried out. The main
activities under this phase are :
Project and engineering design : It consists of site probing and
prospecting; preparation of blue prints, plant design, plant engineering,
selection of machinery, equipment.
Negotiations and contractions : It covers the activities like project
financing, acquisition of technology, construction of building and civil works,
provision of utilities supply of machine and equipment, marketing arrangement.
Construction : This step involves the activities like site preparation,
construction of building, erection and installation of machinery and equipment.
Training engineers, technicians and workers. Plant commissioning.
OPERATION PHASE
It is the longest phase in terms of time span. It begins when the project
is commissioned and ends when the project is wound up. This is transition phase
in which the hardware built with active involvement of various agencies is
physically handed over for production. This phase is basically a clean up phase
for project personnel. The main concern of this phase is on smooth and
uninterrupted operation of machinery and plant, development of suitable norms of
productivity, establishment of a good quality for the product and securing the
market acceptance of the product. It aims to realize the projections made in the
project regarding sales, production, cost of profits. Project monitoring and
project evaluation are two vital activities under this phase.
Project monitoring is a step towards achieving properly identified
objectives through a carefully laid down strategy. Each activity in the project
implementation should be carefully watched so that, the progress may be measured
and any deviation from the expected progress be identified in time.
Project evaluation refers to post-investment analysis. It aims at finding
out whether the project has achieved the objectives for which it was taken up
and whether it has created the anticipated or intended impact. This helps in
developing an insight for future investment and better planning.
PROJECT PLANNING
Project Planning is foreseeing with blue print towards some predicted
goals or ends. Projects plan is a skeleton which consists of bundle of
activities with its future prospects; it is a guided activity. It is a plan for
which resources are allocated and efforts are being made to commence the project
with great amount of preplanning, project is a way of defining what we are
hoping to do about certain issue. The project alone is not responsible for what
happens during the course of a planning. Project is a final form of written
documents that guides us as to what steps need to be taken next.
NATURE OF PROJECT PLANNING
One cannot conceive a project in a linear manner. It involves few
activities, resources, constrain and interrelationships which can be visualized
easily by the human mind and planned informally. However, when a projects
crosses a certain threshold level of size and complexities, informal planning
has to be substituted by formal planning. Besides that it is an open system
oriented planned change attempt which has certain parameters and dimension. So
that, the need for formal planning is indeed much greater for project work than
for normal operations. The pre-defined and outlined in detail plan of action
helps than managers to perform their task more effectively and efficiently.
There are always competing demands on the resources available in a region
or a country because of the limited availability and ever expanding, human
needs. Planning for the optimum utilization of available resources becomes a
pre-requisite for rapid economic development of a country or a region. Project
planning makes a possible to list out the priorities and promising projects with
a view to exercising national choice among various alternatives available. It is
a tool by which a planner can identify a good project and to make sound
investment decision.
NEED FOR PROJECT PLANNING
One of the objectives of project planning is to completely define all work
requested so that it will be readily identifiable to each project participant.
Besides that there are four basic reasons for project planning.
To eliminate or reduce uncertainty.
To improve efficiency of the operation.
To obtain a better understanding of the objectives.
To provide a basis for monitoring and controlling work.
FUNCTIONS OF PROJECT PLANNING :
The following functions are to be performed carefully in the Project
Planning process.
It should provide a basis for organizing the work on the project and
allocating responsibilities to individuals.
It is a means of communication and co-ordination between all those involved
in the project.
It induces the people to look ahead.
It instills a sense of urgency and time consciousness.
It establishes the basis for monitoring and control.
In planning a project, the project manager must structure the work into
small elements that are :
Manageable, independent, integratable and also measurable in terms of
progress. Planning must be systematic and flexible enough to handle unique
activities, disciplined through reviews and controls and capable of accepting
multifunctional inputs.
AREAS OF PROJECT PLANNING
Comprehensive project planning covers the following. Planning the project
work : the activities relating to the project must be spelt out in detail. They
should be properly scheduled and sequenced.
Planning the manpower and organizations; The manpower required for the
project must be estimated and the responsibility for carrying out the project
work must be allocated.
Planning the money; the expenditure of money in a time-phased manner must
be budgeted.
Planning the information system. The information required for monitoring
the project must be defined.
PROJECT CHARACTERISTICS
Organizational structures and processes are custom made to produce a
specific product of service, organizations have to take up new tasks that they
are not equipped to handle. These tasks are new to the organization as they are
not preformed earlier or they may not be repeated in the future again. To
perform such unique tasks, organizations adopt the project approach. The project
approach is adopted when the existing systems in the parent organization are not
equipped to handle the new task. Some of the characteristics of the tasks that
qualify to be projects are :
Unique activities
Attainment of a specific goal
Sequence of activities
Specified time
Interrelated activities
Unique Activities
Every project has a set of activities that are unique, which means it is
the first time that an organization handles that type of activity. These
activities do not repeat in the project under similar circumstances i.e. there
will be something different in every activity or even if the activity is
repeated, the variables influencing it change every time. For example, consider
a ship building yard that builds ships for international clients. Even though
the organization builds many ships, each time there will be a difference in some
variable such as, the vessel’s design, time allowed for construction etc.
Attainment of a Specific Goal
Organizations take up projects to perform a particular task or attain a
specific goal. These tasks differ from project to project. The projects in an
organization could be constructing a new facility, computerizing the accounts
department or studying the demand for a new product that the organization plans
to launch in the market. All these projects have a specific goal or result to
attain and hence we can say that every project is goal – oriented.
Sequence of Activities
A project consists of various activities that are to be performed in a
particular sequence to deliver the end-product. This sequence depends on the
technical requirements and interdependency of each of the activities.
Specified Time
Every project has specified start date and completion date. This time
limit is either self-imposed or it is specified by the client. The life span of
a project can run from a few hours to a few years. A project comes a close when
it delivers the product or service as per the clients requirements or when it is
confirmed that it is no longer possible for the project to deliver the final
product or services as required by the client.
Interrelated Activities
Projects consist of various technically interrelated activities. These
activities are considered interrelated as the deliverable (output) of one
activity becomes the input for another activity of the project. Consider the
project of building a multistoried luxury hotel. This project consists of
various activities such a making a building plan, landscaping, constructing the
building, designing the interiors, furnishing the rooms etc., All these
activities are interrelated and are equally important for the completion of the
project.
PROJECT PARAMETERS
The primary aim of a project is to deliver a product or service to a
client within the specified time, budget (resources and cost) and according to
quality and performance specifications. The clients often ask for too much to be
delivered within limited resources. Therefore, it is important for the project
manager to make the clients aware of the limitations of time, budget, technical
strategy etc, that he is working under. The success of a project depends on the
project manager’s ability to strike a balance between these interrelated
variables or constraints. Some common constraints that influence a project are :

Scope
Quality
Cost
Time
Resources
Scope
Scope is a brief and accurate description of the end – products or
deliverables to be expected from the project that meet the requirements. Scope
describes all the activities that are to be performed, resources that will be
consumed and the end-products from the successful completion of the project,
including quality standards. The scope also includes the target outcomes,
prospective customers, outputs, work, financial and human resources required to
complete the project. The various issues related to management of project scope
are discussed in Chapter 10.
Quality
Every project has to satisfy the quality requirement at two levels –
product quality and process quality. The first quality requirement relates to
products resulting from the project and the second relates to the management
processes that have to be in place to implement the project. A comprehensive
quality management system ensures effective utilization of scarce resources to
achieve the project objective of delivering products or services to the clients
satisfaction. The various tools and techniques that are needed to ensure quality
are discussed in Chapter 19 (Project Quality Management).
Time
Time is one of the important resources available to a project manager. At
the same time, it is one of the major constraints within which a project has to
be completed. Generally, the client of the sponsor of the project specifies the
time limit for the completion of the project. The time required to complete a
project is inversely related to the cost of the project. Therefore, the cost of
a project increases as the time available for its completion decreases. Since
time cannot be stored as inventory, it is the duty of the project manager to
manage time by carefully scheduling the various activities in time.
Cost
Cost plays a major role in the various stages of a project life cycle.
Project cost include the monetary resources required to complete the activities
mentioned in the scope of the project. Project costs are cost associated with
all the activities in the planning and implementation phases. The client or the
sponsor of the project activities, within which the project manager has to
deliver the product.
Resources
Resources include the people, finances and the physical and information
resources required to perform the project activities.
PROJECT MANAGEMENT
Project management is a system of procedures, practices, technologies and
know-how that enables the planning, organizing staffing, directing, and
controlling necessary to successfully manage a project.
According to PMI, “Project Management is the application of knowledge,
skills, tools and techniques to project activities in order to meet or exceed
stakeholder needs and expectations”
Project management is a carefully planned and organized effort to
accomplish a specific (and usually) one-time effort, for example, constructing a
residential complex or implementing, a new computerized banking system. Project
management includes developing a project plan that includes defining project
goals, specifying how the goals will be accomplished, what resources are needed,
and relating budgets and time for completion. It also includes implementing the
project plan, along with careful controls to ensure that the project is being
managed according to the plan, Project management usually follows five major
phases including feasibility study, project planning, implementation, evaluation
and closing. These aspects of project management will be discussed later in this
book.
PROJECT MANAGEMENT – RELATIONSHIP WITH OTHER MANAGEMENT DISCIPLINES
Although project management has derived most of its knowledge from other
management disciplines, it has evolved as a specialized science over a period of
time. It has its own management techniques such as critical path analysis and
work breakdown structures (discussed later) that are unique to project
management. Like general management, project management also involves all
aspects of planning, organizing, implementing, and controlling.
In many strategic projects, the function of project management will
involve disciplines like :
Finance : Preparing the financial statement while sending the project
proposal and managing the costs of the project
Personnel : Identifying the skills required to carry out the project,
selecting the project team and maintaining a good work environment.
Operations : Managing the activities / operations that are repetitive in
nature
Purchase and logistics : Identifying resources (raw materials, equipments
and services) required for the project. Preparing a list of eligible suppliers
and negotiating with them for procuring the right materials. Managing the
logistics for a smooth implementation of the project.
R & D : New product development, and quality assurance
Marketing : Marketing the project idea to internal and external sponsors.
RELATIONSHIP BETWEEN PROJECT MANAGEMENT AND LINE MANAGEMENT
According to the definition of project management, a project manager has
to control variables such as time, cost and other resources allocated for the
project. But in practice, he only has indirect managers. Therefore the project
manager has to maintain good relations with line managers to ensure a smooth
flow of resources. Thus, a project manager should exercise judicious control
over the resources (money, manpower, machinery, facilities, materials,
technology and information) allocated to the project from various functional
departments.
The success of a project depends on the various aspects of project and
line managers’ relations. The characteristics of a good relationship are;
Amicable working relations between the project manager and the departmental
heads who allocate resources to the project.
Functional project members ability to report to the functional manager of the
department from where he come and the project manager for whom he currently
 works.
Employees of various functional departments who are selected tow work on a
project usually face difficulty in reporting to multiple bosses. The issue of
who should have control over the functional employees becomes a source of
conflict between the line and the project managers. The relations can be
strained further if any one of them claims sole credit for the success of the
project or rewards for the profits generated by the project. These conflicts can
be resolved when the managers understand their distinct roles in achieving the
overall objectives of the organization.
PROJECT MANAGEMENT ENVIRONMENT – AN OVERVIEW
Many project managers wonder why they should be concerned about the
project environment when the objective of project management is to get the
project completed within scope, cost and schedule. They fail to understand that
a project operates in an environment broader than the project, and managing the
day – to – day activities efficiently will not alone guarantee the success of
the project. Today’s project managers need to be aware of the cultural,
organizational and socioeconomic influences on projects, Understanding these
influences involves identifying the project stakeholders and examining their
ability to influence the project’s success. This chapter discusses various
aspects of project management like the role of project stakeholders,
organizational and socioeconomic influences and project time environment.
PROJECT STAKEHOLDERS
According to the Project Management Institute’s (PMI) Guide to the Project
Management Body of Knowledge, project stakeholders are ‘individuals and
organizations who are actively involved in the project, or whose interest may be
positively or negatively affected as a result of project execution or successful
project completion’
Types of Stakeholders
The major stakeholders of any project include
Project manager
Customer
Project team members
Sponsor
Parent organization.

ORGANIZATIONAL INFLUENCES
Projects are usually taken up by organizations larger than the projects
themselves. These organizations can be business corporations, government
organization, professional associations, research and development centers etc.,
Organizations that initiate a project will have an influence on the
implementation of the project. These organizational influences even act on
projects that have been initiated by joint ventures or partnerships. Some of the
major aspects of large organizations that influences projects are :
Organizational systems
Organizational cultures and style
Organization structure
Organizational Systems
Organizations, which primarily carry out projects, are known as project –
based organizations. They earn revenues mainly by undertaking projects. Some
examples of project-based firms are : consultancy firms, architecture firms,
software development firms, infrastructure contractors etc.
Some organizations adopt a management by project approach to manage their
ongoing operations. These organizations treat various aspects of ongoing
operations as projects and apply project management principles to them.
Project-based organizations have well designed management systems (such as
financial systems, control systems etc). to help them manage projects
effectively. These organizations have a number of specifically designed systems
in place to monitor the progress of the activities of a project. For example,
finance systems are designed to take care of accounting, tracking and reporting
activities of multiple projects.
Non-project-based organizations, such as manufacturing firms, hotels etc.,
may not have any management systems for addressing project needs. Managing
projects in these organizations is a difficult activity. But some
non-project-based organizations will have separate divisions or sub-divisions
that work as project-based organizations with project oriented management
system. So, the project management team should be capable of understanding the
influence of various management systems on the project.
Organizational Culture and Style.
Each organization has its own culture, i.e., its shared values, norms and
beliefs. An organization’s policies, procedures and attitude towards authority
also reflect its culture. Organizational culture and management styles have a
direct impact on the functioning of the project team. As a result organizations
that have a aggressive, risk-taking culture will not employ conservative,
cautions project managers.
Organizational Structure
Sometimes, the organization structure obstructs the free flow of resources
from the parent organization to the project. The organizational structure can
be functional, matrix or project-based.
A functional organization has a hierarchical structure. In such a
structure, superior – subordinate relationships are clear, i.e., the line of
control is clearly defined. The employees are grouped into departments according
to their areas of specialization, e.g., mechanical, engineering, electrical
engineering, production, marketing, accounting etc. Functional organizations
also work on projects, but their project activities are limited to a single
function. e.g., engineering, manufacturing, marketing etc. For example, when a
functional organization takes up the project of new product development, the
engineering department will handle the design development phase of the project.
The activities carried out by this department will be strictly limited to the
engineering function. If any question arises concerning the manufacture of the
product, the question is passed on to the manufacturing department for
clarification, through format communication channels.
In a project – based organization, the project manager has the authority
to assign priorities and to direct the work of individuals assigned to the
project. Most of the organization’s resources are allotted to various projects.
These organizations also have functional departments, but the groups working in
these departments report directly to the project manager and help in the
execution of various projects. A project organization structure is shown in
Figure 2.1
A matrix organization structure combines some of the characteristics of
functional and project-based organizational structures. In matrix organizations,
project managers and functional managers are jointly responsible for assigning
priorities and for directing the work of individuals assigned to projects. In
this organizational setup project managers have equal authority to functional
managers and the staff members report to functional managers as well as project
managers. A matrix organization structure is shown in Figure 2.2. Every
organization has one of the above discussed organizational structures, and they
have an impact on the projects initiated by them. For example, when a project
team is formed by a functional organization, those teams have to form their own
operating procedures and reporting structures that are similar to that of
project – based organizations. This organizational structure also has an impact
on the functioning of a project manager. (See Exhibit 2.1)
SOCIO-ECONOMIC INFLUENCES
A wide range of socioeconomic issues influence projects. The project team
should be aware of these issues as even a minor change in the socioeconomic
environment can sometimes affect the success of a project. Some of the
socioeconomic factors that influence projects are :
Standards and Regulations
Internationalization
Culture
Standards and Regulations
Standards are measures for judging the quality of products, Generally,
standards are documented and approved by a recognized agency / body. These
standards specify the rules and guidelines that organization must observe when
producing a product of a service. Even when these standards are not mandatory,
following them will enhance the marketability of the products produced by the
project organization.
Regulations are mandatory guidelines that lay down the necessary
characteristics of products or services. Building codes established by the Roads

and Buildings (R&B) department are an example of regulations. Usually, these

regulations are drafted by various governmental regulatory agencies and are
enforced by regulatory personnel. The project team should be cautious enough to
ensure that the project meets the standards and regulations. The early detection
of deviations from standards and regulations can help reduce project costs and
duration.
Internationalization
Many organizations have subsidiaries in different countries. The projects
undertaken by such organizations generally cross many national boundaries.
Project managers must therefore be familiar with the political and economic
environment of the countries in which the projects are being executed. They must
also design a communication plan that enables them to manage and coordinate the
project activities that are being carried out in different countries.
Culture
The culture of an organization and the external environment of a project
have a significant impact on the success of the project. The culture the
organizational culture, work environment, and the culture of various
stakeholders of the project. The project manager should have an in-depth
understanding of the organizational culture as it has a direct influence on the
functioning of the project. The organizational environment and culture depend
on.
The philosophy and managerial style of the top management.
The organizational structure of the project (functional, project – based or
matrix form)
The character and maturity level of project team members i.e. achievement
level, motivation level etc.
The size of the project.
The culture of the project team members (their values, beliefs and
convictions) influences their attitudes towards ethics, achievement, training
and supervision and their interpersonal, problem – solving and conflict
resolution skills. It also determines their level of motivation. A good
understanding of different cultural values, languages, and special business
styles and techniques would be an asset for a project manager, especially when
handling international projects.
ENVIRONEMENTAL AND LEGAL INFLUENCE
 Environmental and legal concerns have a major impact on the successful
completion of a project. Therefore, the impact of the environment on the project
should be assessed before and after a project has been undertaken. In addition,
analyzing the impact of a future project on the environment will help the
project manager define rational goals for the project and the organization.
The project manager should acknowledge these regulatory processes as a
part of good planning, instead of regarding them as barriers to the achievement
of project goals. The project manager should obtain the necessary clearances
from environmental protection agencies before starting the project. If possible,
he should integrate these regulations (legal, environmental, etc.) into the
overall plan of the projects.
All the projects should comply with all aspects of the law, Organizations
usually take the help of legal advisors to ensure that the activities of the
project manager and his team are in compliance with the law. Legal advisors must
also ensure that the project has applied for and received all the required
permits and licenses.
Technical Analysis
Analysis of technical and engineering aspects is done continually when a
project is being examined and formulated. Other types of analyses are dependent
and closely inter-twined with technical analysis. Technical analysis is
concerned primarily with :
Material inputs and utilities
Manufacturing process / technology
Product mix
Plant capacity
Location and site
Machineries and equipments
Structures and civil works
Project charts and layouts
Work schedule
This chapter discusses these aspects of a project and emphasizes the need
to examine alternatives.
MATERIAL INPUTS AND UTILITIES
An important aspect of technical analysis is concerned with defining the
materials and utilities required, specifying their properties in some detail,
and setting up their supply programme. There is an intimate relationship between
the study of materials and utilities and other aspects of project formulation,
particularly those concerned with location, technology, and equipments.
Material inputs and utilities may be classified into four broad categories

; (i) raw materials. (ii) processed industrial materials and components, (iii)
auxiliary materials and factory supplies, and (iv) utilities.
Raw Materials
Raw materials (processed and / or semi – processed) may be classified into
four types : (i) agricultural products, (ii) mineral products, (iii) livestock
and forest products, and (iv) marine products.
Ease of absorption. The ease with which a particular technology can be
absorbed can influence the choice of technology. Sometimes a high-level
technology may be beyond the absorptive capacity of a developing country which
may lack trained personnel to handle that technology.
Agriculture Products In studying agricultural products the quality must first be
examined. Then, an assessment of quantities available, currently and
potentially, is required. The questions that may be raised in this context are:
What is the present marketable surplus? What is the present area under
cultivation? What is the yield per acre? What is the likely increase in the area
of cultivation? What is the likely increase in yield per acre?
Mineral Products In assessing mineral raw materials, information is required on
the quantum of exploitable deposits and the properties of raw materials. The
study should provide details of the location, size, and depth of deposits and
the viability of opencast or under ground mining. In addition, information
should be generated on the composition of the ore, level of impurities,need for
beneficiation, and physical, chemical and other properties.
Livestock and Forest Products Secondary sources of data on livestock and forest
products often do not provide a dependable basis for estimation. Hence, in
general, a specific survey may be required to obtain more reliable daa on the
quantum of livestock produce and forest products.
Marine Products Assessing the potential availability of marine products and the
cost of collection is somewhat difficult. Preliminary marine operations,
essential for this purpose, have to be provided for in the feasibility study.
Processes Industrial Materials and Components
Processed industrial materials and components (base metals, semi-processed
materials, manufactured parts, components, and sub-assemblies) represent
important inputs for a number of industries. In studying them the following
questions need to be answered: In the case of industrial materials, what are
their properties? What is the total requirement of the project? What quantity
would be available from domestic sources? What quantity can be procured from
foreign sources? How dependable are the supplies? What has been the past trend
in prices? What is the likely future behavior of prices?
Auxiliary Materials and Factory Supplies
In addition to the basic raw materials and processed industrial materials
and components, a manufacturing project requires various auxiliary materials and
factory supplies like chemicals, additives, packaging materials, paints,
varnishes, oils, grease, cleaning materials, etc. The requirements of such
auxiliary materials and supplies should be taken into account in the feasibility
study.
Utilities
A broad assessment of utilities (power, water, steam, fuel, etc.)_ may be
made at the time of input study through a detailed assessment can be made only
after formulating the project with respect to location, technology, and plant
capacity. Since the successful operation of a project critically depends on
adequate availability of utilities the following questions should be raised
while conducting the input study. What quantities are required? What are the
sources of supply? What would be the potential availability? What are the likely
short ages / bottlenecks? What measures may by taken to augment supplies?
Manufacturing Process / Technology
For manufacturing a product / service often two or more alternative
technologies are available. For example:
Steel can be made either by the Bessemer process or the open hearth process.

Cement can be made either by the dry process or the wet process.
Soda can be made by the electrolysis method or the medical method.
Paper, using bagasse as the raw material, can be manufactured by the kraft
process or the soda process or the simon cusi process.
Vinyl chloride can be manufactured by using one of the following reactions;
acetylene on hydrochloric acid or ethylene on chlorine.
Choice of Technology
The choice of technology is influenced by a variety of considerations:
Plant capacity
Principal inputs
 Investment outlay and production cost
Use by other units
Product mix
Latest developments
Ease of absorption
Plant Capacity Often, there is a close relationship between plant capacity and
production technology. To meet a given capacity requirement perhaps only a
certain production technology may be viable.
Principal Inputs The choice of technology depends on the principal inputs
available for the project. In some cases, the raw materials available influence
the technology chosen. For example, the quality of limentones determines whether
the wet or dry process should be used for a cement plant. Here it may be
emphasized that a technology based on indigenous inputs may be preferable to one
based on imported inputs because of uncertainties characterizing imports,
particularly in a country like India.
Investment Outlay and Production Cost The effect of alternative technologies on
investment outlay and production cost over a period of time should be carefully
assessed.
Use by Other Units The technology adopted must be proven by successful use by
other units, preferably in India.
Product Mix The technology chosen must be judged in terms of the total product =
mix generated by it, including saleable by - products.
Latest Developments The technology adopted must be based on latest developments
in order to ensure that the likelihood of technological obsolescence in the near
future, at least, is minimized.
Acquiring Technology.
The acquisition of technology from some other enterprise may be by way of
(i) technology licensing, (ii) outright purchase, or (iii) joint venture
arrangement.
Technology Licensing A popular method of acquiring technology, the
technology license gives the licensee the right to use patented technology and
get related know-how on a mutually agreed basis. Often suppliers of technology
tend to provide a technology package which may consist of some elements which
are not essential. Hence the technology package should be disaggregated into its
component parts like the technology proper, engineering services, supply of
intermediate products, supply of equipment by the licensor, use of a trade name,
etc. Efforts should be made to acquire only the essential components of the
technology package offered by the licensor.
The contract for technology licensing should be carefully scrutinized with
respect to; (i) definition of technology to be acquired, (ii) cost of
technology licensing, (iii) guarantees provided by the licensor, (iv) duration
of technology licensing, and (v) purchase of intermediate products, components,
and other inputs.
Purchase of Technology. This mode of acquiring technology may be used in
certain kinds of industries. It is appropriate when (i) there is no possibility
of significant improvement in technology in the foreseeable future, and (ii)
there is hardly any need for technological support from the seller of
technology.
Joint Venture Arrangement. The supplier of technology may participate
technically as well as financially in the project. Financial participation is
typically in the form of equity holding. It is argued that financial
participation may strengthen the motivation of technology supplier to transfer
improvements promptly.
Appropriateness of Technology
Appropriate technology refers to those methods of production which are
suitable to local economic, social, and cultural conditions. In recent years the
debate about appropriate technology has been sparked off mainly by Schumacher
and others. The advocates of appropriate technology urge that the technology
should be evaluated in terms of the following questions :
Whether the technology utilizes local raw materials?
Whether the technology utilizes local man power?
Whether the goods and services produced cater to the basis needs?
Whether the technology protects ecological balance?
Whether the technology is harmonious with social and cultural conditions?
PRODUCT MIX
The choice of product mix is guided by market requirement. In the
production of most of the items, variations in size and quality are aimed at
satisfying a broad range of customers. For example, a garment manufacturer may
have a wide range in terms of size and quality to cater to different customers.
It may be noted that variation in quality can enable a company to expand its
market and enjoy higher profitability. For example, a toilet soap manufacturing
unit may by variation in raw material, packaging, and sales promotion offer a
high profit margin soap to consumers in upper – income brackets.
While planning the production facilities of the firm, some flexibility
with respect to the product mix must be sought. Such flexibility enables the
firm to alter its product mix in response to changing market conditions and
enhances the power of the firm to survive and grow under different situations.
The degree of flexibility chosen may be based on a careful analysis of the
additional investment requirement for different degrees of flexibility.
PLANT CAPACITY
Plant capacity (also referred to as production capacity) refers to the
volume or number of units that can be manufactured during a given period.
Several factors have a bearing on the capacity decision.
Technological requirement
Input constraints
Investment cost
Market conditions
Resources of the firm
Governmental policy

Technological Requirement
For many industrial projects, particularly in process type industries,
there is a certain minimum economic size determined by the technological factor,
For example, a cement plant should have a capacity of at least 300 tonnes per
day in order to use the rotary kiln method, otherwise, it has to employ the
vertical shaft method which is suitable for lower capacity.
Input Constraints
In a developing country like India, there may be constraints on the
availability of certain inputs. Power supply may be limited, basic raw materials
may be scarce; foreign exchange available for imports may be inadequate.
Constraints of these kinds should be borne in mind while choosing the plant
capacity.
Investment Cost
When serious input constraints do not obtain, the relationship between
capacity and investment cost is an important consideration. Typically, the
investment cost per unit of capacity decreases as the plant capacity increases.
This relationship may be expressed as follows :
C1 = C2 ( Q1
Q2 )
 Where C1 = derived cost for Q1 units of capacity
C2 = known cost for Q2 units of capacity
a = a factor reflecting capacity – cost relationship.
This is usually between 0.2 and 0.9.
Example Suppose the known investment cost for 5,000 units of capacity for
the manufacture of a certain item is Rs.10,00,000. What will be the investment
cost for 10,000 units of capacity if the capacity – cost factor is 0.6
The derived investment cost for 10,000 units of capacity may be obtained as
follows :
C1 = 10,00,000 x (10,0000 / 5,000)0.6 = Rs.15,16,000
Market Conditions
The anticipated market for the product / service has an important bearing
on plant capacity. If the market for the product is likely to be very strong, a
plant of higher capacity is preferable. If the market is likely to be uncertain,
it might be advantageous to start with a smaller capacity. If the market,
starting from a small base, is expected to grow rapidly, the initial capacity
may be higher than the initial level of demand – further additions to capacity
may be effected with the growth of market.
Resources of the Firm
The resources, both managerial and financial, available to a firm define a

limit on its capacity decision, Obviously, a firm cannot choose a scale of

operations beyond its financial resources and managerial capability.
Government Policy
The capacity level may be influenced by the policy of the government.
Traditionally, the policy of the government was to distribute the additional
capacity to be created in a certain industry among several firms, regardless of
economies of scale. This policy has been substantially modified in recent years
and the concept of “minimum economic capacity” has been adopted in several
industries.
LOCATION AND SITE
The choice of location and site following an assessment of demand, size,
and input requirement. Though often used synonymously, the terms “Location” and
“size” should be distinguished. Location refers to a fairly broad area like a
city, an industrial zone, or a coastal area; site refers to a specific piece of
land where the project would be set up.
The choice of location is influenced by a variety of considerations;
proximity to raw materials and markets, availability of infrastructure,
government policies, and other factors.
Proximity of Raw Materials Markets
An important consideration for location is the proximity to sources of raw
materials and nearness to the market for final products. In terms of a basic
locational model, the optimal location is one where the total cost (raw material
transportation cost plus production cost plus distribution cost for the final
product) is minimized. This generally implies that : (1) a resource – based
project like a cement plant or a steel mill should be located close to the
source of basic material (for example, limestone in the case of a cement plant
and iron – ore in the case of a steel plant); (ii) a project based on imported
material may be located near a port; and (iii) a project manufacturing a
perishable product should be close to the centre of consumption.
However, for many industrial products proximity to the source of raw
material or the centre of consumption may not be very important. Petro –
chemical units or refineries, for example. may be located close to the source of
raw material, or close to the centre of consumption, or at some intermediate
point.
Availability of Infrastructure
 Availability of power, transportation, water, and communications should be
carefully assessed before a location decision is made.
Adequate supply of power is a very important condition for location –
insufficient power can be a major constraint, particularly in the case of an
electricity – intensive project like an aluminum plant. In evaluating power
supply the following should be looked into: the quantum of power availability,
reliability, and cost of transportation for various alternative locations should
be assessed.
Given the plant capacity and the type of technology, the water requirement
for the project can be assessed. Once the required quantity is estimated, the
amount to be drawn from the public utility system and the amount to be provided
by the project from surface or sub-surface sources may be determined. For doing
this the following factors may be examined : relative costs, relative
dependabilities, and relative qualities.
In addition to power, transport, and water, the project should have
adequate communication facilities like telephone and telex.
Government Policies
Government policies have a bearing on location. In the case of public
sector projects, location is directly decided by the government. It may be based

on a wider policy for regional dispersion of industries.

In the case of private sector projects, location is influenced by certain
governmental restrictions and inducements. The government may prohibit the
setting up of industrial projects in certain areas which suffer from urban
congestion. More positively, the government offers inducements for establishing
industries in backward areas. These inducements consist of subsidies,
confessional finance, tax relief, and other benefits.

Other Factors
Several other factors have to be assessed before reaching a location
decision, ease in coping with environmental pollution, labour situation,
climatic conditions, and general living conditions.
A project may cause environmental pollution in various ways: it may throw
gaseous emissions; it may produce liquid and solid discharges; it may cause
noise, heat, and vibrations. The location study should analyze the costs of
mitigating environmental pollution to tolerable levels at alternative locations.
The labour situation at alternative locations may be assessed in terms of
: (i) the availability of labour, skilled, semi-skilled, and unskilled; (ii) the
past trends in labour rates, the prevailing labour rates, and the projected
labour rates; and (iii) the state of industrial relations judged in terms of the
frequency and severity of strikes and lockouts and the attitudes of labour and
management.
The climatic conditions (like temperature, humidity, wind, sunshine,
rainfall, snowfall, dust, flooding, and earthquakes) have an important influence
on location. They have a bearing on cost as they determine the extent of
air-conditioning, de-humidification, refrigeration, special drainage, etc.,
required for the project.
General living conditions, judged in terms of cost of living, housing
situation, and facilities for education, recreation, transport, and medical
care, need to be assessed at alternative locations.
Site Selection
Once the broad location is chosen, attention needs to be focused on the
selection of a specific site. Two to three alternative sites must be considered
and evaluated with respect to cost of land and cost of site preparation and
development.
The cost of land tends to differ from one site to another in the same
broad location. Sites close to a city cost more whereas sites away from the city
cost less. Sites in an industrial area developed by a governmental agency may be
available at a concessional rate.
The cost of site preparation and development depends on the physical
features of the site, the need to demolish and relocate existing structures, and
the work involved in obtaining utility connections to the site. The last
element, viz., the work involved in obtaining utility connections and the cost
associated with it should be carefully looked into. It may be noted in this
context that the cost of the following may vary significantly from site to site:
power transmission lines from the main grid, railway siding from the nearest
railroad, feeder road connecting with the main road, transport of water, and
disposal of effluents.
MACHINERIES AND EQUIPEMENTS
The requirement of machineries and equipments is dependent on production
technology and plant capacity. It is also influenced by the type of project. For
a process-oriented industry, like a petrochemical unit, machineries and
equipments required should be such that the various stages are matched well. The
choice of machineries and equipments for a manufacturing industry is somewhat
wider as various machines can perform the same function with varying degrees of
refrigerators could take various forms. To determine the kinds of machinery and
equipment required for a manufacturing industry, the following procedure may be
followed; (i) Estimate the likely levels of production over time. (ii) Define
the various machining and other operations. (iii) Calculate the machine hours
required for each type of operation. (iv) Select machineries and equipments
required for each function.
The equipments required for the project may be classified into the
following types: (i) plant (process) equipments, (ii) mechanical equipments,
(iii) electrical equipments, (iv) instruments, (v) controls, (vi) internal
transportation system, and (vii) others.
In addition to the machineries and equipments, a list should be prepared
of spare parts and tools required. This may be divided into : (i) spare parts
and tools to be purchased with the original equipment, and (ii) spare parts and
tools required for operational wear and tear.
Constraints in Selecting Machineries and Equipments
In selecting the machineries and equipments certain constraints should be
borne in mind: (i) there may be a limited availability of power to set up to an
electricity – intensive plant like, for example, a large electric furnace; (ii)
there may be difficulty in transporting a heavy equipments to a remote location,
(iii) workers may not be able to operate, at least in the initial periods,
certain sophisticated equipments such as numerically controlled machines, (iv)
the import policy of the government may preclude the import of certain
machineries and equipments.
Procurement of Plant and Machinery
For procuring plant and machinery, orders for different items of plant and
machinery may be placed with different suppliers or a turnkey contract may be
given for the entire plant and machinery to a single supplier. The factors to be
considered in selecting the supplier / s of plant and machinery are the desired
quality of machinery, the level of technological sophistication, the relative
reputation of various suppliers, the expected delivery schedules, the preferred
payment terms, and the required performance guarantees. If in house technical
expertise is inadequate, external consultants / may be employed to select plant
and machinery and supervise the installation of the same.
STRUCTURES AND CIVIL WORKS
Structures and civil works may be divided into three categories : (i) site
preparation and development, (ii) buildings and structures, and (iii) outdoor
works :
Site Preparation and Development
This covers the following : (i) grading and leveling of the site, (ii)
demolition and removal of existing structures, (iii) relocation of existing
pipelines, cables, roads, powerlines, etc., (iv) reclamation of swamps and
draining and removal of standing water, (v) connections for the following
utilities from the site to the public network : electric power (high tension and
low tension), water for drinking and other purpose, communications (telephone,
telex, etc.,) roads, railway sidings, and (vi) other site preparation and
development work.
Buildings and Structures
Buildings and structures may be divided into : (i) factory or process
buildings; (ii) ancillary building required for stores, warehouses,
laboratories, utility supply centre, maintenance services, and others; (iii)
administrative buildings; (iv) staff welfare buildings, cafeteria, and medical
service buildings, and (v) residential buildings,
Outdoor Works
Outdoor works cover (i) supply and distribution of utilities (water,
electric power, communication, steam, and gas); (ii) handling and treatment of
emission, wastages, and effluents; (iii) transportation and traffic arrangements
(roads, railway tracks, paths, parking areas, sheds, garages, traffic signals,
etc,); (iv) outdoor lighting; (v) landscaping; and (vi) enclosure and
supervision (boundary wall, fencing barriers, gates, doors, security posts,
etc).
PROJECT CHARTS AND LAYOUTS
Once data is available on the principal dimensions of the project –
market size, plant capacity, production technology, machineries and equipments,
buildings and civil works, conditions obtaining at plant site, and supply of
inputs to the project – projects charts and layouts may be prepared. These
define the scope of the project and provide the basis for detailed project
engineering and estimation of investment and production costs.
The important charts and layouts drawings are briefly described below :
General Functional Layout. This shows the general relationship between
equipments, buildings, and civil works. In preparing this layout, the primary
consideration is to facilitate smooth and economical movement of raw
materials, work-in-process, and finished goods. This means that :
The layout should seek to allow traffic flow in one direction to the extent
possible, with a minimum of crossing.
Godowns, workshops, and other services must be functionally situated with
respect to the mail factory buildings.
Material Flow Diagram This shows the flow of materials, utilities,
intermediate products, final products, by – products, and emissions. Along
with the material flow diagram, a quantity flow diagram showing the quantities
of flow may be prepared.
Production Line Diagrams These show how the production would progress along
with the key information for main equipments.
Transport Layout This shows the distances and means of transport outside the
 production line.
Utility Consumption Layout this shows the principal consumption points of
utilities (power, water, gas, compressed air, etc.) and their required
quantities and qualities. These layouts provide the basis for developing
specifications for utility supply installations.
Communication Layout This shows how the various parts of the project will be
connected with telephone, telex, intercom, etc.
Organizational Layout This shows the organizational set-up of the project
along with information on personnel required for various departments and their
inter-relationship
Plant Layout The plant layout is concerned with the physical layout of the
factory. In certain industries, particularly process industries, the plant
layout is dictated by the production process adopted. In manufacturing
industries, however, there is much greater flexibility in defining the plant
layout. The important considerations in preparing plant layout are :
Consistency with production technology
Smooth flow of goods from one stage to another
Proper utilization of space
Scope of expansion
Minimisation of production cost
Safety of personnel
WORK SCHEDULE
The work schedule, as its name suggest, reflects the plan of work
concerning installation as well as initial operation. The purpose of the work
schedule is :
To anticipate problems likely to arise during the installation phase and
suggest possible means for coping with them.
To establish the phasing of investments taking into account the availability
of finances.
To develop a plan of operations covering the initial period (the running in
period).
Often, it is found that the required inputs like raw material and power
are not available in adequate quantity when the plant is ready for
commissioning, or the plant is not ready when the raw material arrives.
In the first case the plant remains idle and in the second the material
may tend to deteriorate and / or pose problems of storge. To avoid losses
arising from idle capacity and deterioration of stocks of material, work
schedule should be drawn up with care and realism so that the commissioning of
plant is reasonably synchronized with the availability of the basic inputs.
NEED FOR CONSIDERING ALTERNATIVES
The need for considering alternatives has been touched upon earlier.
This point, however, needs to be emphasized. There are alternative ways of
transforming an idea into a concrete project. These alternatives may differ in
one or more of the following aspects :
Nature of project
Production process
Product quality
Scale of operation and time phasing
Location
Nature of Project The project may envisage the manufacture of all the
parts and components in a vertically integrated unit or it may consist of an
assembly type unit which obtains the bulk of the parts and components from
outside suppliers. The project may consist of processing up to the finished
stage or may stop at a semi-finished stage. These alternatives are available
with respect to the nature of the project.
Production Process There may be several alternatives with respect to the
 production process. The availability and charachteristics of raw materials,
the cost structure, and the nature of markets served are factors that have to
be borne in mind while deciding about the process.
Product Quality Barring a few products like clinical thermometers where
a certain standard has to be maintained, the choice with respect to quality is
fairly wide. This is particularly true in the case of consumer products like
textiles, footwear, etc. The quality and product range decisions would depend
on the characteristics of the market, the elasticity of demand, consumer
preferences, and the nature of competition.
Scale of Operation and Time Phasing In many cases several scales of
operation are feasible technically and financially. The choice of a particular
scale would depend on the financial resources available. The nature of
competition, the nature of demand, and the economies of scale.
Further, a given capacity may be installed in one stage or in phases.
The capital cost of capacity installation is usually lower when it is done in
one stage. The cost of idle capacity, however, is higher when it is built in a
single stage. The trade-off between these costs would determine the optimal
pattern of time phasing.
Location Location and size are closely interrelated. Perhaps the same
demand could be satisfied by : (i) a single plant for the entire market; or
(ii) one large plant for the bulk of the market with a few smaller plants for
the remaining market; or (iii) several plants of similar size spread over the
market areas. The choice would depend mainly on the trade – off between
economies of scale in manufacturing and economies of distribution.
Key Project inter-linkages
While evaluating various alternatives, the inter – linkages among key
facets of the project like product (or service), demand, plant capacity,
production technology, location, investment outlay, financial resources,
production costs, selling price, and profitability must be borne in mind.
Exhibit 5.1 shows these inter-linkages pictorially.
MARKET AND DEMAND ANALYSIS
SITUATIONAL ANALYSIS AND SPECIFICATION OF OBJECTIVES
In order to get a “feel” for the relationship between the product and
its market, the project analyst may informally talk to customers, competitors,
middlemen, and others in the industry. Wherever possible, he may look at the
experience of the company to learn about the preferences and purchasing power
of customers, actions and strategies of competitors, and practices of the
middlemen.
If such a situational analysis generates enough data to measure the
market and get a reliable handle over projected demand and revenues, a formal
study need not be carried out, particularly when cost and time considerations
so suggest. In most cases, of course, a formal study of market and demand is
warranted. To carry out such a study, it is necessary to spell out its
objectives clearly and comprehensively. Often this means that the intuitive
and informal goals that guide situational analysis need to be expanded and
articulated with greater clarity. A helpful approach to spell out objectives
is to structure them in the form of question. Of course, in doing so, always
bear in mind how the information generated will be relevant in forecasting the
overall market demand and assessing the share of the market the project will
capture. This will ensure that questions not relevant to market and demand
analysis will not be asked unnecessarily.
To illustrate, suppose that a small but technologically competent firm
has developed an improved air cooler based on a new principle that appears to
 offer several advantages over the conventional air cooler. The chief executive
of the firm needs information about where and how to market the new air
cooler. The objectives of market and demand analysis in this case may be to
answer the following questions:
Who are the buyers of air coolers?
What is the total current demand for air coolers?
How is the demand distributed temporally (pattern of sales over the year)
and geographically?
What is the break-up of demand for air coolers of different sizes?
What price will the customers be willing to pay for the improved air cooler?

How can potential customers be convinced about the superiority of the new
cooler?
What price and warranty will ensure its acceptance?
What channels of distribution are most suited for the air cooler? What trade
margins will induce distributors to carry it?
What are the prospects of immediate sales?
COLLECTION OF SECONDARY INFORMATION
In order to answer the question listed while delineating the objectives of

the market study, information may be obtained from secondary and / or primary
sources. Secondary information is information that has been gathered in some
other context and is already available. Primary information, on the other hand,
represents information that is collected for the first time to meet the specific
purpose on hand. Secondary information provides the base and the starting point
for market and demand analysis. It indicates what is known and often provides
leads and cues for gathering primary information required for further analysis.
This section looks at the secondary information and the following at the primary
information.
General Sources of Secondary Information
The important sources of secondary information useful for market and
demand analysis in India are mentioned below :
Census of India A decennial publication of the Government of India, it
provides, inter alia, information on population, demographic characteristics,
household size and composition, and maps.
National Sample Survey Reports Issued from time to time by the Cabinet
Secretariat, Government of India, these reports present information on various
economic and social aspects like patterns of consumption, distribution of
households by the size of consumer expenditure, distribution of industries,
and charachteristics of the economically active population. The information
presented in these reports is obtained from a nationally representative sample
by the interview method.
Plan Reports Issued by the Planning Commission usually at the beginning,
middle, and end of the five-year plans, these reports and documents provide a
wealth of information on plan proposals, physical and financial targets,
actual outlays, accomplishment, etc.
Statistical Abstract of the Indian Union An annual publication of the Central
Statistical Organisation, it provides, inter alia, demographic information,
estimates of national income, and agricultural and industrial statistics.
India Year Book An annual publication of the Ministry of Information and
Broadcasting, it provides a wide range of information on economic and other
aspects.
Statistical Year Book An annual publication of the United Nations, it provides
 world statistics relating various aspects like population, demography, gross
domestic publication, industrial production, international trade, etc.,
Economic Survey An annual publication of the Ministry of Finance, it provides
the latest data on industrial production, wholesale prices, consumer prices,
exports, agricultural production, national income, etc.,
Guidelines to Industries This is an annual publication of the Ministry of
Industrial Development.
Annual Survey of Industries An annual publication of the Central Statistical
Organisation, it contains information on various aspects of industry; number
of units and state – wise distribution, average number of working days,
employment, materials consumption, quantity of products, etc.,
Annual Reports of the Development Wing, Ministry of Commerce and Industry An
annual publication, it gives a detailed review of industries under the purview
of the wing. It also provides information about new items manufactured for the
first time in India and the list of protected industries.
Annual Bulleting of Statistics of Exports and Imports An annual publication of
the Ministry of Commerce, it provides data on imports and exports for a very
large number of items and as per international classification.
Techno-Economic Surveys The National Council of Applied Economic Research has
conducted and published techno-economic surveys for various states.
Industry Potential Surveys The Industrial Development Bank of India in
consortium with other financial institutions has conducted and published
industrial potential surveys for several backward areas.
The Stock Exchange Directory This directory, published by the Bomb ay Stock
Exchange, provides a ten-year picture of performance and financial statements
for all listed companies and other important companies. It contains very
valuable information for comparative analysis. It is periodically updated.
Monthly Studies of Production of Selected Industries A monthly publication of
the Central Statistical Organisation, it provides all – India date on
production, number of units installed, capacity, state-wise break-up stock
level, etc., for several selected industries.
Monthly Bulletin of Reserve Bank of India This provides information on
production indices, prices, balance of payment position, exchange rates, etc.,
Publications of Advertising Agencies. The leading advertising agencies like
Clarion, McCann and Thompson have published test markets, marketing rating
indices of towns of India, consumer index of markets, and other studies which
throw valuable light on Indian markets.
Other Publications Among other publications, mention may be made of the
following : (i) Weekly Bulletin of Industrial License, Import License and
Export Licenses (published by the Government of India), (ii) Studies of the
economic division of the State Trading Corporation; (iii) Commodity reports
and other studies of the Indian Institute of Foreign Trade; (iv) Studies and
reports of export promotion councils and commodity boards; and (v) Annual
Report on Currency and Finance (issued by the Reserve Bank of India)
Evaluation of Secondary information
While secondary information is available economically and readily
(provides the market analyst is able to locate it) its reliability, accuracy,
and relevance for the purpose under consideration must be carefully examined.
The market analysis should seek to know :
Who gathered the information? What was the objective?
When was the information gathered? When was published?
How representative was the period for which the information was gathered?
Have the terms in the study been carefully and unambiguously defined?
What was the target population?
How was the sample chosen?
How representative was the sample?
 What was the degree of sampling bias and non – response bias in the
information gathered?
What was the degree of misrepresentation by respondents?
How accurately was the information edited, tabulated, and analysed?
Was statistical analysis properly applied?
CONDUCT OF MARKET SURVEY
Secondary information, though useful, often does not provide a
comprehensive basis for market and demand analysis. It needs to be
supplemented with primary information gathered through a market survey,
specific to the project being appraised.
The market survey may be a census survey or a sample survey. In a census
survey the entire population is covered. (The world “population” is used here
in a particular sense. It refers to the totality of all units under
consideration in a specific study. Examples are: all industries using milling
machines, all readers of the Economic Times). Census surveys are employed
principally for intermediate goods and investment goods when such goods are
used by a small number of firms. In other cases, a census survey is
prohibitively costly and may also be infeasible. For example, it would be
inordinately expensive – nay, impossible – to cover every user of Lifebuoy or
every person in the income bracket Rs.10,000 – Rs.15,000.
Due to the above mentioned limitations of the census survey, the market
survey, in practice, is typically a sample survey. In such a survey a sample
of the populations is contacted / observed and relevant information is
gathered. On the basis of such information, inferences about the population
may be drawn.
The information sought in a market survey may relate to one or more of
the following :
Total demand and rate of growth of demand
Demand in different segments of the market
Income and price elasticities of demand
Motives for buying
Purchaseing plans and intensions
Satisfaction with existing products
Unsatisfied needs
Attitudes towards various products
Distributive trade practices and preferences
Socio-economic characteristics of buyers
Steps in a sample Survey
Typically, a sample survey consists of the following steps :
Define the Target Population
In defining the target population may be divided into various segments
which may ously defined. The target population may be divided into various
segments which may have differing characteristics. For example, all
television owners may be divided into three to four income brackets.
Select the Sampling Scheme and Sample Size
There are several sampling schemes : simple random sampling, cluster
sampling, sequential sampling, stratified sampling, systematic sampling, and
non-probability sampling. Each scheme has its advantages and limitation. The
sample size, other things being equal, has a bearing on the reliability of
the estimates – the larger the sample size, the greater the reliability.
Develop the Questionnaire
The questionnaire is the principal instrument for eliciting
information from the sample of the respondents. The effectiveness of the
questionnaire as a device for eliciting the desired information depends on
its length, the types of questions, and the wording of questions. Developing
 the questionnaire requires a thorough understanding of the product / service
and its usage, imagination, insights in to human behaviour, appreciation of
subtle linguistic nuances, and familitarity with the tools of descriptive
and inferential statistics to be used later with the tools of descriptive
and inferential statistics to be used later for analysis. It also requires
knowledge of psychological scaling techniques if the same are employed for
obtaining information relating to attitudes, motivations, and psychological
traits. Industry and trade market surveys, in comparison to consumer
surveys, generally involve more technical and specialized questions.
Since the quality of the questionnaire has an important bearing on the
results of market survey, the questionnaire should be tried out in a pilot
survey and modified in the light of problems / difficulties noted.
Recruit and Train the Field Investigators
Recruiting and training of field investigators must be planned well
since it can be time-consuming. Great care must be taken for recruiting the
right kind of investigators and imparting the proper kind of training of
them. Investigators involved in industry and trade market survey need
intimate knowledge of the product and technical background particularly for
products based on sophisticated technologies.
Obtain Information as per the Questionnarie from the Sample of Respondents
Respondents may be interviewed personally, telephonically, or by mail
for obtaining information. Personal interviews ensure a high rate of
response. They are, however, expensive and likely to result in biased
responses because of the presence of the interviewer. Mail surveys are
economical and evoke fairly candid responses. The responses rate, however,
is often low. Telephonic interviews, common in western countries, have very
limited applicability in India because telephone tariffs are high and
telephone connections few.
Scrutinise the Information Gathered
Information gathered should be thoroughly scrutinized to eliminate
data which is internally inconsistent and which is of dubious validity. For
example, a respondent with a high income and large family may say that he
lives in a one-room tenement. Such information, probably inaccurate, should
be deleted. Sometimes data inconsistencies may be revealed only after some
analysis.
Analyse and Interpret the Information
Information gathered in the survey needs to be analysed and
interpreted with care and imagination. After tabulating it as per a plan of
analysis, suitable statistical investigation may be conducted, wherever
possible and necessary. For purposes of statistical analysis, a variety of
methods are available. They may be divided into two broad categories;
parametric methods and non-parametric methods. Parametric methods assume
that the variable or attribute under study conforms to some known
distribution. Non-parametric methods do not presuppose any particular
distribution.
Results of data based on sample survey will have to be extrapolated to the
target population. For this purpose, appropriate inflationary factors, based on
the ratio of the size of the target population to the size of the sample
studied, will have to be used.
The statistical analysis of data should be directed by a person who has a
good background in statistics as well as economics.
It may be emphasized that the results of the market survey can be vitiated
by: (i) non-representativeness of the sample, (ii) imprecision and inadequacies
in the questions, (iii) failure of the respondents to comprehend the questions,
(iv) deliberate distortions in the answers given by the respondents, (v) inept
handling of the interview by the investigators, (vi) cheating on the part of the
investigators, (vii) slip-shed scrutiny of data, and (viii) incorrect and
inappropriate analysis and interpretation of data.
Some Problems
A market researcher in India has to contend with the following problems :
Heterogeneity of the Country Since it is well-nigh impossible to cover all
the states in an all – India survey, the country has to be divided into broad
territories going beyond the state boundaries. However, the heterogeneity of the
country makes the task difficult. Presently the research agencies seem to divide
the country the way they think it is a appropriate. This cause problems in
comparing the findings of different research agencies.
Multiplicity of Languages Scaling techniques, commonly recommended in
marketing research literature, involve a 5-point scale or a 7-point scale. Such
refined scales are not easily amenable to translation in regional languages.
More important, they are often not comprehensible to a vast majority of
respondents who may lack the education and sophistication to understand them.
Hence when refined scaling techniques are used, answers tend to be erratic and
inconsistent. It is perhaps desirable to rely more on open-ended questions and
less on pre-coded questions on definite scales.
CHARACTERISATION OF THE MARKET
Based on the information gathered from secondary sources and through the
market survey, the market for the product / service may be described in terms of
the following :
Effective demand in the past and present
Breakdown of demand
Price
Methods of distribution and sales promotion
Consumers
Supply and competition
Government policy
Effective Demand in the past and present
To gauge the effective demand in the past and present, the starting point
typically is apparent consumption which is defined as :
Production + Imports – Exports – Changes in stock level
The figure of apparent consumption has to be adjusted for consumption of the
product by the producers and the effect of abnormal factors. The consumption
series, after such adjustments, may be obtained for several years.
In a competitive market, effective demand and apparent consumption are equal.
How ever, in most of the developing countries, where competitive markets do not
exist for a variety of products due to exchange restrictions and controls on
production and distribution, the figure of apparent consumption may have to be
adjusted for market imperfections. Admittedly, this is often a difficult task..
Breakdown of Demand
To get a deeper insight into the nature of demand, the aggregate (total)
market demand may be broken down into demand for different segments of the
market. Market segments may be defined by (i) nature of product, (ii) consumer
group, and (iii) geographical division.
Nature of Product One generic name often subsumes many different products
: steel covers sections, rolled products, and various semi-finished products;
commercial vehicles cover trucks and buses of various capacities; so no and so
forth.
Consumer Groups Consumers of a product may be divided into industrial
consumers and domestic consumers. Industrial consumeners may by sub-divided
industrywise. Domestic consumers may be further divided into different income
groups.
 Geographical Division A geographical breakdown of consumers, particularly
for products which have a small value-to-weight relationship and products which
require regular, efficient after-sales service is helpful.
Why is segmental analysis required? Segmental information is helpful
because the nature of demand tends to vary from one segment to another (the
demand from consumers in high income brackets may not be sensitive to price
variations whereas the demand from consumers in low income brackets may be very
sensitive to price variations) and different marketing strategies may be
appropriate to different market segments.
Price Price statistics must be gathered along with statistics pertaining
physical quantities. It may be helpful to distinguish the following types of
prices : (i) manufacturer’s price quoted as FOB (free on board) price or CIF
(cost, insurance, and freight) price, (ii) landed price for imported goods,
(iii) average wholesale price, and (iv) average retail price.
Methods of Distribution and Sales Promotion
The method of distribution may vary with the nature of product. Capital
goods, industrial raw materials or intermediates, and consumer products tend to
have differing distribution channels, Further, for a given product, distribution
methods may vary. Likewise, methods used for sales promotion (advertising,
discounts, gift schemes, etc.,) may vary from product to product.
The methods of distribution and sales promotion employed presently and
their rationale must be specified. Such a study may explain certain patterns of
consumption and highlight the difficulties that may encountered in marketing the
proposed products.
Consumers
Consumers may be characterized along two dimensions as follows :
Demographic and sociological Attitudinal
Age Preferences
Sex Intentions
Income Habits
Profession Attitudes
Residence Responses
Social background
Supply and Competition
It is necessary to know the existing sources of supply and whether they are
foreign or domestic. For domestic sources of supply, information along the
following lines may be gathered; location, present production capacity, planned
expansion, capacity utilization level, bottlenecks in production, and cost
structure.
Competition from substitutes and near – substitutes should be specified
because almost any product may be replaced by some other product as a result of
relative changes in price, quality, availability, promotional effort, and so on.
Government Policy
The role of government in influencing the demand and market for a product
may be significant. Governmental plans, policies, legislations, and fiats which
have a bearing on the market and demand of the product under examination should
be spelt out. These are reflected in: production targets in national plans,
import and export trade controls, import duties, export incentives, excise
duties, sales tax, industrial licensing, preferential purchases, credit
controls, financial regulations, and subsidies / penalties of various kinds.
DEMAND FORECASTING
After gathering information about various aspects of the market and demand
from primary and secondary sources, an attempt may be made to estimate future
demand. A wide range of forecasting methods is available to the market analyst.
These may be divided into three categories : qualitative methods, time series
projection methods, and causal methods. A brief description of these methods
follow. For a more detailed exposition, consult Appendix 4A at the end of this
chapter.
Qualitative Methods
These methods rely essentially on the judgment of experts to translate
qualitative information into quantitative estimate. The important qualitative
methods are as follows:
Jury of executive opinion method Very popular in practice, this method calls
for the pooling of views of a group of executives on expected future sales and
combining them into a sales estimate.
Delphi method This method involves converting the views of a group of
experts, who do not interact face – to – fact, into a forecast through an
iterative process.
Time Series Projection Methods
These methods generate forecasts on the basis of an analysis of the
historical time series. The important time series projection methods are as
follows :
Trend projection method Very popular in practice, the trend projection
method involves extrapolating the past trend onto the future.
Exponential smoothing method In exponential smoothing, forecasts are
modified in the light of observed errors.
Moving average method According to this method, the forecast for the next
period represents a simple arithmetic average or a weighted arithmetic average
of the last few observations.
Causal Methods
More analytical than the preceding methods, causal methods seek to develop
forecasts on the basis of cause – effect relationships specified in an explicit,
quantitative manner. The important methods under this category are as follows:
Chain ratio method A Simple analytical approach, this method calls for
applying a series of factors for developing a demand forecast.
Consumption level method Useful for a product that is directly consumed,
this method estimates consumpation level on the basis of elasticity
coefficients, the important ones being the income elasticity of demand and the
price elasticity of demand.
End use method Suitable for intermediate products, the end use method
develops demand forecasts on the basis of the consumption coefficient of the
product for various uses.
Leading indicator method According to this method, observed changes in
leading indicators are used to predict the changes in lagging variables.
Econometric Perhaps the most sophisticated forecasting tool, the econometric
method involves estimating quantitative relationship derived from economic
theory.
MARKET PLANNING
To enable the product to reach a desired level of market penetration, a
suitable marketing plan should be developed. Broadly, It should cover pricing,
distribution, promotion, and service. The details that need to be hammered out
are shown below :
Pricing Distribution
Ex-factory price Packaging
Taxes and duties Transportation
applicable for the arrangement
domestic price
Trade margins / Channel of
discounts distribution
Final price to the Role of distributors,
domestic customer wholesalers, and retailers
Export price
Promotion Service
Branding Installation
 Advertising User education
Personal selling Warranties
Promotional efforts After-sales service

PROJECT COST
The project cost is the sum of all die costs of the activities associated
with the project. It includes all costs under die following heads: building and
civil works, land and site development, plant and machinery, expenses on foreign
technicians, miscellaneous fixed assets, margin money, far working, capital,
provision for contingencies, preoperative expenses and initial cash losses. Some
of the items that fall under these heads are listed in Exhibit 8.1.
MEANS OF FINANCING THE PROJECT
The project manager can finance die project in a number of ways: share
capital, term loans, debenture capital, deferred credit, and other miscellaneous
sources. Any one or a combination of two or more of these methods can be chosen
to finance die project.
Share Capital
Share capital is of two types: equity capital and preference capital.
Equity capital is the capital contributed by owners of the firm. Equity holders
enjoy the profits and bear die risks of the firm. Preference capital refers to
the contribution made by preference shareholders by investing in a firm s
preference shares.
Term Loans
Term loans are secured borrowings provided by financial institutions and
commercial banks. These loans help firms take up expansion, modernization, and
renovation projects. Term loans are available in both rupees and foreign
currencies. Companies take foreign currency term loans to meet their foreign
currency expenditures e.g. import of machinery, or consultation fees of foreign
technicians.
Debenture Capital
Debentures are issued by firms to raise debt capital, normally for a period
of 5 to 10 years. The debentures are secured against the assets of the issuing
firm. There are three types of debentures: non - convertible debentures,
partially convertible debentures, and fully convertible debentures. A fixed
interest is paid for non - convertible debentures. In the case of Partially
Convertible Debentures (PCDs), only a part of them are converted into equity
shares; but in the case of fully convertible debentures, all the debentures are
fully converted into equity shares as per pre-determined terms?

Elements of Project Cost

Costs of Building and Civil Works
Buildings for the main plant and auxiliary services like workshops,
laboratory- etc.
Godowns and warehouses
Garages and drainage systems
Costs of Land and Site Development
Costs of acquiring the facilities (land) comprising the project
Premium payable on leasehold, conveyance charges
Costs of the acquisition, clearing, and grading of land and laying approach
roads
Costs of Plant and Machinery
Costs of machinery, equipment and related facilities acquired or purchased
for inclusion in the facilities and the cost of shipping, transportation and
 installation.
Cost of indigenous machinery, including sales tax, other taxes, if any. and
transportation charges to site
Foundation and installation charges
Professional Service Costs
Costs of architects and engineers services related to the project prior to
and during the period of acquisition.
Cost of financial consultant, and special services and legal advice.
Cost of services of foreign technicians
Miscellaneous Fixed Assets
Costs of office furniture and office machinery (like computers, printer,
fire fighting equipment etc).
Expenses incurred for procurement or use of patents, copyrights, trademarks
etc.
Deposits made to the electricity board, telecom board, water supply board
etc.
Taxes or other municipal or governmental charges levied or lawfully assessed
against the facilities acquired during the period of acquisition
Margin Money for Working Capital
Part of working capital requirement funded from long term sources of
finance.
Provisions for Contingencies
Unexpected increase of input rates and labor costs
Expenses for sudden machinery breakdown
Pre-operative Expenses
Mortgage and initial traveling expenses
Costs of insurance premiums in connection with acquisition of the
facilities.
Interest and commitment charges on borrowings

Deferred Credit
Machinery and equipment suppliers often provide credit facilities to firms.
This is referred to as deferred credit. This credit is repaid over a period of
time, depending on the value of the machinery and the credit standing of the
buyer. Normally, suppliers demand a bank guarantee equivalent to the value of
the machinery.
Miscellaneous Sources
Miscellaneous sources include unsecured loans, public deposits (as per the
rules of Central Government and RBI), incentive sources form government
agencies, and leasing and hire purchase finance. But these sources contribute
only a small part of the total project capital.
WORKING CAPITAL REQUIREMENTS AND FINANCING
The project manager considers the following points when estimating die
working capital requirements of a project:
Raw materials and components
Work-in-process
Stocks of finished goods
Operating expenses
The important sources of working capital are
Working capital advances from commercial banks
Long-term sources of financing
Trade credit
Accruals and provisions
The project manager should be aware of the limits for obtaining working capital
advances from commercial banks:
The aggregate permissible bank finance, as per the norms of lending,
prescribed by the Tandon Committee.
 The amount of margin money a firm can provide against each current asset.
Initially, the Tandon Committee proposed a method for determining the
maximum amount of money a project can obtain to meet its working capital
requirements. According to that method, at least 25 percent of current assets
must be supported by long term sources of finance. To provide greater freedom to
borrowers to assess working capital requirements, this method (and similar
methods) was withdrawn, effective 15 April, 1997. Banks were instructed to
evolve their own methods to assess working capital requirements of projects.
The margin requirement varies with type of current asset. The ranges
within which margin requirements lie for various types of current assets are:
However, there is no standard formula for determining the margin amount.

Current asset Margin

Raw material 10-25 percent
Work-in-process 20 - 40 percent
Finished goods 30 - 50 percent
Debtors 30 - 50 percent
EVALUATION OF PROJECT INVESTMENTS
The project manager uses the following criteria to evaluate returns from project

investments. They are:

Non-discounting criteria
Discounting criteria
Non-Discounting Criteria
The non-discounting criterion does not consider the time value of money.
Following are the two methods in non-discounting criteria:
Average Rate of Return (ARR)
Payback period
Average rate of return (ARR)
This method estimates the relationship between the average annual profits
earned by a project and the investments made in the project. This is expressed
in percentage form.
Average Rate of Return
= Average Annual Profit x lOO
Initial Investments
Assume there are two investment options. For Investment-1, the initial
investment is Rs. 10,000 and the average profit is Rs.1250; for Investment-2,
die initial investment is Rs. 10,000 and the average profit is Rs. 1800. Using
the ARR method, die two proposals can be evaluated in the following manner.
Investment-1:
Average profit = Rs. 1,250
Initial investment = Rs. 10,000
ARR = Rs. 1,250 x 100 = 12.5%
Rs. 10,000
Investment-2:
Average profit= Rs. 1,800
Initial investment = Rs. 10,000
ARR = Rs. 1800 x 100 = 18%
Rs. 10,000
According to the ARR method, Investment-2 is better as it generates a
higher average rate of return than investment-1.
Accept - Reject criterion
A project is accepted when the actual ARR is higher than the minimum
desired ARR. The project manager can also rank all the alternative options in
descending order and choose the project with the highest ARR.
Advantages of ARR
The method is simple to calculate, as it uses readily available accounting
 information.
A quick decision can be taken comparing the ARR values of various projects.
Disadvantages of ARR
It ignores the time value of money. Payback period method
Payback period is the time period in which a firm can recover its
investments made in a project.
The payback period is calculated as:
Suppose a firm has two options, Option- A and Option- B. The initial
outlay for both the options is Rs. 10,000. The expected cash flows for both
options are as follows:
Option A:

Year Cash Flow

1 4000
2 6000
3 4000
4 1000
The payback period for option A is 2 years: Rs. 4000 (year 1) + Rs.6,000
(year 2) In two years, the total investment is recovered. Hence, the payback
period is 2 years. Option B:

Year Cash Flow

1 1000
2 2000
3 5000
4 5000
5 6000
The payback period for option B is 3.4 years:
1000 (year 1) + 2000 (year 2) + 5000 (year 3) + 2000/5000 (40% of year 4)
For option- B, the total investment is recovered in 3.4 years.
Hence, option A is accepted
Accept-Reject criterion
The actual payback period of a project is compared with a pre-determined
payback set by the firm s management. If the actual payback period is less than
the predetermined payback period, the project can be accepted; otherwise, the
project is rejected. The project manager can also rank alternative project
proposals according to their payback period and the project with shortest
payback period is chosen.
Advantages of payback method
The method favors the projects with substantial cash inflows in earlier years.

The method is easy to understand and does not require complex calculations.
Disadvantages of payback period
It measures only the capital recovery of the projects, not their
profitability.
The method ignores cash flows beyond the payback period.
Discounted Cash Flow Criteria
In this criteria, the time value of money is considered when evaluating
the costs and cash flows of a project. There are three methods:
Net present value method (NPV)
Internal rate of return (ERR)
Profitability Index
Net present value method (NPV)
The net present value of a project is equal to the sum of all the cash
flows associated with the project. In this method, all the future cash flows are
converted into their present values, using the required rate of return. The
difference between the present value of cash outflows and the present value of
all cash inflows gives the net present value.
RISK ANALYSIS OF PROJECT INVESTMENTS
Every project is exposed to a certain amount of risk and the extent of
risk varies from project to project. So, the project manager should attempt to
estimate the possible level of risk his project is likely to be exposed to.
Suppose the project manager has a choice two between two alternatives, X
and Y, each involving the same investment, but offering different outcomes as
given below. ;
The expected outcome of Proposal X is (10,000 x 0.5 + 0 x 0.5) = 5,000;
Therefore, the expected outcome of both proposals are equal. If the project
manager does not want to take any risk, he prefers Proposal Y. The project
manager can also take up Proposal X, if he wants to take up some risk.
Proposal Possible Outcome Probability
X 10000 0.5
0 0.5
Y 5000 1

Normally, three types of project risks are studied for each project idea.
They are stand alone risk, corporate risk, and systematic risk.
Stand alone risk
Stand alone risk refers to the risk a project faces when it is considered
in isolation.
Corporate risk
This refers to the risk a firm faces because of a project.
Systematic risk
This risk is caused by the existing market situation. This risk is also
called market risk.
Techniques of Risk Analysis
Firms follow different techniques to protect their projects from risks.
Some of the techniques used by firms are Sensitivity Analysis, Scenario
Analysis, etc.
Sensitivity analysis
This technique is used to find out how sensitive the results of a
particular financial model are to changes in input variables. For example, the
net present value of a project depends on several factors like selling price of
the product, annual sales, project life period, income tax etc. Sensitivity
analysis aims at examining how net present value changes with changes in the
above factors. To carry out this analysis, the project manager establishes a
relationship between the net present value and factors that affect the net
present value. Then he studies the range of net present values with variations
in each of the factors affecting it. By understanding the affect of several
factors, the project manager estimates the possibility of achieving the project
objectives.
Scenario analysis
If the variables that affect the project output are inter-related, then
the project manager uses scenario analysis. This analysis identifies
combinations of inputs that lead to a change in output values. The project
manager develops each scenario that represents a combination of variables. For
example, the project can be evaluated under the three scenarios;
Scenario in which demand and price are normal
Scenario in which demand is high and price is low
 Scenario in which demand is low and price is high.
This helps the project manager analyze how the project objectives can be
achieved under several scenarios.)
SOCIAL COST BENEFIT ANALYSIS (SCBA)
Since projects affect society, they should also be studied from the point
of view of society. So the project manager has to analyze the social and
economic benefits generated by the project and also the social costs of the
project.
Social costs refer to the harmful effects of a project to society like air
pollution, water pollution, soil erosion, deforestation, production of harmful
products, etc. Social benefit refers to the positive impact of a project on
society like increase in employment opportunities, rise in per capita income
etc. The objective of a Social Cost Benefit Analysis is to assess the positive
and negative effects of a project on society. The project manager finally
chooses the project that is socially beneficial.
Indicators of Social Desirability of a Project
There are several evaluation methods for testing the social desirability
of a project. Some of the important indicators of the social desirability of a
project are discussed below.
Employment opportunities
Unemployment is a major problem in developing countries like India. So, a
project with high employment potential is desirable. Since there is surplus
labor in these countries, labor intensive projects would generate more
employment opportunities.
Foreign exchange benefits
Countries that are experiencing a foreign exchange crunch give preference to
projects that earn foreign exchange. An import substitution project that saves
the country s foreign exchange is thus a desirable project.
Output per unit of capital
In countries where there is a dearth of capital, a project that gives a higher
output per unit of capital employed is preferred.
Value addition criterion
The Value addition of a project refers to the difference between the market
price of a project s output and the costs/price of the goods and services
bought from other firms for carrying out the project. According to this
approach, the value added per unit of capital is ascertained so that the
project that gives higher value can be chosen.
Cost benefit ratio
The social costs and social benefits associated with a project are calculated
and the project that provides more benefits than costs is selected and
implemented. Here, costs and benefits are ascertained based on the shadow
prices. The shadow price is the real price that would have prevailed had there
been no imperfections in the market. Then these costs and benefits are
discounted to the present value of social costs and benefits and the ratio of
benefits to the costs gives the cost benefit ratio.
UNIDO Approach
Social Cost Benefit Analysis is a useful tool for selecting a project.
However, it is not easy to quantify the social costs and social benefits. The
United Nations Industrial Development Organization (UNIDO) has therefore
developed a method for measuring social costs and social benefits.
The method consists of five steps:
Calculating financial profitability at market prices
Calculating net benefits at economic prices
Adjustment for project s impact on savings and investment
Adjustment for project s impact on income distribution
Adjustment for impact of project on merit and demerits goods
Calculation of Financial Profitability at Market Prices
In this step, the project manager assesses the net profitability of the
project on the basis of the market prices of all inputs and outputs. The profit
is obtained by subtracting the expenditure incurred from the firm s revenues.
The project manager calculates the profitability of the project as the
percentage of profit to the capital employed.

Calculation of Net Benefits at Economic Prices

In this step, the project manager measures the net benefits of the project
in terms of economic prices (also called shadow prices). These are calculated on
the basis of impact of the project on the national economy.
If the project s product has an impact on consumption, then the price that
the consumer is willing to pay for the product becomes the shadow price of the
product. If the impact is on production, shadow price is the cost of production.
If the impact of the product is on international trade, then the shadow price is
the foreign exchange value of the product. In the case of pure tradable goods,
the shadow price of a good is the international price of the good since there
exists no opportunity cost in the country. Taxation makes it difficult to
calculate shadow prices.
SOCIAL COST – BENEFIT ANALYSIS :
The foremost aim of all the individual firm of a company is to earn maximum
possible return form the investment on their project. In this aspect project
promoters are interested in wealth maximization. Hence the project promoters
tend to evealuate only the commercial profitability of a project. There are some
projects that may not offer attractive returns as for a s commercial
profitability is concerned but still such projects are undertaken since they
have social implication. Such projects are public projects, projects like road,
railway, bridge and other transport projects, irrigation projects, power
projects etc. for which socio-economic considerations play a significant part
rather than mere commercial profitability. Such projects are analysed for their
net socio economic benefits and the profitability analysis which is nothing but
the socio-economic cost benefit analysis done at the national level.
All the projects imposes certain costs to the nation and produces certain
benefits to the nation. The cost may be of two types i.e. direct cost and
indirect cost. In this respect the benefit derived from any project will also be
of two types i.e. direct benefits and indirect benefits.
The social cost benefit analysis is a tool for evaluating the value of
money, particularly of public investments in many economies. It aids in decision
making with respect to the various aspects of a project and the design
programmes of closely interrelated project. Cost benefit analysis has become
important among economists and consultants in recent years.
MAIN FEATURES OF SOCIAL COST – BENEFIT ANALYSIS :
Assessing the desirability of projects in the public as opposed to the
private sector
Identification of costs and benefits
Measurement of costs and benefits
The effect of (risk and uncertainly) time in investment appraisal
Presentation of results – the investment criterion.
STEPS INVOLVED IN SOCIAL – COST BENEFIT ANALYSIS :
Estimates of costs and benefits which will accrue to the project
implementing body.
 Estimates of costs and benefits which will accrue to the community.
Estimates of cost and benefits which will accrue to the National
Exchequer.
STAGES OF SOCIAL COST BENEFIT ANALYSIS :
Determine the financial profitability of the project based on the market
prices.
Using shadow prices for the resources to arrive at the net benefit and the
project at economic process.
Adjustment of the net benefit for the projects impact on savings and
investment.
Adjustment of the net benefit for the projects impact of income
distribution.
Adjustment of the net benefit for the goods produced whose social values
differ from their economic values.
ECONOMIC INDICATORS OF SOCIAL COST BENEFIT ANALYSIS
Economic Rate of Return
Effective Rate of Protection
Domestic Resource Cost.
LIMITATIONS OF SOCIAL COST BENEFIT ANALYSIS :
Social cost Benefit analysis suffer from the following limitations :
(i) The problems of Qualification and measurement of social costs and
benefits are formidable. This is because many of these costs and benefits
are intangible and their evaluation in terms of money is bound to be
subjective.
(ii) Evaluation of social costs and benefits has been completed for one
yield better results fro the social point of view.
The nature of inputs and outputs of projects involving very large investment
and their impact on the ecology and people of the particular region and the
country as a whole are bound to be differing from case to case.

COMMERCIAL OF FINANCIAL PROFITABILITY :

In order t o assess the operational efficiency of a project and its
profitability most of the industrially advanced countries including India to
employed various technique for the purpose of profitability analysis. Profit is
the primary objective of an enterprise. The word profit implies a comparison of
the operations of business between two specific dates which are usually
separated by an interval of one year.
The maximization of profit within a socially acceptable limit implies that a
proper regard for public interest has been shown. Really it is the growth of
profit which enables a firm to pay higher dividends to its ordinary
shareholders.
PREFEASIBILITY REPORT
Basic Information in PFR
Based on the UNIDO and MPI guidelines and the guideline suggested by field
experts like PK Joy and others, a detailed format has been prepared so that it
could give all the information required for the PER clearances.
1. Project Background and Description
Project enterprise, name and profile, detailing its experience and
performance in project implementation
Project description
Cost study / investigations already carried out
2.Market Demand and Plant Capacity
Demand pattern, size and market
Existing size and capacities of the industry, who are the market leaders, its
past growth, the projected size of future growth Government’s and private
sector’s development programmes, the local dispersal of the industry, its
major problems and prospects and general quality of goods, and product mix.
 Past / present imports and future trend of volume and prices

The role of the industry in the national economy and the national policies,
and priorities and targets related or assigned to the industry.

The approximate present size of demand, its past growth / graph major
determinants and / or indicators.
Sales forecast and marketing plan :

Anticipated competition for the project from existing and potential local and
foreign producers and suppliers.
Local market share for products and by – products.
Sales programme and distribution arrangements
Estimate annual sales revenues from products and by – products, from home
market and exports.
Estimated annual cost on marketing and sales promotion

Production programme

Products
By-products
Wastes
Estimated annual costs on waste

Determinations of plant capacity

Feasible normal capacity

Quantitative relationship between sales, plant capacity and materials and
other inputs.
3.Materials and Inputs
(Give the details of input requirements, their sources, present and
potential supply positions and an estimate of annual costs of utilities and
local and foreign materials, under the following sub headings)
Raw materials / Feedstock
Processed industrial materials
Bought – out components
Auxiliary materials
Factory supplies / Captive manufacture
Power, water and other utilities
Transport service
(Attach a Note on the materials and components which the unit will farm out
and procure from ancillary units. This is a social obligation)
4. Location and Site
Alternative locations, descriptions and area of lands preselected (Indicate
the number of families to be rehabilitated)
Estimated and cost including its development, for each of the proposed
alternatives.
Schedule and soil investigation cost
Factors influencing the selection of each of the alternatives proposed
5.Project Engineering and Investment Costs
(Show local and foreign amounts separately on CIF / delivery at site basis)
Preliminary determination of scope of the project
Process / technology and equipment cost.

Processes technologies that can be adopted, in relation to capacity size

Estimate of costs of local and foreign technologies, if local ones are
available
Layout of the proposed
Production equipment
Auxiliary equipment
Service equipment
Major spare parts, wear and tear parts and tools
Estimate of investment cost of equipment under the above classification
KDJKDJKFJD
Civil engineering works :
DDFDFD
Layout of civil engineering works, arrangement of buildings, and descriptions
of construction materials to be used, classified as under
Site preparation and development
Buildings and special civil works
Outdoor works
Estimate of investment cost of civil engineering works classified as above
(indicate prices of bulk materials in a schedule)
6.Plant Organisation and Overheads
Organisation layout for

Production
Sales Administration
Management

Name, profile and experience of the consultant as pointed proposed for

appointment
Estimated overhead costs on
Factory
Administration
Financial items (interest, bank charges and depreciation as per separate
schedules)
7.Manpower (Local and Foreign)
(Show labour / staff classifications and broad skill – trade analysis of
work-force)
Estimated manpower requirements
Estimated annual salaries and wages including allowances, fringe benefits and
long-term social and statutory provision
Labour housing plan estimated cost
8.Implementation and Schedule
Proposed time schedule (attach a schedule of time frame indicating major
activities)
Estimated implementation costs matching the implementation programme (attach
cost budget)
9. Finance and Economic Evaluation
Total investment costs (attach estimate)
Estimated fixed assets
Estimated working capital requirements
Total operating costs, classified by
Fixed costs
Variable costs
Project financing arrangement proposed
Proposed capital structure and finance plan
Loan / Borrowings planned
Interest rate / rates, and estimates of interest amounts during construction

Operating costs (attached estimate)

Financial evaluation based on the estimates
Profitability
Pay – back of investment
Cash flow
National economic evaluation (Not insisted in PFR)
Effect on industrialisation (the unit’s role in infrastructure development or
in providing up-stream product or as promotr of ancillaries)
Estimate of employment generation
Estimate of foreign exchange earning or saving
Approximate social benefit – cost analysis (SBCA), using estimate weights and
shadow prices
10. Status of Clearances and Approvals from Various Central and State Government
Department / Bodies Mentioned Below
Soil investigation report
Industrial licence / Letter of intent (if applicable as pre Press Note No.9
of 1991)
Automatic permission or specific approval, as the case may be, for foreign
technical collaboration as per Para 39C of the Industrial Policy Statement
of 1991.
Automatic permission or specific approval, as the case may be, for foreing
investment as per Para 39B of the Industrial Policy Statement, 1991.
Approval of appointment of foreign consultant
Foreign exchange permission
Import licence or automatic permission of import of capital goods and raw
materials, as per Press No.13 of 1991
Vetting of the draft prospectus for capital issues by the Securities and
Exchange Board of India (SEBI)
Clearance from Pollution Control Board
International Airport Authority’s clearance
Electricity Authority / Board’s clearance
Clearance from the Chief Controller of Explosives
Clearance from the Chief Conservator of Forests
 Clearance from the State Industries Department
These details are also the basic information required for TEFR but with a
little more accuracy and realistic stastistics. Hence the crucial details that
should be given under heads will be discussed in the next lesson on TEFR.
In fact all the 3 stages of reports have the same structure or outline, the
difference is in the refinement or the level of accuracy in the date,
information and figures, as more details are collected and the design advances
in the later phases.
At the TEFR or DPR stages more detailed estimates, work sheets, graphs,
quotations etc should be submitted.
The format 3.1 is only the skeleton. Any amount of additional information
the form of supporting document, explanatory notes, sketches, diagrams, drawings
etc may also be given, but it must contain the basic information on the items
given in the format, so that the clearance agency could get a clear picture
about the feasibility of the project. The PFR should not be vague and ambiguous.
As we all know, first impression is the best impression. If the PFR is able
to convince the clearance agency, then it would be easier to prepare the next
two stages of reports with additional refinement and more details and
corroborative evidences.
Viabilities looked for
In all the 3 stages of evaluation, the clearance agencies will look for the
viabilities from the following angles because, these are the very objectives of
their appraisal of the project :
Market demand for the end products of the project and the plant capacity
Availability of materials and other inputs.
Suitability and availability of the location and site
Viability of engineering and investment costs.
Mode of plant organization and the overhead cost required.
Whether Manpower in the required specialization, quality, and number will be
available
Is the implementation schedule practicable
Financial and economic soundness.
DO’S AND DON’TS
In preparing the PFR
Give the best available information (may not be very precise and accurate
figures)
Do not hide any adverse aspect.
Do draw special attention to any favorable or unfavorable aspect which needs
to be highlighted.
Give correct details of cost of foreign process / technology, its age,
obsolescence and the plan for Indianisation. (Normally foreign agencies dump

the obsolete garbage on developing countries, of course, with cost

reduction, but it may affect the marketability.
If you are looking for foreign technology, do have a global search in that
particular field and analyze the cost – benefits.
Do not suppress any important material fact. Such omission may lead to
dangerous failure
While PFR is being processed, try to get other clearances to be obtained
from other agencies
Remember that state / central Government which have a crucial role, would
take much time to process because of red-tapism and rigidity, and hence
apply sufficiently in advance to avoid delay.
Whenever necessary, give even advance information also in specific cases,
apart from submission of general application..
TECHNO – ECONOMIC FEASIBILITY REPORT
TERF should be prepared meticulously involving all specialists in the
organization. No relevant detail should be omitted. Care should be taken not to
give wrong information on the following :
Materials
Soil conditions
Hydrology
Take all efforts to choose right process, right size of plant and
appropriate equipment, to make correct assessment of market demand and accurate
calculation of costs, especially in large projects. Otherwise, any wrong
judgement may lead to disastrous failure at the stage of implementation. The
genuine efforts taken for the preparation of the TEFR would stand in good stead
at the time of implementation.
Apart from guidelines of UNIDO / IDBI and Project Appraisal Division of the
Central Planning Commission, any guidelines given by the Funding Agencies should
also be carefully followed.
There is nothing wrong in giving additional information which would help the
appraisal team to understand the project better but care should be taken to
avoid irrelevant detail or providing information without any coherence.
With the general introduction, let us see more details on 10 major heads
given in the format.
HIGHLIGHTS OF INFORMATION TO BE GIVEN UNDER MAJOR HEADS
1. Project Description and Background
Give details of major project parameters used for conducting the preliminary
study. Potential of the project, specifications of the major and by – products.
Highlight the economic, sectoral project coverage
Details on how the project idea has been evolved to the level of the
project, emphasizing the feasibility from socio-economic angles.
The business / entrepreneurial experience of the promoters should also be
given
If the proposal is for modernization or expansion the performance history
and profitability of the present unit should be given

2. Market and Plant Capacity

As indicated in format 3.1, the major sub-heads to be elaborated are :
Demand pattern, size and market
Sales forecast and marketing plan
Production programme and
Plant Capacity
Let us see important facts to be covered
Determine correctly the size and composition of demand based on the possible

degree of market penetration.

Estimate sales revenue taking into account the technology / process used
plant capacity, production programme and market strategy, for 10 to 15 years
after stabilisation.
Realistic pricing in comparison with competing products should be made.
Only reliable demand projection and sales prospects can help to decide plant
capacity
Significant points to be considered for detailed market study are :
Customer base
Product mix in demand
Latest reliable statistics and projection on demand and supply
Increase reliability by verification, text checks and interview
All aspects of competition and their strategies
Any government regulations or marketing channel
 Estimated distribution costs
Expert demand, past and present levels and future projection
External marketing agencies and their conditions
Tax concessions, subsidies, incentive if any
Selling price movement and relationship with wholesale price index, consumer
price index and prices of raw materials
Sensitivity Analysis (SA)
Testing with a pilot plant
Consider latest R&D in the connected field
Market stability aspect – boom and depression
Captive market – your output becoming input of other plant-percentage
Uniqueness, if any
Company’s reputation and its reliability
Using your own products, know-hows, services, R & D etc
Is your product hazard / polluction free
Take effective plant capacity considering all aspects, shut down,
maintenance etc.,
Relation among inputs, technology, output and marketing considering waste /
losses at every stage.
3.Materals and Inputs
Important points to be considered are :
Definition of raw materials, feedstock, other inputs and utilities with
reference to technology
Sources, and the past and present supply position
Future supply potential and annual cost.
Location and Sites
Appropriate site selection is a crucial factor in the success of the
project. Therefore consider the following significant points
Land clearnance and environment clearance problems
Have alternative sites and study their comparable advantages
Soil research with reference to earth work and foundation
Public policy in setting up industry in the location
Materials and Labour availability
Market orientation
Infrastructural facilities – water, power, road, rail, transport
Cost of land and rent
Climate and terrain
Construction facilities and living conditions
Ecology, waste disposal facility
Maps (geographical and geodetical descriptions
Prescribed distance from cities for locating industries (other than
pollution – free units)
50 km for cities with population of 25 lakhs and more
30 km for cities with population more than 15 lakhs less than 25 lakhs
15 km for cities with population more than 7.5 lakhs less than 1.5 lakhs
(Distance measured from boundary of urban area limit)
Law and order situation
Labour productivity
The last two items are so important and if it is not considered there will
be excessive cost overruns
5.Project Engineering and Investment Costs
In this part the following details should be given in the TEFR
Definition of the scope of the project, with charts and layouts
Justification for selection of technology.
Definition of the scope of the civil engineering work.
Estimated costs of all these
If the technology selected is foreign, sufficient care should be taken to
analyse the following aspects :
Is it necessary as compared to indigenous technology? – Advantages and
 merits.
The source and technology owners reputation
Is it already established? If so past experience
Suitability to Indian conditions.
R & D and facility for updating.
Conditions of transfer
Plans for Indianisation
Any delegation of personnel is necessary for procurement, training etc.
Terms of payment of license fee
Any export market exists.
Equipment selection should be based on technology to be adopted
Process owner should also be involved in selecting equipment
Over-capacity equipment should not-be installed.
Meticulous care should be taken is selecting the most appropriate
equipment.
Cost estimation should also be considered in deciding the appropriateness
of the equipment.
Define the scope of structural and civil works
Provide details on site preparation and development, process buildings non
process buildings, employees township and outdoor installations.
Give cost details as per prescribed format
Proposals with least financial outlay on township construction are
preferred.
Lay out drawings for site buildings, and equipment must be submitted along
with TEFR.
6.Plant Organisation and Overhead Costs
Organisation
This section should contain details to convince the appraisers that the
plant will be adequately manned by suitable personnel for efficient management
and the overhead costs would be within the permitted limits. The materials,
machines installed could give the expected results if and only if the “men” are
suitably employment and effective organization system is evolved.
It is the organization system which ultimately takes us towards the target
or goal. Strong and efficient organizational plan is a must for project success
and the details and technical aspects of organization will be discussed later in
unit VI.
Overheads
Administrative overheads
Travel, security, communications, rent, taxes, royalties, property taxes,
effluent disposal, legal charge, license and registrations fees, staff
remuneration, welfare expenses, risk management and insurance and general office

service costs.
Production overheads
Depreciation and interest are sometimes treated as production overheads
depending on the practice.
Manpower :
Based on the determination of technology, plant capacity, marketing and
selling subsystems required, realistic assessment of the manpower required for
manning the plant and for its maintenance, should be made. So also the staff
required for management and administration of the enterprise should also be well
planned. This area has now become so vital and significant that no more it is
restricted as personnel department. Including the aspects or recruitment,
training including on-the-job training, it is now termed as Human Resource
Development. All plant and machineries may become idle if suitable technical and
other staff are not available. The number and level at which the manpower
required in technically specialized fields and the general administrations
should be accurately estimated. The cost of manpower including welfare measures
and incentives for optimal utilization should also be correctly worked out.
Fringe benefits (UNIDO calls it as surcharge) should also be considered because
it encourages the staff and family, A detailed recruitment, training, and
manning schedule should be attached to the TEFR.
8. Implementation schedule
The stages of project work which starts after approval of TEFR, until the
commencement of the of stabilized production and maintenance is called
implementation stage.
Implementation includes :
Design
Engineering
Procurement
Contracting
Construction
Start-up
Stabilisation of operation and maintenance :
All these activities should be scheduled in a cogent and coherent manner so
that there is integrated coordination in the smooth movement of the work
schedule. Without loss of time. This could be well presented in a network
diagram or bar charts.
In order to get excellent implementation, each and every substage should be
meticulously planned after having firsthand detailed discussions with the
concerned specialists / experts, or staff of the organization. Discussion should
also be held with prospective suppliers and manufactures, financiers, bankers
and underwriters (in case of issue of equity and other instruments). The time
frame should be accurately planned including sub-networks because time involves
costs. Based on the time and work schedule, a cost budget should be prepared and
enclosed to the TEFR.
At the TEFR stage, the methods of guesswork and rough estimation adopted at
PFR stage should never be applied. Even is details are not available for a small
part of the schedule, adequate efforts should be taken to arrive at exact
estimates as otherwise the total schedule will be upset. So also any stoppage or
bottleneck in the middle would have chain reaction.
In order to arrive at accurate estimates of time and cost seek the
assistance of
Technology owner’s expertise
Consultant’s experience
Executive’s Competencies
Your knowledge and understanding
Other connected peoples promises and
Reliable statistics corroborated by test checks.
9. Financial and Economic Evaluation
This section is the most crucial part of the TEFR and needs arduous and
meticulous efforts to prepare all the schedules / statements
Financial and Economic Evaluation analyses
Capital cost estimates
Operating cost estimates
Working capital estimate and cost Distribution schedule
Profitability and financial analysis
Sensitivity Analysis (SA) and Risk Analysis (RA)
Project Balance Sheet and Income Statement, and
Social Cost – Benefits
Let us examine the details required under these major heads.
Capital Cost Estimate
For preparing a realistic capital cost estimate seek the cooperation And
expertise of knowledgeable of
Project Engineering department
Product line experts
Project management unit
Commercial and Contracting department
Planning department
Processing department
Construction
Finance and accounts
Human Resource and
Statistics and data processing
DETAILED PROJECT REPORT
DPR has to be approved by the Cabinet Committee on Economic Affairs (CCEA)
apart from PIB. This shows the significance of DPR.
The firmed up estimates of DPR should confirm to +/-15 percent accuracy
(i.e) 85 percent validity) it is better to go ahead with the documents listed in
the following checklist
Checklist of Documents and Data Necessary for preparation of DCE, to accompany
DPR
Process / systems design
Raw materials / feedstock and project specification
License fee for technology
Engineering plan and engineering manpower curves
Final flow diagrams
Piping and electrical layout drawings for both underground and above ground
Piping and instrumentation diagrams for process and utilities
Layout plans for buildings, equipment, utilities and off – sites
General project specifications
Soil investigation report and foundation requirement
Site grading plan
Single line electrical drawings
Construction plan
Environmental protection plan
Specifications and data sheets for all major equipment
Quotations / proform a invoices and other procurement costs for major
equipment
Equipment list
Resources schedules
Bulk materials take off sheets and price schedules
Construction labour wage rates and productivity details
Organisational charts and manpower curves
Construction equipment usage charts and equipment prices
Works contract tax basis and rates
Any other Project – specific data.
You are permitted to submit DPR upto one year after getting the clearance of
TEFR but it is better you do it as early as possible, of course without haste
inaccuracies and errors; when time lapses, the escalation costs will be
increasing.
If you are to delay beyond one year, you must motify PIB and give reasons
How DPR is prepared
Breakdown all project components, time phase and schedule them with accurate
cost estimates. Explain how you have improved from TEFR.
Develop baselines for controlling time and cost during the implementation
and
Indicate your preparedness with all technical and resources requirements.
 In short, the DPR will constitute, copy of the approved TEFR, firmed up DEC
with baseline calculations and additional data / information listed in the
following circular of BPE (Dec 12, 1969)
Additional data / Information to accompany DPR
1. Deviations from Feasibility Study
Deviations in cost, profitability analysis, technology, scope of work,
market demand, pricing and location to be indicated (Attach copy of the
Feasibility Report)
II. Drawings
Map / Index plan showing location of the project in relation to adjoining
towns, trunk roads, railways lines, etc.
Drawings showing detailed layout of factory, indicating roads, railway
lines, water supply, sewerage and power lines and installations.
III. Physical / Topograhical
General topographical features of the site
Soil characteristics of site
Average annual rainfall and maximum monthly rainfall
Maximumand minimum temperature
Prevailing direction of wind
IV. Rates
A copy of the schedule of Rates of the District based on which the estimate
has been prepared.
Cost of materials and labour at site. For materials, the cost at sources,
lead and carriage charges should be indicated.
V. Water and power Supply
An indication regarding the assurances from the state Government or local
authority concerned, guaranteeing supply of the required quantity of water and
power.
VI. Information to Accompany Estimate Provisions
1. Land
Total area to be acquired. Area required for immediate use and that required
for future expansion.
2. Levelling and Dressing
An indication of the extent and nature of work involved may be furnished in
justification of the rates provided.
3. Main plant structures
Plinth area, broad details of structure (RCC or steel), side cladding,
roofing, flooring, height of columns, number and capacity of gantry cranes;
basis of arriving at the plinth area; and rate per sq.m The same may be
furnished in respect of each structure.
4. Auxiliary plant structures – as above.
5. Welfare buildings (canteens, first – aid centre, etc.)
Plinth area of each buildings, basis of arriving at the plinth area and rate /

sq.m. with broad specifications.

6. Administrative buildings, etc – as above
7. Roads and paved areas
Length and width of roads, areas to be paved within and outside the factory
limits, specifications proposed and justification in relation to traffic,
rates and basis for the same.
8. Railway lines
Total length of track including yards, within and outside the factory limits,
rate per Km and basis of arriving at the same, and traffic load
9. Water supply
Basic on which the requirements have been arrived at, source of supply,
details of headworks, mains purification plant, storage and distribution, and
basis of costing.
10. Effluent disposal
Nature and quantify of effluent, system of disposal proposed to be adopted
with brief details of alternative schemes examined, capacity of plant
 oxidation pond, details of sewers, and basis of costing.
11. Storm water drainage
Length and section of the drains, broad specification, details of outflow
arrangements, and basis of costing.
12. Power supply
Plinth area of substation buildings, capacity of substation equipment, length
of HT and LT lines, basis of costing.
13. Construction plant and equipment
Equipment of each type required and justification thereof
14. Compound wall / fencing
Length, height, specification and basis of costing.
15. Plant and equipment Layout
Layout of the various shops, and equipment to be installed in each.
16. Plant and machinery
For each group of plant and machinery, for both production and maintenance
Equipment hours required for full production. Percentage efficiency Percentage
allowance for failures, delays, and breakdowns.
17. Spares
Percentage of equipment to cover initial running spares, insurance spares and
standly equipment
18 Foundation, erection and electrification
Cost of each item to be shown separately.
19. Material handling equipment
Numbers and type of equipment. Material handling analysis for imported and
indigenous plant and machinery should be separately shown.

UNIT - II
FUNDAMENTALS OF PROJECT NETWORK DIAGRAMS
According to the Project Management Body of Knowledge (PMBOK), a pi
network diagram is a schematic representation of the project activities and the
Io relationships (dependencies) among them. The diagram helps the project
manager in j sequencing, scheduling and controlling the project. The diagram
represents all the project activities, the sequence in which they have to be
performed, the duration of each activity, the interdependencies among various
activities and the criticality (significance) of each activity.
The project network diagram helps the1 project manager in project
planning by detailing the project activities, estimating the required resources,
and displaying the interrelationships among activities. The diagram helps to
determine the start and end dates of each activity during scheduling and it also
provides insights into possible trade-offs while controlling the project.
A good project network diagram should answer the following questions:
What is the estimated completion time of a project?
How does a delay in an activity affect the expected completion time?
How can the expected completion time of a project be reduced, if
additional resources are available?
Activity and Node
The project network diagram is represented by a series of activities and
nodes. An activity is a specific task or operation required to do a project. It
is depicted by an arrow. A node (also called an event), is a time oriented
reference point that signifies the start or end of an activity. It is
represented by a circle.
The difference between an activity and a node is that the activity
represents the passage of time and the nodes are points in time that denote the
starting or ending of a specific activity. In the diagram, activity A is
represented with i and j as the starting and ending nodes. The activity can also
be written as I -j. Event i is called the tail event and event j is called the
head event.
Dummy activity: An activity of zero duration that is used to represent the
logical relationship in the network diagram is called a dummy activity. Dummy
activities do

Activity A

<D

Tail Node

Head Node
not consume any resources, but are used to maintain the proper precedence
relationship between the activities that are not connected by the nodes. It is
represented by a dashed line headed by an arrow.

For example, in a project, A and B are concurrent activities. Activity C is

dependent on A and activity D is dependent on both A and B. Then the project
manager uses a dummy activity X to represent the relationship between activity A
and activity D.
Dependencies in the Project Network Diagram
A dependency is a relationship that exists between a pair of activities.
There are four types of activity dependencies that describe the relationship
between any pair of activities. They are: finish to start, start to start, start
to finish and finish to finish.
Finish to start
Finish to start dependency states that activity A must be completed before
activity B can begin. If activity A is obtaining raw material and activity B is
inspecting the raw material, then activity B can be performed only after the
completion of activity A. Therefore, the dependency is finish to start.
Start to Start
Start to start dependency states that activity B can be started only if
activity A has begun. This can be explained with the help of the previous
example - that is the inspection activity can be started and continued once the
raw materials start coming. Subsequently, both activities go on in parallel.
Start to Finish
Start to finish dependency states that activity B must start before
activity A can finish. For example, if a firm wants to develop a new information
system to replace the existing one, the firm has to confirm that the new system
is well operating. When the new system starts to work (activity A), the existing
system can be discontinued (activity B).
Finish to Finish
Finish to finish dependency states that activity A must finish before
activity B finishes! For example, data feed operation (activity B) cannot be
finished until the collection oi data (activity A) is completed.
ACTIVITY SEQUENCING
Once the project activities are identified using the work breakdown
structure, til project manager prepares an activity list of the project. He puts
ail the activities down in a logical sequence to arrive at the project
end-product. Several project management software packages like Project 2000
provide sequencing of activities to achieve the project end product. While
sequencing the activities, the project manager has to study various aspects such
as the description of the end product, mandatory- and discretionary dependencies
among the activities, external dependencies, other constraints and] assumptions
of the project.
While analyzing the product description, the project manager has to
consider the physical characteristics of the product and the logical sequencing
of the activities to achieve the end product. The product description is
generally less detailed in early] phases of the project and it is progressively
elaborated later.
The project manager analyzes the mandatory and discretionary dependencies
among the various project activities. Mandatory dependencies are those that are
inherent in tie nature of project. Here, the dependency between activities is
certain. For example, new machinery is erected only when the layout has been
finalized. Therefore the dependency among the activities is mandatory.
Discretionary dependencies are those dependencies of the project that are
defined by the project team. Tins dependency is also called as preferred
logic.
The project manager also has to analyze the dependencies among project
activities with external activities. For example, voter identity cards should be
distributed before the elections. Therefore, the activity of holding elections
is dependent on the distribution activity. The sequencing of activities is also
affected by several other constraints and assumptions made by the project
manager regarding the project.
Methods of Activity Sequencing
The project manager considers all the above issues to sequence the project
activities. The project manager sequences all the project activities in an
appropriate manner and represents them in the project network diagram. Some of
the methods of activity sequencing are given below. Figure 12.1 represents the
various activity relationships in ADM and PDM methods.
Arrow Diagram Method (ADM)
In this method, the network diagram is constructed using arrows to
represent the activities and connecting them at nodes to show the dependencies.
This method uses finish-to-start dependencies only to explain the logical
relationships. This method is also called as Activity- On -Arrow (AOA) method.
Precedence Diagram Method (PDM)
In this method, the network diagram is constructed using nodes to
represent the activities and connecting them with arrows to represent the
dependencies. Tin s method uses all four types of dependencies. This method is
also called as Activity-On-Node (AON) method.
Conditional Diagramming Methods
The project manager also uses conditional diagramming methods like GERT
(Graphical Evaluation and Review Technique) and system dynamics that represent
non-sequential activities like loops (where activities are repeated again and
again) or conditional branches (e.g. a design update is required only when
errors are found in the inspection). PDM and ADM cannot represent loops and
conditional branches.
ACTIVITY DURATION
After the project activities are sequenced, the project manager estimates
the duration of each activity to calculate the duration of the entire project.
The duration of an activity is the time period required to complete the
activity. As it is not possible for a person to work continuously, the project
manager may include some time allowance while estimating activity duration. He
assigns these allowances based on his experience, the difficulty involved in the
activity, the ability of the workman to execute it, etc. It is assumed that an
average performer completes an activity in the estimated duration with his
normal performance.
The activity duration is not synonymous with work effort. Suppose an
activity takes 30 days to complete, we cannot assume that the effort is made for
30 days, even though the activity duration is 30 days. For example, if the
activity is to consult an external expert for the given problem, the actual
consultation time is only about 3 hours, but the duration assigned for the
activity will be about 30 days considering the time required to find the expert,
discuss the matter and solve the problem.
Activity duration could also be influenced by the amount of resources
allocated. Generally speaking, more the resources, the shorter the duration of
the activity. For example, if more number of people are included to work on a
project, then the project can be completed on or before time. However, it cannot
be assumed that the relationship between activity duration and resources
allocated is completely proportional. Thus, the project manager has to allocate
more resources till the crash point is arrived at. Beyond this point, it is not
possible to reduce the duration of an activity.
The actual duration of activities may vary from the estimates. Therefore,
the project manager has to see to it that there is as little deviation as
possible. The different skill levels of manpower employed, unexpected events
like acts of nature, vendor delays, power failures, or misunderstanding the
nature of work are some of the causes for variations of actual activity
durations from the estimates.
Methods of Estimating Activity Duration
The project manager uses the techniques given below to estimate the
appropriate duration of the project activities.
Similarity to other activities
Some project activities may be similar to activities in other projects. In
such cases, the estimates of activity duration can be taken from those
activities. This is normally followed in case of administration activities
that are common for all projects.
Historical data
The actual durations of successful projects in the past can be used to
estimate the duration of the activity. Larger firms maintain an extensive
database of activity duration history that records the estimated time, actual
time, reasons for time overrun (if there was one), characteristics of the
activity, the skill levels of the people, etc. Whenever firms wish to assign
duration estimations, they refer to historical data and find the duration
estimate and actual time.
Expert advice
In case of highly technical activities, the project manager can consult a
technical expert to estimate the activity duration. He can also consider the
advice of vendors and other non-competing firms to assign the duration
estimates.
Delphi method
In this method, the project manager forms a group of people and asks them to
estimate the duration of an activity, after describing the nature and
characteristics of the activity. The estimates of each participant are then
 collected. Those participants whose estimations are very high or very low are
asked to explain the reasons for their estimates.
The project manager then discusses with all the group members to know why
their estimates are higher or lower than estimates of the other participants.
He then asks the participants to write down new estimates of duration after
the discussion. This process continues until the entire group arrives at a
particular estimate. In general, this method is followed when expert advice is
not available.
Three- point method
The duration of an activity may vary even when the same activity is repeated
in similar conditions. Therefore the project manager considers three types of
estimates in this method.
They are:
Optimistic time
Pessimistic time
Most Likely time
Optimistic Time (to)
Optimistic time is the minimum amount of time within which an activity can be
completed. It is possible to complete an activity within the optimistic time
only when the external environment is extremely favorable.
Pessimistic Time (tp)
Pessimistic time is the maximum amount of time required to complete an
activity. This happens when the external environment is unfavorable.
Most Likely Time(tm)
It is the time that is the best guess for an activity completion - neither
optimistic nor pessimistic.

Expected time
The project manager arrives at the expected time based on the above
estimates. The project manager calculates the estimate of duration of an
activity as,
t = (to + 4tm + tp) / 6
Wide band Delphi method
A combination of the Delphi method and the three point method is referred to
as the Wide Band Delphi method. In tins method, the members are asked to
give an optimistic time, a pessimistic time, and the most probable time,
instead of a single estimate. Then the project manager follows the Delphi
method and determines the duration estimate.
SCHEDULE DEVELOPMENT
Schedule development is concerned with determining a realistic start and
finish time for project activities. It aims to match project resources like
machinery, materials and labor with project activities over time. Good
scheduling eliminates production problems, facilitates timely procurement of raw
materials, and ensures project completion on time. Otherwise, it may lead to
delays in project activity, loss of inventory and cost overruns.
The project manager should be aware of the resources and the quantity of
these resources needed at every stage of the project. He has to prepare a
resource pool description that contains details of all the project resources
and their allocation to project activities.
The project manager prepares two types of calendars; project calendars and
resource calendars to schedule the project. Project calendars emphasize the
completion time of the project activities. Suppose it is estimated that the
project is to be completed in 7 200 hours in normal working conditions. Then
schedules are prepared based on the time estimates. The project manager assumes
that 60% of the project is accomplished, if 4,320 hours are spent on the
project. Most of the projects are scheduled based on project calendars.
Resource calendars schedule the project on the basis of the resources
used. The focus here is on scheduling and utilizing specific resources
effectively. For example, a construction project requires 1200 bags of cement.
If 360 bags have been used, the project manager can assume that 30% of the work
has been done. Here, the project manager concentrates on whether the specific
resources are being used effectively or not. Project calendars are concerned
with how various project resources are consumed over a period of time. Resource
calendars deal with how a specific resource or specific category of resources is
spent over a period of time.
TECHNIQUES FOR SCHEDULE DEVELOPMENT
The project manager can use some of the following methods for schedule
development:
Critical Path Method (CPM)
Program Evaluation and Review Technique (PERT)
Graphical Evaluation and Review Technique
These methods are used:
To estimate the completion time of the project
To find out if the project is behind, ahead of or on schedule.
To compare the actual resources spent with the planned resources at any
stage of the project.
To study activities that are critical for project completion and
activities that can be delayed without delaying project completion.
The project network diagram is used in schedule development.
Construction of a Network Diagram
Before assigning the duration estimates, the project manager sequences all
the activities and then gives numbers to all nodes.
Numbering nodes
Step 1: Assign the starting event as 0 .
Step 2: Assign the next number to any unnumbered event whose predecessor
events are already numbered.
Repeat Step 2 until all events are numbered.
The basic scheduling computations of a project can be grouped under three
heads: Forward pass, backward pass, and calculation of floats.
Forward pass
The forward pass computation finds the earliest start and earliest finish
times for each activity; or the earliest expected occurrence time for each
node. The computation starts with an assumed earliest occurrence time of zero
for the initial project event.
The earliest starting time for activity (i,j) is the earliest event time of
the tail event,
i.e. ESij = Ei.
The earliest finish time for activity (i,j) is the earliest starting time plus
the activity duration, tij
i.e., EFij = ESy + tij
Event is just a time oriented reference point. Events will have only the
earliest time and latest time. The earliest time is obtained in the forward
pass, and the latest time is obtained in the backward pass. But every activity
will have earliest start time, earliest completion time in forward pass and
latest start time and latest finish time in backward pass.
Suppose an activity A is connected between two events i and j, and
duration of the activity is 5 units of time. Then the earliest start time of
activity A is 0 and the earliest completion time is 5. Also, the earliest time
of event i is 0, and the earliest time of event j is 5.
Earliest event time for event j is the maximum of earliest finish time of
all activities leading into that activity.
Ej = Maximum {Ei + tij}.
 Consider the network diagram, where three activities are leading into
event m.

Here, the earliest event time at m , is the maximum of the earliest

finish times of all the activities ending into that activity.
Thus, Em is the maximum of
{(ESim+ tim), (ESjm + tjm), and (ESta + tkm)}
Backward pass
The backward computation finds the latest start and completion times of
each activity without affecting the total project duration. Here the calculation
starts at the end node

and ends with the first node . The total project duration is taken as the
latest time of the end node.
Latest finish time for activity (i,j) is the latest event time of event j. i.e.,
LFjj = Lj
Latest starting time for activity (i,j) is the difference between the latest
completion time of (i,j) and the activity duration, i.e., LS , = LFy -1 ^
Latest event time for event i is the minimum of the latest start time of all
activities starting from that the event i.
L = Minimum {LFy -1 j:}.
Consider the network diagram, where three activities are beginning at the event
i.
The latest event time of event i is calculated as:
Minimum of {(LFy - %), (LF™ -t^), (LFa - t,i)>
Calculation of floats
There are three types of floats. They are:
Total float
Free float
Independent float
Total Float
This is the amount of time by which the completion of an activity can be
delayed beyond its expected earliest completion time without affecting the
overall project duration. It is calculated as the difference between the latest
start time and the earliest start time of a project activity.
Total float = LSij – Esij
= (Lj – tij) – Esij
= (Lj – Ei) - tij
Free Float
This is the amount of time by which the completion of an activity can be
delayed beyond the earliest finish time without affecting the earlies* start of
a subsequent activity.
Free float= Earliest event time of event j - Earliest event time for event
i - activity time (i,j)
= (Ej-Ei)- tij
Independent Flout
This is the amount of time by which the start of an activity can be
delayed without affecting the earliest start of any activities following
immediately.
Independent float= (Ej - L,) – L
Event slacks
For an event, slack is the difference between the latest event time and earliest
event time. For an event i, slack = L, - E,
For an activity (i, j), the slack of event j is called head slack, and the slack
of event i is called tail slack.
Head slack = L,- - Ej
Tail slack = L; - E,
The values of free float and independent float can be expressed in terms of head
and tail slacks.
Free float = Ej - E-, - f»
= LJ-EI-tij-(LJ-EJ)
= Total float - Head slack Independent float = (Ej - L;) – u
= EJ-E1-tjj-(L1-Ei)
= Free float - Tail slack
Critical Path Method (CPM)
Critical Path Method is a network analysis technique used to predict the
project duration by finding out which sequence of activities (the critical path)
has the feast amount of scheduling flexibility. In this method, the project
manager identifies the critical activities of the project that constitute the
critical path of the project.
Critical activities are those activities whose total float value is 0.
This means, any delay in the critical activity results in a delay in the entire
project to the same extent. The project manager identifies a series of critical
activities from the beginning of the project to its completion. The series of
critical activities is called the critical path of the project.
Table 12.3: Floats of the Project Activities

ActivityDurationTotal Float (LrEi)-tyFree Float (Total Float -Head

Slack)Independent Float
(Free Float - Tail
Slack)
A6100
B1110
C8-.. 000
D5444
E9000
F12000
G3000
X-000
The critical path of the project is the longest path tlirough the network.
The length of the critical path gives the shortest allowable time for the
completion of the project. This helps the project manager to concentrate and
prioritize critical activities while allocating project resources.
Program Evaluation and Review Technique (PERT)
The duration estimates in this technique are probabilistic. The project
manager considers optimistic, pessimistic and the most likely completion time of
each activity rather than a single estimate as in the Critical Path Method.
The project manager calculates the expected time for each activity as,
te= (to+tp+4tm)/6,
Where to, tp, and tm are the optimistic, pessimistic and most likely
completion times of a project activity.
The methodology of PERT is explained below.
Step 1: Develop a list of project activities, and identify all their immediate
predecessors.
Step 2: Calculate time estimates for each activity as te= (to+tp+4tm)/6
 Step 3: Calculate the earliest start time and earliest finish time for each
activity, based
on the expected time.
Step 4: Identify the critical path of the network taking into consideration
those activities whose total float value is 0 and determine the expected
project duration.
Step 5: Calculate the standard deviation of the project. The standard
deviation is a square root value of project variance. The variance of a
project activity is calculated as (tP - to )2/ 36, and the project variance is
the sum of variances of all project activities.
Step 6: The square root value of project variance gives the standard deviation
of the project. Calculate the value of z as,
z = (Due date - Expected date of completion) / (Standard deviation of the
project).
Where, z is the number of standard deviations the due date lies from the
mean or expected date.
Step 7: Using the standardized normal distribution table, determine the
probability of meeting a specific completion date for the obtained z value.
Step 8: Crash or compress the project to the extent possible.

Graphical Evaluation and Review Technique (GERT)

Graphical Evaluation and Review Technique is similar to PERT, except that
it allows multiple project activities by the way of looping and branching
project activities. Suppose an activity fails due to some unavoidable reasons,
then the project manager has to look for alternative ways to obtain the end
result.
Similarly, some of the activities may not be carried out at all, some may
be partially carried out and some that may be repeated. PERT cannot show
alternative plans in a single network diagram. GERT overcomes these problems as
it shows alternative ways to continue the project.
Duration Compression Techniques
When the project manager finds that the expected completion time of the
project is more than the desired time, he attempts to reduce the project
duration using some duration compression techniques like crashing, fast
tracking, etc.
Crashing
Crashing refers to decreasing the total project duration after analyzing a
number of alternatives to determine how to get the maximum duration compression
for the least cost. Here, the project manager reduces the project duration by
allotting more resources, subcontracting some activities, using more labor, etc.
The project manager considers the time-cost trade-offs for all project
activities. These trade offs reveal how the duration of a project activity is
reduced with additional costs. Normally, the project manager focuses on
time-cost trade offs for the critical activities of the project as they play a
major role in deciding the project completion time.
Some people argue that crashing may decrease the quality of a project. As
all project activities cannot be completed just by adding more resources, the
project manager should ensure that the quality of the project end product does
not suffer as a result of crashing. Activities like planning and inspection are
not crashed, in general, because they have an effect on the quality of the
project output.
The following are the types of activities that are considered for
crashing:
A critical activity of the project.
An activity of longer duration.
 An activity that has low per unit crash cost.
An activity that does not cause any quality problems, if crashed
An activity that is labor intensive.

The crashing procedure is explained below.

Identify the sequence of activities and prepare a network diagram. Each

activity should list the details of normal cost, normal time, crash cost and
crash time.
Compute the critical path of the project network.
Calculate the crashing cost for all project activities using the formula,
(Crash cost - Normal cost)
(Normal time - Crash time)
Rank all the project activities in the ascending order of their crashing cost.

Crash a critical activity that has the least crashing cost and calculate the
new cost by adding the cost of crashing to the normal cost.
When the critical path duration is reduced by crashing, other paths may also
become critical. These are called parallel critical paths. So the project
duration can be reduced by crashing the activities of activities in the
parallel critical paths simultaneously.
The crashing process is continued till further crashing is not possible or
it does not result in the reduction of project duration.
For different project durations, the total cost is found. The optimal
project duration is found by the project duration corresponding to the
minimal total cost.
Fast tracking
In this technique, the project manager attempts to reduce the project
duration by doing ^~ project activities in parallel. Suppose activity B can be
started only after the completion of activity A in normal conditions. But the
project manager can start both activities at the same time, but makes
modifications to activity B as per the changes in activity A. This ultimately
reduces the duration of the entire project.
For example, software code is normally written only after the design is
approved. But both the activities are started at the same time and the final
code is written only after the software design is approved by the top
management. But this technique requires modifications, reworking, etc.
Resource Leveling
CPM and PERT techniques assume that the project has unlimited resources,
and*they can be assigned for project activities. However, in reality, project
resources are usually limited. Sometimes activities may be delayed because of
the non-availability of resources.
So, the project manager sequences the project keeping in mind the
availability of resources, which forces him to recalculate the activity
schedules. Normally, the project manager assigns the available resources to the
critical activities first as they play a major role in determining the total
completion time of a project.
SCHEDULE CONTROL
The project manager has to ensure that all the project activities are being
carried out as per the schedules. Schedule control studies all the factors that
affect project schedules. Schedule control determines the schedule changes and
manages to complete them within the desired duration. Based on the changes, tire
project manager updates the project schedules.
 The project manager has to consider the project schedule, performance
reports, and change requests while controlling the schedule. The project
schedule represents the planned start and expected finish dates for each project
activity. It provides a basis for the project manager to measure the schedule
performance. Performance reports provide information about schedule performance
and point out whether the activities are proceeding as per the planned schedule
or not. The project manager initiates controls to complete all tire activities
within the desired time. He considers the change requests made by the project
stakeholders, which may be verbal or written. These change requests may be for
extension or acceleration of project schedules.
The project manager uses techniques like schedule change control system, and
performance measurement in controlling the project schedule. The schedule change
control system describes the procedures by which project schedules can be
modified. The methods include redrawing the project network diagrams, and
understanding the proposed changes. Performance measurement systems assess the
effective completion of the project activity in the nomial duration. They
calculate the magnitude of variation that may occur for each project activity.
Software packages like Project 2000 also help tire project manager in
controlling tire project schedules by continuously studying the planned and
actual time periods of each project activity. Sometimes additional planning is
required when the project manager thinks that it is important to incorporate
certain changes in the project. The project manager then revises the duration
estimates, modifies the sequence of activities and analyzes alternative
schedules.
Network Techniques – PERT and CPM
Network analysis is one of the most popular techniques used for planning,
scheduling monitoring and coordinating large and complex projects comprising a
number of activities. It involves the development of a network to indicate
logical sequence of work content elements of a complex situation. It involves
there basic steps:
Defining the job to be done.
Integrating the elements of the job in a logical time sequence.
Controlling the progress of the project.
Network analysis is concerned with minimizing some measure of performance of
the system such as the total completion time of the project, overall cost and so
on. By preparing a network of the system, a decision maker can identify (i) the
physical relationship (properties) of the system, and (ii) the
inter-relationships of the system components. Network analysis is specially
suited to projects which are not routine or repetitive and which will be
conducted only once or a few times. Thus, network analysis is the organized
application of systematic reasoning for planning, scheduling the monitoring
large and complex projects.

Objectives of Network Analysis

Network analysis can be used to serve the following objectives :
Minimization of total time : Network analysis is useful in completing a project
in the minimum possible time. A good example of this objective is the
maintenance of production line machinery in a factory. If the cost of downtime
is very high, it is economically desirable to minimize the maintenance time
despite high resource costs.
Minimization of total cost. Where the cost of delay in the completion of a
project exceeds cost of extra effort, it is desirable to complete the project in
time so as to minimize total cost.
Minimization of time for a given cost. When a fixed sum is available to cover
cost, if may be preferable to arrange the exis ting resources so as to reduce
the total time for the project instead of reducing total cost.
Minimization of cost for a given total time. When no particular benefit will be
gained from completing the project early, it may be desirable to arrange
resources in such way as to give minimum cost of the project in the set time.
Minimization of idle resources. The schedule should be devised to minimize large
fluctuations in the use of limited resources. The cost of having men / machines
idle should be compared with the cost of hiring resources on a temporary basis.
Network analysis can also be employed to minimize production delays,
interruptions and conflicts.
Managerial Applications of Network Analysis.
Network analysis can be applied to a very wide range of situations involving
the use of time, labour and physical resources. Some of the more common
application of network analysis in project scheduling are as follows :
Assembly line scheduling.
Installation of a complex new equipment, e.g., computers, large machinery
Research and Development.
Maintenance and overhauling complicated equipment in chemical or powr
plants, steel and petroleum industries, etc.
Inventory planning and control.
Shifting of manufacturing plant from one site to another.
Development and testing of missile system.
Development and launching of new products and advertising campaigns.
Control of traffic flow in metropolitan cities.
Long range planning and developing staffing plans.
Budget and audit procedures.
Organization of international conferences.
Launching space programmes, etc.
Advantages of Network Analysis
The network analysis offers the following benefits :
Network analysis is simple and easy to apply even by people without advanced
knowledge of mathematics.
It is a powerful tool of planning, scheduling and control. In the planning
stage, it helps to identify the tasks to be performed and the resources
required. During scheduling, network analysis time and resources needed at
each stage of activity can be calculated. In the monitoring phase, it is
useful for measuring the actual against the planned performance.

Network analysis shows in a simple way the inter-relationship of the various

activities constituting a project or a programme. This helps in bringing out
clearly the technological interdependence of the various activities and so
in integrating the project plan.
It helps the management to think through the project systematically ensuring
that the sequence requirements are adequate and necessary. It also forces
the management to prepare time estimates for individual portions of the
total project. This in turn helps to identify possible improvements in these
portions or in their relationship to the whole project.
Network analysis reveals the critical path or the series of activities that
require longest time. When it is necessary to reduce the project completion
 time, the network technique can identify those activities for which extra
effort would not be beneficial. Extra time can he taken for some of these
without lengthening the total project time.
It develops a discipline and a systematic approach in planning and
scheduling which is not accomplished to this extent by older and traditional
methods.
Network analysis identifies the earliest possible starting date and latest
allowable completion date for each activity.
It provides a comprehensive view of the project and brings about better
communication and coordination between the concerned departments.
Network analysis facilitates control by exception whereby management need
act only when the situation is out of control.
It focuses attention on the critical elements of the project and suggest
areas for increasing efficiency and reducing costs.
Network analysis provides up-to-date information on the progress of the
project through frequent re porting and accurate analysis.
It lends itself easily to computers. Several computer manufacturers provide
standard packages of network analysis routines with their equipment.
Limitations of Network Techniques
Network techniques suffer from the following shortcomings.
It is very often difficult, if not impossible, to construct an accurate
network for complex projects. In real world projects interrelationships
between activities and events are not clear cut and precise.
Network analysis based on the assumption that all the resources required to
perform any number of activities simultaneously are available. In reality,
resources are very often limited and less than those needed for the network.

What may appear to be a non-critical path in the network of a project may

actually be a semi-critical path, In such cases it is quite easy for delays
to occur causing the path to became truly critical even though network does
not show it critical.
Several complexities are involved in calculating the project duration in the
form of alternative critical paths, compression and relaxation occurring
simultaneously and critical activities changing to non-critical ones.
Project networks involve a large number of activities and it is very
difficult to calculate valid time estimates for them. This problem applies
especially to PERT analysis where three time estimates are required for each
and every activity.
When the network has hundreds of activities use of computer becomes
necessary. Network analysis becomes an expensive exercise.
Terminology of Network Analysis.
The basic concepts. Symbols and conventions common used in network techniques
are described below :
Activity. An activity represents some action and as such it is a time
consuming part of a project. It may be an operation, transportation or
inspection. It consumes both time and resources. An activity is represented by
an arrow. Each and every activity has a point of time where it begins and a
point where it ends.
Event. An event represents the start (beginning) or completion (end) of some
activity and as such it consumes no time. It has no time duration and does not
consume any resources. It is also known as a node. An event is represented by
a circle. An event is not complete until all the activities following into it
are completed.
Network Diagram. It is a pictorial presentation of the various events and
 activities concerning a project. In a network diagram each arrow represents an
activity and each circle an event. The event which is the ending point of two
or more activities is called node.
Critical Path. Critical path is the longest path in a network. It is the
sequence of activities that requires the maximum time for completion. It is
critical because its length determines the minimum time in which the project
may be completed. If there is any delay in the critical path activities the
project is also delayed. The critical path is denoted by darker or double
lines to distinguish it from the other non – critical paths.
Critical Activities All the activities associated with the critical path are
called critical or bottleneck activities. Such activities require special
attention.
Stack. Stack is the time period for which an activity can be delayed without
causing delay in completion of the project. Stack may be positive or negative.
Positive slack represents idle time and resources whereas negative slack
occurs when the project requires more resources than are normally available.

Float While slack is used for events, float is applied for activities. There
are various types of float, e.g. total float, free float, independent float.

Arrow Diagram. An arrow diagram is a network in which arrow are used to

represent activities.
SELECTIONG THE STAFF REQUIRED
Good leaders are essential for the successful management of projects. To
effectively manage a project, these leaders require a group of dedicated
individuals, committed to achieving project goals. While selecting a good staff
is important, it is equally important to assign them the right jobs. The
following are involved in project management :
The Project Manager
The Project Team
To understand the staffing requirements of a project, it is necessary to
answer the following questions:
What traits should an individual posses to be a project manager?
Who should a project team comprise of?
Who should a project office comprise of?
What potential problems can arise while recruiting staff?
What could be the consequences of losing key members of the project team?
It is advantageous to plan for staffing only after these questions have
been answered. Proper ground work has to be done before starting the selection
process. This ground work involves understanding the characteristics of project
management, its processes and the project environment.
Selecting the Project Manager
The project manager plays a key role in the success of a project. Project
managers should be able to analyze project risk and uncertainty. Exhibit 13.2
gives the skills required for a project manager. The following are the desirable
traits of a project manager;
He should be honest
He should understand the problems of the personnel
He should understand the technology invovled in the project
He should understand organizational principles and the communication process

He should be quick and alert in responding to problems

He should be versatile
 He should have very high energy levels
He should possess good decision – making skills
Generally, the project organizationa establishes a committee to screen
candidates for the post of project manager. This committee;
Establishes a selection criteria apart from the professional qualifications of
the project manager.
Acts according to the selection policy received from top management
Involves senior management in the selection process.
The following parameters are checked when screening a candidate:
Background and experience : The background and experience of the candidate
should suite the nature and need of the project. The selection committee should
consider not only the candidates educational background, but also his
conceptual, analytical, operational, technical and practical experience.
Leadership and strategic expertise: The committee should check the
candidate s foresightedness i.e., the ability to visualize the final output
while working out the details of the planning and implementation phases.
Technical expertise: Though technical knowledge is not a parameter for
selecting a project manager, it can help a project manager direct, evaluate and
make better decisions regarding the technical aspects of a project. The project
manager should be able to understand:
The technology involved in tire project
The various engineering tools and techniques used
The requirements of the customers in specific markets
The application of the product
The emerging trends in technology
People management skills: These skills are concerned with tire ability of
the project manager to
Motivate, inspire, lead and train the team members
Listen with patience and give feedback
Relate to feelings, needs and emotions
Resolve and prevent conflicts
Be sensitive and diplomatic while communicating tough decisions
Selecting the Core Team Members
This is the most important aspect of the whole selection process.
Recruiting and selecting tire core team members is a challenging task for the
project manager. Selecting the core team members at the beginning of the project
initiation phase facilitates their participation in tire planning of the
project. The following are expected of the core team members:
Commitment to project: Members of the core team should prioritize their duties
and responsibilities, and be fully committed to the project.
Sharing responsibility: Team members should share responsibilities equally
among themselves.
Adaptability: The team members should be able to adapt to tire unexpected
situations.
Orientation towards the task: Team members should be result oriented because
they will be judged mainly by their ability to finish the task as per
schedule.
Staying on schedule: Members should be able to finish tire task assigned
within time, budget and quality specifications.
Trustworthiness and supportiveness: An effective team is characterized by
trust and mutual support among team members.
Orientation towards team: The team members should have a strong sense of team
spirit.
Open-mindedness: The team members should encourage each other and listen to
each other s points of view, so as to come up with creative solutions to
problems.
 Flexibility to function across the structure and authority: The team members
should learn to be adaptable, flexible and open minded while working with
people from different backgrounds and with different experiences.
Usage of project management tools: Team members should make use of technology
as far as possible, because knowledge of software tools will help them respond
faster to the problems, prepare and deliver activity status and progress
reports.
Selecting the Contracted Team Members
In some cases, some individuals from external agencies may be selected to
work on a project for a limited period of time. Generally, organizations
outsource because they do not have sufficient staff or lack the required
expertise. For instance, many software development firms source tlieir project
team members, on a contract basis, through manpower consultancies. To recruit a
good contract team, a project manager must:
Determine the skill set needed and the number of personnel required
Identify the list of companies to be invited to submit proposals
Set up criteria to analyze the proposals and select the consultants
Shortlist vendors and invite them to make formal presentations
Organize presentations on site
Enter into a contract after choosing the final consultants.
Contracted team members work on a project only for a certain period of
time. They leave the project after their work is over. Many problems arise due
to the presence of contracted team members on the project. These problems arise
since:
They work in the project for only a short period of time, tlieir activities
must be carefully integrated with the project schedule.
They have to be assigned a role in the project, and tlieir relationship with
other activities must also be defined.
They may have a low level of commitment, and quality standards may be
violated.
• They may require greater supervision and monitoring, and the project
manager will be forced to take on this additional responsibility.

The Project Office

The project office is the entity in an organization that helps the project
manager carry out his tasks. The people in this office are dedicated to the
achievement of the project goals. It is also their responsibility to maintain a
good working relationship between the project and functional managers. The
responsibilities of the project office are:
To act as a center of information to both external and internal
stakeholders.
To follow contract requirements by controlling time, cost and performance.

To document the tasks performed and communicate the same to all

stakeholders.
To ensure authorization of tasks accomplished and their funding through
contract documents.
To integrate work across functional departments of the organization.
Though the size of the project office is determined by the project ik
pager basically dependent on factors like project size, need for internal
support category of the project, level of technical expertise required, and the
customer support needed.
The project manager should employ only those individuals in a project
office who are interested in making a career in project management. The
following guidelines help the project manager recruit staff for the project
office:
Select only those candidates who wish to become project managers
by transforming themselves from technical champions to generalists.
Select individuals who are suitable for being promoted vertically rather
than horizontally.
TEAMS
A team is defined as a reasonably small group of individuals, who bring in
a set of complementary and appropriate skills and who hold themselves mutually
accountable for achieving a clear and identifiable set of goals. Teams have to
accomplish performance goals and the team members are mutually accountable for
achieving them.
Getting a group of individuals together to produce a synergistic output is
the biggest challenge for the project manager. Though a major part of
team-building is done in the project organization phase, it is a process that
lasts throughout the project.
Need for Team Building
The ever increasing complexities associated with implementing a project
raises the need for building teams that can address various problems. Solving
these problems (technical, political or social) requires expertise of different
kinds. Only multidisciplinary teams having members with diverse skills can solve

all these problems.

Project Team Building
Team building can be defined as the "process of planning and encouraging
working practices that are effective and which minimize the difficulties that
obstruct the team s competence and resourcefulness." In other words, it is the
process of gathering a group of individuals with diverse skills and making them
work together as a group. Like projects, teams too have a life cycle. Exhibit
13.3 describes the life-cycle of a team.
Complex projects involve multifunctional tasks that demand a high level of
innovation and state-of-the-art teclmology. Such projects require teams of
specialists with diverse skills.
Most of the project team building processes and methods that are commonly
used today, were first used in the aerospace industry where temporary task
forces were used to carry out short duration projects. This industry initially
faced a lot of difficulty in getting individuals from different functional areas
to work together. Many organizations found that bringing together specialists
from varied disciplines and building an effective team is difficult. This made
them recognize team building as a process that require considerable time.
The Process of Project Team Building
A basic project team consists of a project manager and a group of
specialists recmited for the project. A project team has both managerial and
non-managerial staff who work either full-time, or on a contract basis. All the
team members participate in decision making concerned with the team.
The process of team building is effective only when it is directed by a
strong leader. The team building process is based on the type of the project,
the leadership style of the project manager and on the type of individuals
involved in the team. The project manager must undertake the following
activities for building a team;
Team Life Cycle
Like projects, teams too have a life cycle. There are five stages in a
team s life cycle: collecting, entrenching, accommodating, synergizing and
decline. The team can be dissolved at any of these stages either because it is
no longer feasible for it to work together, or the task has been accomplished.
The project manager s knowledge on the team s life cycle helps him know the
stage at which his or her team is operating.
Collecting is the process of grouping individuals to solve a problem
collectively. At this stage, the members try to find out what their roles and
responsibilities will be.
Entrenching as the team starts working, the members would evaluate themselves on
various issues. Entrenching occurs when the members know the way a project
proceeds. In this phase the team members compete for power and the project goals
are not clear. Hence this phase is usually unproductive and destructive.
Accommodating involves building mutual trust, harmony, self esteem and
confidence by resolving disagreements. In mis stage the productivity of the team
increases.
Achieving synergies a team achieves synergies when the performance of the total
team is greater than the performance of all individual team members put
together. This is the stage in which the team works most effectively.
Decline is a phase in wliich tire team starts witnessing a decline in its
effectiveness. The decline in effectiveness can be due to the rigid nature of
tasks or due to shifts in focus. Breakup is a situation in which the team is
dissolved before finishing the task.
Make plans for building a team
Negotiate for team members
Organize team members
Hold a kick-off meeting
Get commitments from team members
Establish communication links among team members
Conduct team building exercises
Induce team building into all project activities.
Make plans for building a team
The project manager usually starts the team building process from project
planning stage. The basic aspects of project planning are important for team
building because planning has a significant impact on team building. Planning
gives the what? how? and when? aspects of a project. After organizing the team,
jobs are assigned on the basis of these aspects. Writing a detailed project plan
has a profound impact on the team building process.
What - Team goals and objectives are based on the project goals and
objectives. There should be compatibility and consistency between the team goals
and project goals.
How - Planning and documenting project procedures and controls should be
done carefully. This aspect identifies the process of accomplishing the project
goals in the best possible manner using team effort.
When - Project schedules should be prepared keeping in mind the abilities
of the team members.
Who - Defining project roles carefully helps the project manager to select
the right people for ever} job. This is the phase in which decisions are taken
on the kind of individuals required to work on the project.
Negotiate for team members
This involves sourcing the most promising project team personnel from the
available candidates. While selecting the team members, the project manager
must consider what contributions each team member can make to the project and
to the team.
Organize the project team
Organizing a group of diverse individuals into a team is the responsibility of
the project manager. In this phase every individual is assigned with a
specific job. While organizing the project team, it is essential to design
work authorization for every work package in the WBS to be assigned to every
 individual in the team. After assigning work to every team member, a linear
responsibility chart should be prepared and distributed among the team
members.
Authority and responsibility
Authority and responsibility are usually two sides of the same coin. Having
one without the other is futile. The project manager should have authority
over the project and should be responsible for completion of the project
within the time, budget and according to specifications. Even though authority
over the project can be delegated, it is the project manager who is ultimately
responsible for completing the project.
Holde a kick-off meeting
The basic purpose of holding a kick-off meeting is to get the project started
on the right note and to initiate the team-building process. The kick-off
meeting helps the project manager bind everyone involved in the project under
a unity of purpose to achieve the project goals. Though kick-off meetings do
not have a specific structure, the following guidelines should be followed;
Introduce team members to each other
Establish working relationships and communication channels
Set goals and objectives for the team
Review the project status
Identify the problem areas in the project
Specify responsibilities and accountability of individuals as well as
groups.
Get commitments from team members
The project manager must ensure that the team members are committed to the
project. In the early stages of the project life cycle, individual team
members may not be sure about how long they will work on the project. This
gives rise to uncertainty and consequently lack of commitment. It is the
project manager s responsibility to remove this uncertainty and to make sure
that all the team members are deeply involved with the project.
Establishing communication links among team members
Teamwork is not possible without proper communication channel. It is the
responsibility of the project manager to establish and maintain all the
communication channels across the organizational hierarchy. A team cannot be
effective unless there is effective communication among the team members.

Conducting team building exercises

Team building exercises enhance the efficiency of teams particularly in the
initial phases of the project life cycle. Team building proves to be effective
when integrated with the regular day-to-day activities of the project. Once
the project manager completes the team building process, he has to establish
the operating rules for the team.
Establishing Operating Rules
Operating rules describe the functioning of a team -decision making, conflict
resolution and progress reporting along with other administrative jobs.
Exhibit 13.4 gives the parameters for effective functioning of teams. The
different aspects to be considered for establishing operating rules are:
Decision making
Project managers take many decisions in their day-to-day operations. There are
three types of decision making models. They are:
Directive model
Participative model
Consultative model
Directive model: In this model the project manager or the activity manager
takes the decision. In this approach, it is only the decision maker s
information that is available, which may or may not be sufficient or correct.
Participative model: In this model, every team member participates in decision
making. Because, this model is participative in nature, team members are more
committed to the decisions taken in a participative approach than they are to
decisions taken in the directive model.
Consultative model: This model combines the best of the participative and
directive models. While the leaders make most of the decisions, they do so
only after consulting all the members of the team.
The project manager selects the decision making model, which he thinks to be
the most appropriate for the given situation. A few organizations have
developed their own decision making models and tried to support their
decisions with the help of financial parameters like Expected Monetary Value
(EMV).
Resolving conflicts
Conflicts are inevitable in teams. Disagreements arise because individuals
see, hear and interpret things differently. When conflicts focus on fault
finding and fixing blame, they can cause frustration and stress. However, a
lot depends on how the conflict is managed. While badly managed conflicts
damage relationships, properly managed conflicts can lead to creative
solutions, greater job satisfaction and better relationships.
When faced with a conflict, different people respond in different ways. Some
of these approaches are
Avoiding - This approach focuses away from the conflict altogether.
Unwillingness to talk things out, pretending that a conflict does not exist,
making attempts to smooth things over when differences appear, are all
characteristic of this approach. Many a time this approach can prove counter
productive. After all, no problem can be solved by wishing it away. But this
approach can be useful in the following situations;
When the project team needs time to gather facts or think abo^ a problem
situation;"
When it is advisable to allow emotions to settle;
When the potential damage of confronting the conflict overweighs the benefit
of resolution.
Accommodating - While avoiders shut themselves out, accommodators neglect
fheir own concerns in order to satisfy the concerns of others. They are
usually more concerned with being liked and getting along than with being
right. As with avoidance, accommodation can sometimes prove disastrous. But
this style is the best option when:
Members realize they were wrong;
Members want to make a goodwill gesture when the issue is important to
others:
Preserving relationship is more important than the issue at hand.
Competing - A person who adopts this approach is committed to his own position
or perspective and considers relationships as secondary issues. Though this
approach does generate ill will that is costly and unpleasant, it does have
its advantages in the following situations:
in emergencies
when announcing unpopular decisions
when the members have to protect themselves against those who take advantage
of a more cooperative approach.
Collaborating - This approach focuses on satisfying both parties to the
greatest degree. It is cooperative in nature. Both parties work together to
resolve conflicts ina way that meets the concerns of both. While a
collaborative style is not appropriate in all cases, it is particularly
effective when:
both parties concerns are too important to be compromised;
 a long-term relationship between the parties is important
Compromising - Though tins approach is also cooperative in nature, here the
cooperation is dictated by self interest. Each party forgoes something that it
is seeking in order to reach an agreement. Here the goal is an expedient,
mutually acceptable solution that partially satisfies both the parties. A
compromise is best when:

the goals of both parties are important but not worth pushing too hard to
achieve
a quick solution is the need of the hour
a temporary settlement is needed
two parties with equal power are committed to mutually exclusive goals.
Building consensus
This is the most important part of all the team operating rules. Building
consensus helps test the creativity of the team members and the team at
various stages of the project life cycle. It helps team discover solutions to
problems.
Brainstorming
Brainstorming sessions prove to be useful when the team cannot arrive at
a solution on a particular issue. It helps project team discover solutions. At
a brainstorming session, all the participants are free to come up with their
ideas. Discussion on the ideas starts only after all the ideas have been
listed. Considering each idea with an open mind results in identifying the
underlying solution.
Team meetings
It is the responsibility of the project manage* to decide the. frequency,
duration and timings of team meetings. He must prepare and distribute the
agenda, decide who will chair trie meeting and assign icsponsiteiiity foi
tecotdmg asnsk dvstafowtvug, the vavautes.. The project manager should ensure
that all the team members participate in all the meetings that are held at
various stages of the project life cycle. He should also make sure that the
team members understand the rules and structure of team meetings. Team
meetings are held for solving problems, scheduling tasks, planning and
discussing issues that affect the performance of the project and for taking
decisions.
Advantages of Team Building
Team building is the most effective tool in project management. Apart
from helping the project manager to simplify complex tasks and solve problems,

it offers the following advantages:

Helps conflict resolution
Motivates team members
Improves creativity
Develops inter-dependency among team members
Minimizes communication problems
Facilitates collective decision making
Enhances job satisfaction
Disadvantages of Team Building
The disadvantages of team building are as follows:

An un-supportive top management and a faulty concept can affect the success
of a project team.
Inappropriate team members on the project team and an inappropriate project
manager can also lead to serious problems in the project, even if there is
 strong team building process.
It is difficult to implement effective team-building practices in new
projects.
PROCESS OF COST MANAGEMENT
The process of cost management involves four steps:

Resource planning
Cost estimating
Cost budgeting
Cost control
Resource planning identifies the resources required and the
quantitieFrequired of each of these, for the completion of die project. Cost
estimating is calculating the approximate costs of all project activities, while
cost budgeting is the assigning of costs to each project activity. Cost control
involves taking necessary steps to keep project costs within permissible limits.
RESOURCE PLANNING
Resource planning is the process of identifying what project resources are
required and in what quantities. Resources normally include money, manpower,
machinery and: materials. For instance, the construction of a cement plant
requires skilled workmen, some initial investment, machines like concrete mixers
and various construction materials. The project manager should have a thorough
knowledge of all the project activities in order to allocate the resources
properly.
Resource planning is done after considering the Project Scope Statement,
the Work Breakdown Structure of the Project, Historical Information, Description
of the Resource Pool, and Organizational Policies.
Project Scope Statement: The scope statement allows all project
stakeholders to gain an understanding of the project. It explains why the
project has been taken up and what the main objectives of the project are. Both
these aspects have to be considered during resource planning.
Work Breakdown Structure (WBS): The WBS is a deliverable-oriented
grouping of project elements. Each descending level of WBS represents an
increasingly detailed description of a project component (the component may be a
product or service). As it describes all the project activities, it gives the
project manager an idea of the resources that will be required.
Historical Information: The project manager studies similar projects that
were successfully implemented earlier. This gives him an idea of the resources
he will require to execute the current project.
Description of Resource Pool: Here, the project manager specifies what
project resources he will require and in what quantities. For example, the skill
levels of the workmen, and the kind of machinery and materials to be used, are
listed. The resource pool description is specific to each project. It also
varies from one phase of the project to another. For example, in the planning
phase of an engineering design project, only senior engineers are required.
While the project is being executed, junior engineers can also be used for
activities like inspection, quality testing, etc.
Organizational Policies: The project manager has to abide by the
organizational policies while developing resources plans. Policies regarding the
purchase of supplies and staffing should be considered. For instance, if a firm
has a long-term contract with a specific supplier for the procurement of raw
materials, the project manager must go to the same supplier.
While allocating resources for various project activities, the project
manager identifies the alternative ways of completing each activity and makes
use of the opinions of experts in various fields.
Identification of Alternatives
There may be several ways of completing a particular project activity. The
resources required vary with each method. The project manager uses techniques
like brainstorming, and focused group interviews to identify different methods
of completing different activities. For example, the project manager may hold
discussions with his team members to identify the suppliers in the market from
whom they can procure the required raw materials.
Expert Opinions
The project manager consults experts like consultants and researchers, to
determine what inputs he will require to implement the project. The ideas given
by these experts help the project manager to come up with better resource plans.
Sometimes, the project manager may get contradictory views about resource
allocation. When this happens, the project manager should choose a suitable
approach after a careful analysis of his own constraints.
The Resource Planning process thus specifies the project resources
required to execute a project. The resource plan shows the type of resources
required and the quantities in which these are required. These resources are
obtained either through staff acquisition or by procurement (discussed in
Chapter 20).
COST ESTIMATING
After the resource requirements are identified, the project manager
develops an estimate of the costs of the resources required to execute the
project. This includes identifying and evaluating various cost alternatives. The
project manager considers the WBS, resource rates, activity duration estimates,
historical information and the chart of accounts in estimating the costs.
The WBS is used to ensure that cost estimates are made for all the
identified activities. The resource rates show the cost of each unit of resource
such as labor cost per hour, the cost of one litre of lubricant oil, etc. The
project manager considers the activity duration estimates for all the project
activities to know by what time the resources should be made ready.
The project manager also considers historical information in estimating
the cost of the project. He studies project files, and commercial cost
estimating databases of past projects. A good overall understanding of similar
projects undertaken in the past proves helpful. The chart of accounts is a
numbering system used to monitor project costs by category (labor, supplies,
materials, etc.) It is a coding structure that the firm uses to report financial
information in its ledger.
Some of the techniques used by the project manager to estimate costs are;
Analogous estimating
Bottom-up estimating
Parametric modeling
Computerized tools
Analogous Estimating
In analogous estimating, the project manager considers similar projects to
estimate the costs of the project. Based on the actual costs incurred in that
project, the project manager prepares the cost estimates by considering the
parameters like time value of money, inflation rate, etc. Though this type of
estimating is easy and economical, but it is less accurate than the other
methods.
Normally, this technique can be used only in consultation with an expert.
The difficulty in using this approach lies in finding a similar project and
determining its actual costs. This technique is also called the top-down
estimating.
Bottom-up Estimating
In bottom- up estimating, the cost of each element of the project is
calculated separately and all these costs are added up to estimate the total
project cost. The smaller the work elements of the project, the greater the
accuracy of the estimate.
Parametric Modeling
In parametric modeling, cost estimates are made using mathematical models.
For instance, if, according to the estimates of the project manager, the cost of
constructing a building is Rs.20,000 per square yard, a sum of Rs. 2 crore is
required for constructing a 1000 square yard building. Even if the estimates
made with these models are not exact, they give the project manager a rough idea
about the costs that are likely to be incurred.
Parametric modeling provides reliable estimates when;
The model is developed on the basis of accurate historical information
All project parameters are quantifiable
The model is scalable (can be applied to all projects irrespective of their
size).

Computerized Tools
The project manager can use computerized project management software
packages like Project 2000 to estimate the project costs. These software
packages compute various costs once the relevant data is provided. The project
manager prepares the cost. estimates, supporting details and the cost management
plan of the project on the basis of techniques discussed above. The cost
estimates for all the project resources are expressed in terms of rupees
dollors, etc.
The project manager provides supporting details for the project cost
estimates. He describes the work estimated (based on the WBS), the basis of
estimation, specifies the assumptions made in the estimation and calculates the
range of possible estimates. The project manager also prepares a cost management
plan that describes how cost variances can be managed. This plan is highly
detailed and prepared in such a way as to meet the requirements of the project
stakeholders. A good cost management plan lets the stakeholders know how the
project manager is going to estimate project costs.
COST BUDGETING
In the process of cost budgeting, the project manager allocates the costs
to individual work items, based on the cost estimates made. The cost allocated
for each individual work become the cost baseline for that work. These cost
baselines are used to measure the cost performance of the project. The Work
Breakdown Structure mid the cost estimates made (in the cost estimating
process) help the project manager to determine the amount of resources to be
allocated for each project work element. The project schedule helps him to
assign costs to the time period during which the costs will be incurred.
The project manager can also use techniques like Analogous Estimating,
Bottom-up Estimating, Parametric Modeling, and Computerized Tools (discussed
earlier) in cost budgeting.
Preparation of Cost Baseline
The cost baseline , an output of cost budgeting, is a time-phased budget
that periodically measures and monitors the cost performance of the project. It
also describes how costs are going to be incurred over a period of time. It is
usually displayed in the form of an S-curve.
COST CONTROL
 The project manager uses cost control to manage the factors that bring
about changt in the cost baseline in such a way as to make sure that the changes
are beneficial. Co control also helps him to determine whether the cost baseline
has changed and 1 manage die changes whenever they occur.
The project manager tries to determine how cost variances are likely occur.
Some the steps that the project manager can take to control project costs are :
Defining the project scope precisely and clearly
Using a relevant and reliable database
Designing an organization structure that is appropriate for the current
project
Monitoring and controlling deviations from the project plan
Periodically evaluating and monitoring cost performances:
Checking whether die changes are recorded in the cost baseline
Selecting vendors and project consultants carefully
Cost Change Control System
The cost change control system describes the procedures that bring about
changes: the cost baseline. The system includes the paper work, die tracking
systems, and the approval levels necessary for authorizing changes. The system
must be integrated with the overall cost change control system, if it is to be
effective.
Performance Measurement
Techniques like variance analysis, trend analysis, and earned value
analysis help the project manager to understand the cost performance. Variance
analysis compares the actual project results to the planned results. The cost
variations are measured at every stage of the project and the causes of these
variances are determined. Trend analysis examines the project results over a
period of time to find out if the cost performance is improving or not.
Earned value analysis is a technique that measures the project performance
by integrating the scope, cost and schedule measures of the project. According
to this analysis, three values are important. These are: Budgeted Cost Work
Schedule, Actual Cost Work Performed (ACWP) and Earned Value (also called
Budgeted Cost of Work Performed, (BCWP)).
The Budgeted Cost Work Schedule is the approved cost estimate planned for
a project activity for a given period. The Actual Cost Work Performed is the
total costs (both direct and indirect) incurred while implementing an activity
in a given period. The Earned Value is a percentage of the total budget equal to
the percentage of work completed.
These three values along with certain measures like Cost Variance
(BCWP-ACWP), the Schedule Variance (BCWP-BCWS) and the Cost Performance Index
(BCWP/ACWP) help the project manager to determine whether the work is
progressing according to the schedule and whether it is within the budget. The
cumulative Cost Performance Index for the entire project (total of BCWPs of all
project activities divided by total of all ACWPs) forecasts the project cost at
completion.
The project manager prepares revised cost estimates, budget updates, and
Estimates At Completion (EAC) and decides what corrective actions should be
taken. The project manager prepares revised cost estimates by making
modifications to the current cost information. These revised cost estimates
should be communicated to all project stakeholders.
In budget updates, changes are made to the approved cost baseline. The EAC
is a forecast of the total project costs on the basis of the project
performance. Here, the completion times are estimated as actual work completed
plus a new estimate for remaining work. The project manager also documents all
the lessons he has learnt in controlling project costs.
COST OVERRUNS AND THEIR IMPLICATIONS
The extra costs incurred over the estimated costs are called cost
overruns. If the actual^ costs incurred are less than the estimated costs, they
are called cost underruns. In; practice, this does not happen often as the human
tendency is to plan the costs at minimum level and they continue to be raised as
the project progresses.
Factors that Cause Cost Overruns
The important factors that cause cost overruns are described below. Figure
17.3 shows these factors.
Cost escalations
The cost of a project usually increases due to the time gap between the
planning and implementation of the project. The project manager prepares a cost
overruns analysis sheet to determine the reasons for cost overruns. Figure 17.4
shows a cost overruns analysis sheet.
Cost escalations occur for many reasons. Some of these are:
An increase in the unit price of materials, machinery, labor costs and
overheads
Change in scope of the project
Increase in statutory taxes and duties like sales tax, customs tax, and
excise duty
The impact of the adverse exchange rate variations on import of machinery
and equipment
An increase in the cost of capital when the project is not completed in the
estimated time
The project manager must arrange for forward contracts with importers of
n\achinery and equipment to take care of cost overruns due to unfavorable
foreign exchange fluctuations. The project manager should prepare contingency
plans to effectively deal with when the cost overruns occur.
Time overruns
Poor planning and failure to meet time schedules result in time overruns. The
project manager prepares a time overruns analysis sheet to understand where
delays have occurred and the reasons for delays. Figure 17.5 shows a time
overruns analysis sheet. Time overruns occur due to;
A change in the scope of the project
Ineffective project time management (which itself is the result of improper
planning and scheduling)
Delays in starting and executing some of the project activities
Delays in subsequent projects as a result of a delay in one project
Use of outdated technology
Bureaucratic/ political interference, and poor administration
To complete the project on schedule, the project manager must prepare
realistic time schedules, select capable vendors, carryout periodical monitoring
of project activities, and take quick decisions.
Scope Changes
Scope changes during the implementation of the project, that were not
envisaged during the planning stage increase project costs. Inadequate
attention to detail at the time of project formulation is the main cause of
these scope changes.
Scope changes include the introduction of new features to the project product,
design modifications, increased plant capacity and extra construction works,
updated technical versions, and newly framed statutory requirements of the
government may necessitate changes in scope.
Proper assessment of the project requirements and understanding the statutory
 conditions help the project manager to avoid changes in the scope of the
project.
Budget under estimation/omission
If the budget prepared is not exact, extra costs are incurred when the project
is actually implemented. This happens when the costs are estimated on the
basis of an incorrect project scope statement, or when adequate technical
information is not available. Sometimes certain project elements might be
ignored while the budget is being prepared. All these factors finally result
in an increase in the project costs. By preparing a detailed, exhaustive
checklist of all project activities, the project manager can reduce overruns.

Rectifications and replacements

The project manager s lack of experience, wrong choice of technology,
defective designs and flaws in the equipment purchased result in project cost
overruns, as drawings have to be revised, or the machinery has to be repaired.
By undertaking frequent inspections, setting up equipment carefully, ensuring
that the equipment is not damaged during transportation, and standardizing
some of die processes, the project manager can reduce diese cost overruns.
Unforeseen contingencies
Unexpected factors like natural calamities, lockouts, labor unrest, fires or
accidents cause project cost overruns. The costs arising out of these
contingencies cannot be controlled. However, die project manager can take some
preventive measures to reduce their impact.
Other related factors
An ineffective organization structure, outdated systems, poor decision making,
and the interference of stakeholders are other factors that push up die costs.
The project manager should be aware of all these aspects in order to be able
to minimize the cosl overruns that are likely to occur in the execution of a
project. An evaluation of all the project activities, consultation witi\
outside experts, and a critical view of all related factors can minimize cost
overruns.
ORGANISATIONAL PLANNING
An organization can be defined as a group of individuals who coordinate
their activities in order to accomplish a business and/or social objective.
Organizational planning is a process of identifying, documenting, and assigning
project roles, responsibilities, and reporting relationships. Choosing an
appropriate organizational structure facilitates the effective implementation of
an organizational plan.
The structure of an organization is dependent on parameters like tire rate
of change of technology, availability of resources, the product/services sold,
competition and other decision making requirements. The primary objective behind
developing an organizational structure is to control and direct the human and
other resources that are crucial to the attainment of business objectives.
Developing an organizational structure also helps in delegating tasks with
responsibility and accountability. A project manager s choice of organizational
structure depends on the nature of the project and the degree of control
required for its implementation. Some of the organizational structures that a
project manager can consider are:
Traditional Organizational Structure
Pure Product Organizational Structure
 Pure Project Organizational Structure
Matrix Organizational Structure
The salient features and the advantages and disadvantages associated with
each of the above organizational structures are discussed below.
Traditional Organizational Structure
Traditional organizational structure is developed around the functional
aspects of the organization such as engineering, manufacturing, marketing, human
resource and information systems. Projects in individual functional departments
do not face any problems. But when different functional departments have to be
coordinated, the project manager may have to assign, control and monitor the
work through the functional manager, because of his lack of authority in the
functional department. Traditional organizational structures are almost 200
years old and have undergone many changes during this period. Those changes can
be attributed to the changing requirements pertaining to information, technology
and the competitive environment. The increasing demands from the customers also
led to changes in the traditional organizational structure.
Advantages of the traditional organization structure
A traditional organizational structure helps in;
Easy cost control and budgeting procedures
Improving control by i) sharing knowledge and responsibility, and ii) grouping
Specialists
Using manpower in a flexible manner
Working with a broad manpower base
Defining the lines of responsibility in an easy and understandable maimer
Establishing continuity in functional disciplines, policies and procedures
Taking up large scale production activities within the specifications
Providing a reporting structure that gives good control over people
Establishing vertical communication channels
Reacting quickly to situations depending on the functional managers
priority.
Disadvantages of the traditional organization structure
A traditional organizational structure has the following disadvantages;
Lack of formal authority i.e., no single person is responsible for tire
total project
It does not provide project-oriented emphasis to achieve the tasks
It is a complex coordinating system that consumes more time in approving the
decisions
There may be partiality in decision making, and the strongest functional
group
may be favoured
It lacks customer focus
It is slow in responding to customer needs
Lack of proper project-oriented planning and authority that leads to
difficulty in
pinpointing responsibilities
It reduces motivation and innovation
Ideas are function oriented rather than project oriented.
Pure Product Organizational Structure
Pure product organizational structure is developed on the basis of
managing individual products as functional departments. Each individual product
is assigned a product manager who has functional specialists working under him.
This kind of a structure is quite common today. Pure product organizational
structure is a result of intra divisional expansion i.e., developing a division
from within a division. The basic advantage of this structure is the individual
line of authority, i.e. a single individual has the authority to control the
entire activity. Its narrow reporting structure helps develop a strong
communication channel along with accelerated feedback.
 Advantages of pure product organizational structure
A pure product organizational structure has the following advantages:
Enables strong control because of a single project authority
Identifies unprofitable product lines that can be eliminated easily
Establishes a direct link between the project manager and other stakeholders

Develops strong communication channels

Maintains project expertise without sharing key personnel
Facilitates speedy reactions to situations
Facilitates loyalty of team members towards project
Retains attention on customer relations
Enables flexibility in identifying time, cost and performance trade-offs
Facilitates simple interface management because of reduced unit size
Enhances decision-making efficiency of senior management.
Disadvantages of pure product organizational structure
The following are die disadvantages of a pure product organizational structure;
Duplication of efforts, facilities and personnel leads to prohibitive costs
of maintenance in multi-product organizations
Retains personnel in projects longer than they are required
Firm s progress is hindered by the lack of strong functional groups and
technology
Controlling functional specialists requires top level coordination
Technology is not shared among projects
No career prospects for the project team.

Pure Project Organizational Structure

Organizations working on large and long-term projects usually adopt pure
project organizational structure. This type of organizational structure contains
functional departments within the individual projects. In this structure, all
die project team members are involved in the project on a full time basis. The
team members report to the project manager directly or indirectly. This is a
vertical organizational structure established to avoid conflicts and problems
faced by traditional and product organizational structures. In this
organizational structure, the project manager can freely access all die
resources required for the project in Ms control.
Advantages of pure project organizational structure
Pure project organizational structure has the following advantages;
The project manager has complete auuiority over the project
The project manager has the freedom to acquire the resources needed for the
project s progress
The project team reports directly to the project manager
Project personnel are shared between the project and die project organization
Facilitates unity of command
Develops a formal communication channel between the project manager and his

Disadvantages of pure project organizational structure

The disadvantages of pure project organizational structure the following:
Inefficiency in resource utilization
Duplication of facilities
Sourcing personnel from internal functional departments to work on the project

affects work in the functional departments.

The Matrix Organizational Structure
A matrix organizational structure is formed as a result of combining the
advantages of all the aforementioned organizational structures. This structure
is suitable for project-driven organizations like software development firms.
This structure makes die project manager totally responsible and accountable for
die success of a project. Every project is treated as a profit center. Hence,
the general manager directly assigns power and authority to the project manager
to handle the project. The project manager is responsible for technical
excellence of the functional departments in managing the projects. The
functional manager in this structure is responsible for educating his team on
the teclmological advancements in die industry. Matrix organizational structure
functions in a collaborative maimer, i.e., it shares die information and
personnel while executing the project. There are certain requirements for
developing a matrix organizational structure;

Ensure commitment by making team members spend full time on the project
Ensure quick conflict resolution
Ensure that the resources are negotiated widi function and project oriented
managers
Ensure die functioning of functional departments as individual entities.
The primary objective of a matrix organizational structure is to derive
synergy through shared responsibility between project and functional management.

Matrix structures can be categorized into strong and weak structures depending
on die influence of the project manager on functional resources. When the
project manager exercises more control on functional resources than the line
manager, then the matrix is said to be a strong one. But, when die line manager
has more control over functional resources than die project manager, dien the
matrix is said to be a weak one. Figure 13.1 represents a matrix organization
structure.
Advantages of a matrix organizational structure
The advantages of a matrix organizational structure are as follows;
Enables die project manager to exercise control over all die resources
Each and every project has its own independent set of policies and
procedures
Autiiorizes die project manager to commit die company resources. This
ensures that scheduling does not clash with otiier projects
Facilitates quick response to conflicts, changes and other project needs
Enables proper Human Resource Development by enhancing die
career prospects of team, members personnel
Facilitates cost minimization by sharing key-personnel
Facilitates spending more time to solve complex problems
Develops a strong technical base
Eases solving of the problems that require top management involvement
Minimizes conflicts
Ensures optimum balance among time, cost and-peffoTTromsx
Enables authority and responsibility sharing.
Since a matrix structure is complex, it is important to note the preconditions
for implementing such a structure. The following are situations in which
implementation of a matrix structure is favorable;
When the primary output of an organization is a complex product
When the organization serves multiple customers in different geographical
locations
When a project with complex design that requires innovation is to be
finished on time
When large amounts of data are required to be processed
When designing, developing and testing a product requires sophisticated
skills
When resources have to be shared among different projects
When the market conditions demand rapid changes in the product.
Selecting an Organizational Structure
 The need for implementing complex and large projects within the given time
and cost along with enhanced performance and profit, made the project management
discipline a specialized field. The increasingly complex modern organizations
have proved the ineffectiveness of traditional organizational structures. This
made it necessary for the organizations to identify an appropriate
organizational structure. Selection of a organizational structure depends on;
The size of the project
The duration of the project
The experience of the organization in managing projects
Transparency at the senior-management level
The physical location of the project
The availability of resources
The uniqueness of the project.
All organizational structures have their own advantages and disadvantages
and the project management approach proves to be an effective alternative with
minimum disadvantages.
Thus, changing from a traditional structure to a project management
structure is a big leap forward, but once the project management structure is
adopted, it is not possible for the organizations to revert to the traditional
structure. Implementing a project management structure always brings in an
up-gradation of jobs and job profiles. Even though a state of the art project
management structure is incorporated, it is necessary to maintain a dynamic
state of equilibrium among its various functions.
After selecting and incorporating an appropriate organizational structure,
it is necessary to select the staff required to work on the project. This task
is significant and highly critical to the top management, because they just
cannot select the people to get the job done. They have to select the right
people for the right jobs.
ORGANIZATIONAL CONSIDERATIONS
The single most important characteristic of the present business
environment is rapid change. The pace and unrelenting nature of this change puts
a lot of pressure on middle managers, whose performance is often evaluated on
the basis of short-term performance measures such as return on assets, and
contribution to profits. In this context, project management is viewed as an
important method for training future, managers and executives to be cost
sensitive as well as profit oriented.
Basic business principles may need to be reconsidered in the future,
because of extent of changes that are taking place. Even while technology is
making many operational tasks obsolete, companies are finding it more and more
difficult to operate profitably. If organizations remain centralized even in the

face of the changes in the environment, improved productivity can be achieved

only through a project type of approach to management, involving shared and
flexible resources. As project management organizations are more adaptable, than
traditional ones, they seem to be the type of organizations that will become
more prevalent in the future. Some functional positions would remain, while the
number of staff positions would be reduced, with the ones remaining becoming
aligned into a more matrix type structure.
There is also likely to be a reduction in the number of layers between the
project managers and the top management. One may also see a situation where many
of the top positions are filled with people from the ranks of project
management, who are conversant with the operations of the whole company, rather
than being narrowly specialized.
NEW TRENDS IN PROJECT MANAGEMENT
Evolution of new technologies will have a significant impact on the future
of project management. Emerging technologies of today can evolve as the most
advanced tools in managing the projects in the future. Some of these trends
could be concerned with role of computers, role of project managers and
demographic and social changes.
Role of Computers
Successful installation of computer systems for individual projects
requires cooperation from the functional departments in exchanging information,
to accomplish the desired results. Data processing project management will
emerge as a driving force in the future because computerization will compel the
functional departments in an organization to integrate at a higher scale. Future
organizations will adopt higher matrix structures by taking the help of
information technology to integrate various functional departments.
Projects in the future will face further scarcity of financial, human and
raw material resources. This requires higher level of management control in
prioritizing activities and more advanced methods of trade-off analysis.
Evolution of network centric computer tools like emails, groupware, intranet and
Internet will enhance the span of control.
Technological revolutions along with reducing costs of microprocessors and
state-of-the-art terminals will mark the start of a new technological era.
Project management software will be an essential tool for managing future
projects. Computers and information will become vital to the success of projects
in the future, and can replace many workers.
Role of Project Manager
The role of project manager in an organization is turning out to be
increasingly complex and challenging. Competition among future organizations
will be based more on management styles and technological advantage than on any
other areas such as marketing or finance. The top management will exercise
tighter control over all aspects of an organization s operations, in the future.
In such a situation, the project manager has to keep himself abreast of all
internal and external developments. But unique projects will continue to require
exceptional leadership skills from the project manager. Project managers may
have to spend more time in planning operations for unique projects in the
future. The following skills are expected of a project manager in the future:
A global perception of project goals and effective planning to accomplish
them with limited resources and within specified performance standards.
Leadership skills to guide the efforts of the project team.
Decision-making skills.
Negotiation skills
Though computers and information technology can be used to develop a
program, they cannot explore alternatives and analyze them in a larger business
environment. Information technology may even fail to deliver an operational plan
that can accomplish project objectives. The systems orientation of the project
manager helps analyze the available alternatives and train the project team as
per the project requirements to implement the action plan.
Recruiting, selecting, training, appraising and retaining project managers
will become a complex and challenging task for HR managers. In the future,
selection.of project managers will be mainly influenced by factors like personal
history, past academic record, performance appraisals, psychometric tests and
career development counseling.
Demographic and Social Changes
Demographics and environmental conditions are in for drastic and complex
change, with increasing uncertainty. The project management discipline needs to
be highly flexible and quick to respond to fast changing market conditions. To
do this, the project management team should be aware of the changes taking place
around them. Planning for uncertainties will become a significant issue.
More number of organizations will transform themselves into not just
international but supranational organizations. Government interference in
business will be low or even negligible. It may also happen that a few major
players will have a disproportionate influence on the political and economic
situation of a country. Amidst all this, the project manager s job will be
increasingly tougher and complex, because with organizations going
supranational, he will have to coordinate the tasks of several people in
different countries with different skill sets.
COLLABORATIVE PROJECT MANAGEMENT
Collaborative project management is the latest trend in project
management. As far as the dictionary meaning goes, collaboration is the way of
working together, especially in a joint intellectual effort. Collaborative
project management is about working together in a uniform maimer towards
achieving a common goal. If communication is a critical tool for the success of
a project, uncontrolled communication will definitely limit the project members
from working effectively. Communicating blindly without knowing what to
communicate, when to communicate and whom to communicate with will not
accelerate the delivery of the project. It is therefore better to determine the
contents and tire medium of communication so that the communication tool used
increases cooperation among team members.
In fact, the tools of collaborative project management address the issues
that are far beyond the scope of traditional project management tools, i.e.,
they look beyond project scheduling, budgeting, uniform resource sharing and so
on. The tools of collaborative project management provide solutions for document
management, problem tracking, on-line chatting, structured e-mailing, risk
analysis, distributive schedule progressing and schedule reporting. For
instance, an organization can think of collaborating its project report delivery
system with the browser interface system so that all members who used to receive
a hardcopy of the report will now be able to access it from their computer
terminals. This will save time and paper cost. But such an attempt should be
planned very carefully, especially in organizations whose reports convey meaning
best when they are in print form. Moreover, collaboration should not lead to
asking all members to print their own copies from their terminals. This makes
the entire setup less effective because the top management will be in a position
of having to print their own copies of reports, a job which would previously
have been done by clerical staff in the pi eject management office.
Organizations that plan to adopt collaborative project management are in
for a big change in their organizational culture. Usually, any change in the
process is often resisted by people, irrespective of the advantages it can
provide in the long run. For instance, sometimes even a slight change in the
position of a computer for ergonomic reasons will be resisted by employees.
Though collaborating is a process of integrating and automating different
activities, these activities are represented by human elements that usually
resist change. The most challenging issue confronting collaborative project
management is getting the acceptance of project managers to implement
collaborative project management. Because it is usually the non-dependent, free
drinking and result-oriented individuals who turn out to be project managers, it
will be difficult to get their approval for collaboration which calls for
information and knowledge sharing. Developing collaborative project management
in an organization requires thorough planning that recognizes and takes care of
all the fundamental components of collaboration namely;
Mode and method of informing project members about the work to be done
Mode and method of informing key stakeholders with crucial information as and
when it is updated
Process of communicating change management procedures to j
stakeholder
Mode of communicating with the project manager, in case the team me require
some significant change at the operational leve
Communication process between the project manager and the client on the r.
statu
Intra communication methods among the project team members
Immediate accessibility among team membevs and its impact on their efficiency
Methodology involved in updating team members on project progress
There are two approaches to incorporate change in organizations;
i) The big-bang approach and
ii) The phase-by-phase approach.
The big-bang approach starts by identifying processes that need to be
changed, time is spent on selecting or preparing software that delivers the
requirement. Pi are then asked to shift to the new process. This approach is
very costly and usual not very successful because it is implemented rather
suddenly.
The phase by phase approach tries to identify the most significant
activities o entire process and starts implementing them one by one. The
shortcoming of approach is that it may never get totally implemented. But this
approach has r advantages like:
Deriving benefits of the process immediately after activating the first
function
Refining the processes over a period of time with the help of the expert
gained.
Easy to impress the client and management as a result of the first few proce
activated.
Investment required to start the process is low.
Minimum interruption to the ongoing organizational jobs because of the lc term
nature of the implementation process.
It is also advantageous to find the changes that are the least expensive
and s implementing them. If these succeed and offer good returns, some more comj
changes can be identified for implementation with internal support.
The following are some of the frequently considered activities for
collaborative pro management:
Conveying project information to members, top management, clients, spons and
several other external stakeholders.
Setting up a centralized bulletin board for placmg information on project
sta and progress.
Setting up a base for defining and analyzing management process.
Developing a distributed system for gathering information on project status.

Developing a delivery system for all project reports and documents.

Developing a decentralized system for receiving feedback from project member

Developing a document tracking system for maintaining project documents.

Collaborative project management is so result oriented that considering
any discipline for collaborating does not bring in any unwanted results. The
disciplines to 1 considered for collaborating must be short listed, depending on
business requirements and capacity, but only after proper budget allocation.
Budgeting should consider the cost of installing, training, technical support
and up-gradation costs. Once the list is finalized, it is better to select a
specific discipline for collaboration that maximizes value both in terms of
quality and return on investment. The project manager involved in collaboration
is responsible for organizing regular review meetings with the stakeholders to
discuss the ways of improving the ongoing systems.
CONTEMPORARY ISSUES IN PROJECT MANAGEMENT
The impact of modern technology on organizations and in the lives of
people has led the project management discipline to focus on certain
contemporary issues such as customer focus, program management, stakeholder
analysis and organizational changes.
Customer Focus
The customer in today s business environment is becoming increasingly
significant. And his significance will be even higher in the future.
Organizations have realized the importance of the customer and hence they have
adopted programs like Customer Relationship Management (CRM). Irrespective of
the type of the customer using the end product (process, product or service) of
the project, successful organizations have always considered the customer to be
a major stakeholder in projects. The need to seek total support from the project
client has been highlighted often, and this is particularly necessary in
software and information technology projects. The most advanced and best
organizations place the client in the project manager s position. This practice
brings in a greater level of responsibility to individuals in the programming
function and even more responsibility on the systems analysts heading the
project team. Bringing in the end user into the role of a project manager also
adds to the responsibility of the client department. If the project is accepted
because of the permissible cost/benefit ratios, then it would be the
responsibility of the client s representative (who is in the role of project
manager) to prove it to the top management that those benefits have been
received.
Program Management
Programs can be defined as projects whose activities themselves are
projects. Hence, program managers are bound to have additional responsibilities
that are more complex. This complexity in responsibility surfaces in situations
where limited resources have to be shared among several projects. A classic
example of this would be a systems development project in an information systems
department. The systems analysts and programmers will be shared in multiple
projects i.e., they are responsible for developing these projects.
Programs are of relatively longer duration than projects. This brings in
another difficulty in program management - employee turnover, which is higher
than in projects. Therefore it is the program manager s responsibility to take
substantial care while selecting, training, developing and retaining employees,
because high employee turnover will disrupt the flow of the program. It is also
essential to include activities pertaining to the development of the team in the
program network. All activities mentioned in the program network should be
properly budgeted, including contingency operations. It is the program manager s
responsibility to make sure that the activities are effectively scheduled and
managed, so that there is proper availability of human resource when required.
Stakeholder Analysis
Chapter 16 discussed the various implications of stakeholder analysis.
This section covers the basic aspects of stakeholder analysis. Stakeholder
analysis involves analyzing the role and information requirements of the various
stakeholders involved in a project. According to Freeman and Weiss, stakeholder
analysis is a strategic tool used by project managers in analyzing the plans,
objectives and techniques while handling several clients, vendors, competitors,
government bodies and other external agencies. Stakeholder analysis helps to map
several groups having a stake in the project. Stakeholder analysis is conducted
because it helps;
Project managers identify the parties to communicate with, in order to
achieve the objectives of the project.
Develop strategies and techniques to be used while negotiating on
competing goals and interests of different parties.
Uncover vested interests of different parties in the project so as to
negotiate for the common good of the project.
Distribute resources effectively and efficiently, so as to handle
different parties in a justified manner.
Most projects involve a certain amount of complexity although the degree
of complexity varies from project to project. Successful completion of projects
requires communicating with the external project environment. A proper
stakeholder analysis significantly simplifies this complexity. Stakeholder
analysis helps project managers understand external opportunities and threats
and facilitates making strategic moves accordingly.
Organizational Changes
Revolutionary changes (technical, strategic, perceptual, demographic) in
business has a significant impact on project management techniques and
procedures. The rapid penetration of information technology and
telecommunication systems has changed the way we work. Information technology
today has a significant impact on the competitive advantage of organizations and
nations. This impact has led to significant vertical and horizontal changes in
the organizational structure and the functions of organizations. Particularly,
project teams are formed for short periods with ad-hoc objectives. As
organizations are becoming boundary less, the significance of project teams is
increasing, as the project team is instrumental in gathering resources from all
functional and geographical areas.
Using information technology for easy access to information has its own
advantageous and disadvantageous for a project manager. While it is advantageous
in that it enables project managers to monitor, report progress, identify
deviations and review better, it is disadvantageous in that even the project
manager himself will be scrutinized by the top management. This close monitoring
from senior management will keep the project manager on his toes i.e., not only
the project manager should be aware of all the project activities but also be
well prepared to give a quick response for the possible questions from the
senior management.
The rapid growth of information technology has made information across the
organizational hierarchy easily accessible for managers. In fact, access to
information has become so simple that even a member of the top management can
retrieve and interpret information without the help of an intermediary (clerical
staff or supervisor). This easy access has created a situation in which the need
for middle managers at several levels is questioned. It ultimately led to the
elimination of several levels of management because they were seen to be no
longer useful. Since many managers are now capable of handling many routine,
clerical tasks with the help of word processors and e-mail, clerical support
staff have to justify their positions.
Organizations in the future may witness a completely new structure, namely
task force, that contains the expertise and resources required to accomplish a
project successfully. The project managers in the future will become task
managers where they have one or more projects under their supervision. They will
be provided with substantial authority and responsibility to manage daily
decision making pertaining to regular project issues. Their responsibility is
not just confined to completing the project on time, within the budget and as
per performance standards, but it will extend to developing a versatile team to
work effectively on multiple projects.

UNIT-III
Project Management
Globalization and the growth of e-commerce have made software and
Information Systems (IS) projects indispensable today. Speed is of the essence
when it comes to information dissemination and this is precisely why companies
are now giving a lot of importance to IS projects. The difficulty lies in
integrating software and information systems engineering with project management
information systems. Information systems engineering deals with establishing a
system by coding and testing procedures, 1 while project management is about
planning and controlling tire engineering aspects to meet the project goals
i.e., cost, schedule and performance. This process is not as simple as it
appears to be. Most software and information systems projects fail to impress
the client either in terms of quality, performance, cost or time. A study on IS
projects found that almost 35% of the projects had more than double cost and
schedule overruns. These failures can be attributed to the lack of proper
project management techniques. For instance, poor planning, incorporating new
technology, unclear objectives and requirements, poor business commitment,
changing requirements of business and customer requirements and poor
communication links can be the major reasons for a project s failure to meet
cost and time targets. Hence it is very important , to have effective techniques
in place to manage software and information systems projects.
Planning is the most crucial stage in an IS project which also determines
if the project will be a success or a failure. If the project manager spends
adequate time on planning the project properly, the probability of success is
higher. The traditional approach of planning a software project involves
developing a requirement configuration and conveying this to all key
stakeholders for evaluation and approval. During the process of distributing the
requirement configuration, some key stakeholders may be missed out, like the
end-users of the product. So, if the project manager is compelled to start the
project without the requirement configuration being approved by all the key
stakeholders, there is a greater probability of failure.
In a software or information systems project, the engineering aspect
includes specifying the requirement configuration, coding, testing etc., while
the project management aspect includes specifying the process of setting project
milestones, managing change, risk management, quality management, performance
reporting and managing human resources.
UNIQUE FEATURES OF SOFTWARE PROJECT MANAGEMENT
Generally, the tasks of a project manager in the IT industry and a project
manager in any other industry are similar. In both cases, their responsibilities
include planning, monitoring, controlling and reporting. Planning in software
projects is extremely significant, and can be divided into five stages:
Decomposition of projects into smaller tasks
 Definition of interdependencies among the different tasks.
Estimation of resources required for each task
Risk analysis
Scheduling project tasks
The difference between software project management and other project
management is often subtle. In a non-IS project, the focus is more on defining
the dependencies and schedules. But in an information systems project, the
emphasis is on estimating the resources required and analyzing the risk involved
in the project.
Decomposition of a Project into Small Tasks
Unlike managers in other projects, software project managers spend a
good proportion of their time on basic design decisions. In most cases, they
are placed in the position of having to prepare detailed task lists, even
before all the major design decisions have been finalized. In such a
situation, experienced project managers use a three step approach to
decomposing the project into tasks:
Concept oriented decomposition
Capability oriented decomposition
Implementation oriented decomposition
Concept-oriented decomposition gives a broad and general estimate of
project requirements.
Capability-oriented decomposition describes the delivery of
functionality to the client and is prepared after finishing the analysis. But
it does not talk about the way in which the functionality is to be achieved.
It is the only stage at which the time and budget estimates are valid within
an approximate plus or minus 25%.
Implementation-oriented decomposition: Project managers go for this type
of task decomposition only when the software design is almost finalized. At
this stage of a software project, the project manager knows how each of the
tasks contribute towards the completion of the final product (i.e., the
software module). The cost, time and budget estimates prepared at this stage
are near to being accurate.
Another difference between an IS project and any other project is the
complexity of identifying a task as complete. In a non-IS project, it is easy
to identify a task as complete. For example, procuring raw-materials within
the cost and as per the quality can be declared as completing the task of
procurement, but in an IS project, even tasks that were declared completed
need to be updated with the changing needs of the client, or to rectify latent
defects, or to combine it with other modules. In software projects,
programming constitutes a small portion of the whole project, while the major
challenge lies in integrating the decomposed tasks into a single code and
testing it for performance.
Definition of Interdependencies Between Decomposed Tasks
Generally, project tasks require atleast the partial completion of a
particular task before starting the next task in the series. In software
projects, the sequence of activities is more dependent on the economies
resulting from doing one particular activity before another activity.
Sometimes, this sequence also depends on the client s preferences. Most of the
"dependencies" that decide the sequence of performing tasks are more employee
driven than task driven i.e., the tasks are performed according to the
convenience and capabilities of the employees working on it. At times, the
tasks are carried out in a sequence to facilitate partial deliveries,
prototyping of key areas, risk reduction etc.
Estimation of Resources Required for Each Task
Estimation of resources required for every task in a software project is
 complex and different from non-IS projects. This is because the pattern of
costs in a software project is non-linear. For instance, constructing a
particular type of building costs Rs.100 per square foot. This figure can be
used to estimate the cost of constructing a 1000 square foot building or a
10000 square foot building just by multiplying the number of square foot to be
constructed with the cost of construction per square foot. But for a software
project, the cost per line of code increments roughly linearly as long as same
number of individuals can complete the task, but it increments non-linearly if
new project personnel are added. The factors that differentiate the resource
estimation of a software project from that of any other project are:
Constantly changing software requirements.
Influence of latent factors like the quality of the software.
The cost of the project cannot be arrived at an early stage because
accurate scope can be known only in the later stages of the project.
Lack of proper historical data will limit the project manager s capability
in estimating the resource requirements.
Individual productivity varies from person to person in the team.
Although it is difficult to estimate the resources required for a software
project, expert project managers often try to interpret the client s budget, and
use that as the basis to decide the extent to which the software will be
customized.
Risk Analysis
Analysis of risk is relatively more important to an IS project managers
than to other project managers. The reason for high risk in software projects is
their uniqueness - no two projects are similar in any fashion and every new
project will have atleast one new state of the art technology in its process.
These unique features and state of art technologies bring in a high degree of
risk into the projects. Successful project managers not only carry out risk
analysis for the whole project but also for each and every task in the work
breakdown structure. Analyzing risk at the WBS level helps avoid risk. There are
five different types of risks that are analyzed and reported by the project
manager on each and every task in the WBS. They are:
Technical risk - failing to meet technical specifications.
Schedule risk - failing to deliver the task as planned or scheduled.
Cost risk - failing to complete the job within the allocated budget.
Network risk - risk arising from interdependencies among the decomposed
tasks.
Total risk - combination of all risks.
The project manager analyzes both the probability and consequence of
failure, for the above risks. Obviously, tasks with high probability and
consequence of failure are most worrisome.
Scheduling Project Activities
Reviewing the initial schedule regularly helps maintain an accurate
schedule for a software project. The major difference between scheduling an IS
project and a non-IS project is that the cost and schedule of IS projects are
dependent on each other. The schedule of the software project determines its
cost. The cost of a project increases as the timeframe is reduced.
Apart from the differences between IS and non-IS projects during the
planning phase, there are also differences during the project monitoring and
controlling phases:
IS projects demand more technical knowledge than non IS projects. For a
project to be successfully implemented, the project manager has to
 understand and interpret all the crucial issues in programming to
communicate effectively, schedule the project activities and make decisions
(design cost trade-offs).
Quality control is one of the major responsibilities of a project manager.
Software modules differ with respect to latent defects and in-built
functionality. Therefore, it is the project manager s responsibility to
control the quality of the code being produced to make sure that the number
of latent defects and in-built functionality of the code are acceptable for
the particular project.
The software project manager has to deal with the client throughout the
project life cycle. Since no client has a clear idea of what the software
will look like when delivered, the project manager should manage the
client s perceptions in a way that it matches the software that will be
finally delivered
IMPACT OF BUSINESS TRENDS ON INFORMATION SYSTEMS PROJECTS
Project management plays a significant role in handling information
systems projects, because of the pressure on these projects to produce
deliverables on time, within cost, and meeting performance standards. Failure to
manage these projects effectively poses a financial threat to the organization
because they involve huge investments. Computer systems used by businesses in
the past do not seem appropriate now, because today s businesses demand highly
complex and bigger systems. Business computing systems in the past were more
focused on automating the transaction processes of individual departments like
the payroll system for the human resource department and the accounts handling
system for the accounts department. But now, organizations can no longer afford
to keep their departments as watertight compartments. Competitive market forces
require functional departments to share information among themselves in order to
control costs and maximize profit margins. These market forces have raised the
level of interdependencies among the functional departments, and consequently
the need to share information. For example, the human resource department can
get the sales target performance of the marketing department so as to appraise
their performance, to enhance their efficiency and reward and motivate them for
better performance. In the same way, the finance department may want information
on the product movement in the market, to allocate funds to the production
department for manufacturing additional units.
This interdependency among the functional departments has grown to an
extent that the businessess have started using strategic information systems
that facilitate information-sharing across the organisation. Therefore,
developing a human resource information system is now not done independently, it
will be integrated with the information systems of marketing, materials,
purchasing, costing and accounts.

IMPACT OF LATEST TECHNOLOGY ON INFORMATION SYSTEMS PROJECTS

Information systems projects are getting more complex because of their
need to use new technology. The latest systems are more or less on-line systems
that demand more specialized skills in the discipline when compared to batch
systems. Latest technology also brings with it the task of distributing the job
of data processing and storing between the desktop computer and the mainframe
through cooperative and distributive processing. These tasks increase the
complexity of projects and require people with unique skill sets, who are rare
to find. This lias resulted in greater specialization of team members in
particular disciplines. This situation demands better project planning and
management from the project manager because resources are limited and they
cannot be freely substituted. Earlier, database files could be designed by team
members but now it requires database design specialists. Because developing
these skills takes considerable training and experience, they are usually
organized into groups that provides services to the project when needed.
Personal computing, data processing, data security and communications have also
become specialized skills, that have become indispensable for any software
project.
The success or failure of an information systems project has a direct
impact on the success or failure of the organization. Businesses now aim at
deriving competitive advantage through information systems. The Indian retailing
industry is a classic example of an industry trying to gain competitive
advantage by using information systems. Shoppers Stop, the retailing major has
invested Rs.12 crore in a world class ERP package in an attempt to integrate its
supply chain management with the purchasing department. The package will link
all its stock keeping units with its warehouses and retail outlets.
Information systems projects are capable of making or breaking the
company, due to the heavy costs involved and they are constantly under pressure
to deliver the most advanced systems within a limited time. It can also be said
that it is the use of good project management techniques that differentiates
successes from failures.
SIMILARITY OF INFORMATION SYSTEMS PROJECTS WITH PROJECTS IN OTHER INDUSTRIES
Most of the project management techniques used in information systems
projects are similar to the techniques used in projects in other industries.
Some of the similarities are:
Product Similarity
Life-cycle Similarity
Management Function Similarity.
Product Similarity
Let us compare the similarity between the products of the construction
industry and the IT industry. Just like tire real estate industry, die project
manager in the IT industry also has to describe the scope and goals of the
project. After the scope and goals of the project are approved by the client and

the key stakeholders, the business is modeled for the analyst to understand the
user s perception of the business environment. In the construction industry, the
architect functions as the project manager. Once the business is modeled,
miniature models are developed to get the designer s perception. Just like an
architect constructs a miniature model of the whole plan as perceived by him, a
technology model is constructed in an IS project. Similar to the IS project s
requirement for a description of the parts of the system, construction projects
also require detailed plans that describe the parts to be used in building the
project. Since there is a similarity between the project management practices of
these two industries, the project managers in both industries perform similar
functions.
Life Cycle Similarity
The life cycle stages of an IS project is quite similar to that of a
construction project. The first stage in the life cycle of both the projects,
deals with finding out the feasibility of the project. In this stage, called
feasibility testing, costs are measured against the expected results and the
project ranking compared with other projects to evaluate its contribution to the
organisation.
The planning stage in both projects is also similar. In this stage, the
scope of the project is defined to get client s approval and objectives of the
project along with the techniques to accomplish them are also stated in clear
terms. The defining stage is similar to the engineering stage in a construction
project, wherein the client s requirements are recorded and the existing system
is modified according to the objectives of the new plan. The designing stage of
an IS project is similar to the detailed engineering stage of the construction
project. This includes describing the requirements of the project in a detailed
manner to develop the final product. The final stage in the life cycle of the
information systems projects is the implementation phase as against the building
construction in construction projects. This stage in the information systems
project involves programming and testing the new system for integrating it with
the existing business system.
Management Function Similarity
The management functions in both IS projects and construction projects are
very similar. Though a majority of IS projects employ a weak matrix organization
structure when compared to construction projects, the project manager is
responsible for completing the project within the allocated budget and time, and
as per the specified performance and quality standards. The management functions
of project managers in both projects are planning, organizing, monitoring,
controlling, leading, scheduling integrating, progress reporting, negotiating
and problem solving.
DIFFERENCES BETWEEN INFORMATION SYSTEMS PROJECTS AND
PROJECTS IN OTHER INDUSTRIES
Traditional project management techniques cannot be easily used to manage
information systems projects. The key challenges faced while managing
information systems projects is the complexity in
Scope definition and management
Handling multiple projects
Rigid organizational structures and
Fast-changing technologies and methodologies.
According to traditional project management, it is the definition of scope
and its management that determines the success of a project, from the
perspective of schedule, resource and cost management. Scope definition in an IS
project gives the details of all the business functions that are to be taken up
for computerization. It is important to differentiate between what should be
considered for computerisation and what is not. The scope of the project is
usually not well defined, while developing traditional IS projects. Some reasons
for unclear scope definition are:
Interdependency among business functions leads to higher computerization
of processes than is required or planned for.
Using text to define scope may lead to misinterpretation of the content.
Complexity in describing the end product or service.
Rapid changes in business requirements over the project life cycle.
Handling Multiple Projects
In big organizations, it is quite common to find people working on several
projects simultaneously. These projects are developed by the IS department of
the organization on the client s request. The most challenging tasks in managing
multiple IS projects are:
Limited availability of resources.
IS projects often require unique skill sets that are rare to find and these
skills, if procured, have to be shared among all the projects being carried
out.
Conflicts may arise due to resource sharing across the projects and this may
result in schedule slippage and budget overruns.
Controlling project costs may require the project manager to manage the
 resources throughout the project on a real time basis.
Rigid Organizational Structures
Organizational structure is another key differentiating factor between IS
projects and any other project. IS projects usually employ a matrix
organisational structure. The project manager in such a situation has to perform
two roles, one of a project manager and the other of a functional manager. This
usually transforms a strong matrix structure into a weaker one. Some of the
charecteristics of such a structure are:
The project manager is also a functional manager to his systems analysts
and programmers (project team members).
The project manager may source the manpower for the project from his own
functional department.
Coordination becomes simpler because most of the team members are
functional subordinates to the project manager.
The pace of response to requisitions is high.
Project managers have more control on immediate subordinates.
The project manager s formal authority over the team members enhances
team motivation because of his positional and reward power.
The project manager can resolve the conflicts in the project team.
The project manager may fail to do justice to both his project and
functional tasks, because of lack of time.
Problems in prioritizing project tasks and functional tasks often
affects the project.
Fast Changing Technologies and Methodologies
IS projects are labour intensive, i.e., they require a number of experts
to work on them. Generally, project leaders get the list of requirements from
the client and use their expertise to transform these requirements into
functional software applications.
To reduce the labour intensiveness of information systems development, a
range of productivity enhancing tools have been designed and developed. These
tools not only shorten the development lifecycle, but also minimize the total
cost of the project. However, most management information systems fail to keep
pace with the rapidly emerging productivity enhancing tools. This has resulted
in software organizations falling back on old and inefficient processess of
information systems development that pose less risk and require more number of
people. The project management discipline is also being accepted reluctantly,
under the belief that it is also a part of the emerging technology.
DEVELOPMENTAL PHASES IN INFORMATION SYSTEMS PROJECTS
Exhibit 24.1 compares the developmental phases of projects in the two
industries -construction and IT. Before starting the development of an IS
project, it is necessary to check the feasibility and justify the need for
development. Many projects fail to qualify at this level itself. Some of the
phases in software projects are
Analysis
Designing
Coding and
Installation
Analysis Phase
This phase involves analysis of business requirements by the project
manager. This analysis describes the problem that is to be solved by the
software application. The analysis is conducted from the client s perspective.
It is advantageous to analyse in a manner that is more inclined towards the
business angle and less towards the technical angle. This analysis phase is
further divided into three stages, i) Preanalysis, ii) Partitioning analysis
iii) Post analysis.
Preanalysis is the initial stage in the analysis. In this stage, the
confidence level of the project team, members may be low, they may not know each
other, the client may fail to state his business requirements clearly and the
project manager may even find the project to be totally out of control. Another
major problem in this phase is to identify the key stakeholders of the project.
This phase of the project should be driven by priorities that are accepted by
both the client and the project organization.
The pre analysis phase is the result of attempts to get a comprehensive
view of the client s business requirements. This phase tries to discover and
solve the problems before the analysis and design phases. Identifying functional
features and procedures is essential to finish tasks successfully. Preanalysis
also helps eliminate issues that may become obstacles in the future. Most of the
existing software specification procedures fail to identify and address
questions like who the client is, who is an important client and what his most
important requirements are. The most significant aspect of preanalysis is that
it helps resolve conflicts in client priorities.
Partitioning analysis is used for analyzing large and technically complex
projects. Partitioning analysis is further split into high-level analysis,
intermediate level analysis and detailed analysis. High level analysis involves
understanding the client and his requirements and his priorities.
Intermediate-level analysis involves elaborating the high level analysis. It
develops a project management contract and the project team tries to get a feel
of the project size. Detailed analysis involves a study of the business problems
and issues and this results in defining the business requirements with more
clarity and gives a detailed specification list to be followed through out the
lifecycle of the project. It identifies the factors that make the project a
success.
Post analysis concludes the decisions on the functions that are to be
automated. This analysis also determines the hardware and software components
required to automate the functional unit. It specifies the total technical
functions to be used for example, whether to use batch or on-line processing,
distributed or centralised processing, databases and other related issues. The
domain of the analysis is not finalized until the scope of the project is
arrived at.Therefore, the scope of the project is not truly specified till all
the phases of analysis are complete.
Designing Phase
This phase involves a change in the state of the project. It progresses
from the chosen solution in the analysis phase to develop a credible and a
quality solution. This is obtained through the application of appropriate
software design procedures to the selected solution. The designing phase is
further divided into three stages namely,": designing the technical
architecture, the external designing and the internal designing.
Designing the technical architecture of the system: Here the system is
divided into different parts that finally form a group of source code
instructions. These groups are generally called sub-systems or programs.
Sub-systems or programs are further divided into modules, routines, sub-routines
and so on. The manner in which these groups interact with each other is known as

the technical architecture of the system. The technical architecture defines the
basic system, control sub-systems and the data structure control interfaces for
intermodule communication.
External design: External design takes design inputs from external sources
to the system without considering internals of the modules, programs etc.,
addressing issues like designing input screens and forms, sequence of screen
menus and designing output reports. In prototyping, a part of the external
design is carried out in the initial stages of the project itself. In such
cases, the remaining external design (that which was not completed in the
initial phases) is completed. Most of the outputs of this sub-phase go as direct
inputs into the customer procedure guides and manuals. Since external design is
related closely to documentation factors, it should be closely coordinated, with
the, members responsible for customer documentation.
Internal designing: Internal designing gives detailed directions for
designing modules, programs, databases and so on. These internal specifications
will be used while coding in order to develop source codes in one or more
compiled programming languages. Team members are given the responsibility of
designing a module each, which is usually less than or equal to 100 source code
instructions. They may also be given the responsibility of developing a program
which is a group of modules, routines or subroutines. The specifications contain
die name, purpose, language, calling parameters, call sequence, algorithms,
module logic, error routines, and recovery and restart procedures. The database
design is also finalized with complete information on the names, fields, field
formats, descriptions, values, size, statistics of data usage, difference
between stored and retrieved data, relationships, methods of access and back up
and retaining criteria.
The Coding or Construction Phase
The actual programming for developing the software application happens at
diis stage. This phase involves writing a code based on the design
specifications of the subsystems and databases. The language used and the
various productivity enhancing tools have a direct impact on die programming
phase. All individual sub-systems or modules developed during diis phase are
subjected to thorough screening and testing process.
The Installation Phase
The most crucial and challenging task for tlie project manager in this
phase is the integration of all the sub- systems and routine codes into tlie
main project. Integration in IS projects is not as simple as it appears to be.
It involves setting up hardware components, documenting, testing, training end
users on die software application and communication. The final phase of the IS
project involves amalgamating the output of the individual components into a
meaningful system. The effectiveness of integration is tested during system
testing and acceptance testing. It is only after the confirmation of the
effectiveness of integration, that the project is given a go ahead for
implementation.
Input Requirements and Utilities
To evaluate a project idea, one must also consider the availability and
utility of the inputs. The project manager should carefully assess the materials
required and their specifications. Material inputs for any project are normally
classified into four categories : raw materials, processed industrial materials
and components, auxiliary materials and factory supplies, and utilities.
Raw materials include agricultural products, forest products, mineral
products, livestock and marine products, livestock and marine products. The
project manager has to determine the material inputs by assessing the quality of
the raw materials, their costs and their availability.
While purchasing industrial materials and components, the project manager
makes use of some testing equipment to measure parameters like quality,
quantity, and specifications. Pharmaceutical companies may use some chemicals to
test their chemical inputs. A project manager should develop a close
relationship with the input suppliers to ensure timely and economical inflow of
required inputs. Most firms make long term agreements with the suppliers till
the completion of the project.
The manufacturing process is also determined by the availability and
quality of raw materials. For example, the quality of limestone decides whether
wet or dry process is to be used in a cement plant. Proper assessment of
availability of infrastructure like power, water, steam, fuel etc should be made
by the project manager to effectively run the project. All these utilities have
to be evaluated in relation to the location, type of technology, supplier’s
capacity and plant capacity. The project manager can also obtain special
permission from the local government to ensure better availability and use of
several utilities.
Product Mix
The project manager has the choice between a broad range of products or a
shortened product mix from a study of market requirements and the firm’s ability
to offer a variety of products. For example, a carpenter offers a wide range of
furniture units with different features and specifications. But a supplier of
electronic durables may offer only a limited range of products. Similarly, Xerox
offers of its products only on a limited scale. The project manager increases
the product range when he adopts an expansion strategy and reduces the product
range with a retrenchment strategy.
Plant Capacity and Functional Layouts
Plant capacity is the ability of the firm to produce certain volumes or a
certain number of units in a given time period. It represents the production
capacity of the firm under normal working conditions. This is determined on the
basis of installed capacity, machinery, and availability of infrastructure and
labor.
Input constraints, investments, market conditions, government policies,
technological up gradations, and financial resources play a critical role in
determining the capacity of a plant. Availability of skilled labor is also a
crucial factor is evaluating the capacity of a project.
Layouts are essential for setting up an effective plant. The three types of
layouts are :
Product layout
Process layout
Fixed layout
Product layout
In this layout, machinery and equipment are arranged according to the
products. This layout is also referred to as an assembly line or production
line. If the equipment is dedicated to continuous production of a narrow product
line. Suppose a firm produces three products : A, B and C According to this
layout, each product is manufactured separately and there will be no
interferences in the production lines of these three products.
Process layout
In this layout, all similar equipment or functions are grouped together
like all lathes in one area, and all drilling machines in another area. Suppose
a firm uses three varieties of machines, say P,Q and R to produce a product X.
All P type machines are grouped at one place, all Q type machines are grouped at
another place, and all R type machines in another place.
Fixed layout
A fixed layout is used when the product is bulky, large, heavy and remains
stationary. For example, all manufacturing and construction firms select a fixed
position for construction and all materials, machines, sub contractors and
workers are taken to the fixed place. Best examples of such layout are ship
building, aircraft assembling, satellite assembling etc.
The project manager can choose any of these layouts based on the
requirements of the project, Usually, no single type of layout can exactly
fulfill the purpose and the project manager may use a combination of different
types of layouts.
Location of the Project
Several of India’s space projects are conducted in Sriharikota as the place
is close to the Bay of Bengal. Most thermal power projects are located near
rivers to meet the high requirements of water. Airport projects are taken up in
dry land areas so as to minimize the land costs. From the above examples, it is
clear that the place of implementation of a project should be located
strategically to take advantages of benefits like availability of necessary
inputs, necessary infrastructure, and nearness to the markets.
The location of public sector undertakings is decided by the government,
which imposes certain rules and regulations on the private projects. The project
manager should carefully ensure that the location is as per the interests of the
government. The government also provides subsidies, and tax reliefs if the
projects are located in backward areas, Study of climatic conditions like
temperature, rainfall, floods, and seismic activity is very important while
choosing the location of a project.
Factors like integrating all departments of the organization, availability
of transport, safety requirements, site cost, political, cultural and economic
situation, geographical proximity to competitors are also to be considered by
the project manager in finalizing the location of a project.

Steps in the location and selection process

The size and scope of operations decide the approach to location and
selection process. Following is a general procedure of making a location
decision :
Defining multiple location objectives
The project manager formulates the broad location objectives based on the
interests and preferences of the project promoters, availability of technicians,
proximity to customers and suppliers, and other relevant factors.
Identifying relevant decision criteria
The project manager selects the project location on the basis of many
economic factors such as labor and material costs, non-economic factors such as
the impact of the plant on the environment and community.
Relating the objectives to the criteria
The relevance of criteria should be evaluated using decision-making,
models / techniques such as break – even analysis, linear programming and
qualitative factor analysis. Though firms prefer to use the aforesaid models for
making the location decision, in practice it is difficult to quantify certain
aspects such as the firm’s relationship with local channel members, market
sentiments etc.,
Generating relevant data to evaluate the alternative locations
Alternative location choices are made that satisfy the location objectives
of the firm. They are evaluated based on the data obtained.
Selecting the best location
Finally, a location that meets the organization’s objectives, best
satisfies the criteria and benefits the community is selected.
Machinery and Equipment
Technical evaluation of a project idea should include the study of
required machinery and equipment to run the project. The machinery and
technology required depend on the plant capacity and type of process selected to
implement the project. The project manager should study constraints like
transportation of heavy equipment, import of foreign machinery, and after sales
service from the sellers of the equipment, before selecting the necessary
machinery and equipment. Machines should be installed in appropriate places and
they should be sequenced to ensure continuous flow of the production process.
Experiences of the existing users should also be taken into account to find out
the practical difficulties in running different machines. Suggestions from
external technical consultants and in-house experts are also helpful.
Consideration of Alternatives
No single criterion is exactly useful in transforming, a good project idea
into a perfect project. A great idea might not be technically feasible. Some
good ideas may be poor at gaining a market while others may require huge
investments, which the firm may not have. All these constraints force the
project manager to think of alternatives and come upto with a workable project
idea. Reconsideration of nature of the project also generates new ideas and
makes the idea feasible.
Market characteristics also force the project manager to produce a high
quality product at a premium price or a low quality item at a cheaper price. To
meet the required market demand, the project manager has two options – either to
construct a single plant to cover the entire market to construct multiple plants
in different locations. As non of the choices may be perfect, the ultimate
decision regarding the project will depend on the trade – off between economies
of scale in manufacturing and the economies of distribution. The next chapter
talks about how a project manager selects a project from the several
alternatives, on the basis of the financial considerations.
PROJECT PROCUREMENT PLANNING
Project procurement planning is the process of discovering the needs of
the project that can be satisfied by acquiring products and services from firms
external to the project organization. The request for the products has to go
through a procurement process, starting from solicitation planning to contract
closure. The project manager should take the help of professionals in
contracting and procurement, if required. Procurement planning basically
involves the how. what and when aspects of procurement, i.e. What to procure?
How to procure? and when to procure? The procurement process is effective if it
contributes to organizational profits through discounts on bulk purchases of
quality products and services. If the procurement practices of an organization
are centralized, then profitability is enhanced because centralization leads to
standardization and minimizes the cost of paperwork involved. The primary
objective of a procurement planning process could be any one of the following:
Acquiring all products and sendees from a single vendor.
Acquiring all products and services from different vendors.
Acquiring a part of the required resources from the external sources.
Acquiring no product and service from vendors.
Some of the inputs required to prepare the procurement plan are:
Scope statement
Product or service description
Procurement resources
Market conditions
Make or buy analysis
Expert judgment
Scope Statement
The scope statement gives all the relevant information on the needs and
the strategics of a project that are to be kept in mind while planning the
procurement activities. The project manager is expected to know when to procure
a product or service from a vendor. The project manager usually employs
networking techniques like Critical Path Method (CPM) and Program Evaluation and
Review Technique (PERT) to estimate the timing of the requirements of products
or services. The project manager has to specify the requirements with the help
of specifications and drawings that define the schedule parameters in terms of
delivery dates and evaluate the cost of products and services according to its
life cycle stages. It is clear by now that defining the needs of the project is
the most crucial task for the project manager.
Product or Service Description
This gives a detailed description of the project deliverables. It also
provides information pertaining to the technical specifications of the products,
which are lo be taken care of while planning procurement. A typical product
description contains the relationship between the product or service being
delivered by the project and the factors (problems, opportunities etc.) that
lead to the initiation of the project. The product description in the initial
phase of the project contains less information and as the project progresses,
the product description becomes elaborate. Some of the factors are:
Market demand
Business requirement
Customer needs
Availability of state-of-the-art technology.
Legal needs
Though the content and format of a product or service description
statement van from product to product and from project to project, it must be
elaborate enough to support the latter stages of project planning. Usually,
product or service specifications are a written or graphical representation of
the product or service to be acquired from the vendors. These specifications can

be of three types:
Design specifications - that describe the physical characteristics of the
product that is to be delivered by the project. Since the buyer specifics the
design, the vendor is
not responsible for its performance.
Performance specifications - that describe the required operational
capabilities the end- product should posses.
Functional specifications - that form a part of the performance specifications
but it is identified only when the vendor mentions the utility of the product
or service and its cost effectiveness.
Procurement Resources
Procurement resources gives a description of the resources (systems and
personnel) needed to procure the products and services from the market as per
the specifications given in the product or service description document. If the
organization doesn t have a formal procurement team, then it is the
responsibility of the project manager and his team to manage the procurement
process. However, when projects are complex and technical in nature, and depend
heavily on the external market for sourcing raw materials or services, then the
presence of a formal procurement team to manage the activities would be
extremely helpful.
Market Conditions
Market conditions play a vital role in the process of procurement
planning. While planning for procuring goods and services from vendors, the
project or purchase manager should be aware of the products or services
available in the market. He should also be aware of the terms and conditions on
which various vendors supply these products or services. Macro-economic factors
like inflation rates, interest rates and government regulations influence
procurement plans. And there are other factors that need to be kept in mind
while planning procurements, such as quality management, cash flow statements,
risk management, staffing, initial ordering costs and the work breakdown
structure. There are certain parameters that arc taken for granted while
planning procurement. But, at tire same time, there are some aspects that
confine the scope of the vendee s choices and most often it is the financial
constraint.
Make or Buy Analysis
Once the project manager has the required information on the required
product and the market conditions, he has to decide whether to source these
products from within the organization or from outside vendors. If the
organization has free machine time and infrastructure mat can satisfy the need
of the project in a cost effective manner, then it is better to make the product
from within the organization than to source it from external vendors. But if the
costs, the infrastructure and other resources are not appropriate, then it is
better to buy it from external vendors. The make-or-buy decision should consider
both direct and indirect costs. For instance, while buying a product from
external sources, the project manager should take into account the indirect cost
of maintaining the procurement process apart from the product cost, such as the
ordering cost, transportation cost and so on. The make-or-buy analysis document
should contain the project organization s point of view and the immediate needs
of the project.

Expert Judgment
Expert judgment is used to analyze and judge the inputs of the procurement
process. It is provided by a single individual or a group of individuals who are
experts in specific fields. The sources for seeking professional and expert help
are:
Personnel within the departments of the organization.
Consulting firms
Professional, technical and industrial associations (All India
Engineers Association, Society for Indian Automobile Manufacturers
Association)
Selecting a Type of Contract
Selection of a contract type is influenced by the project manager s level
of uncertainty. While entering into a contract, the vendee (the procuring
organization) would always like to transfer the maximum risk of performance to
the vendor and at the same time reward him with perks for effective and
efficient performance. On the other hand, the vendor would like to minimize his
level of risk and maximize his profit. Generally there are five major categories
of contracts namely:
Fixed-Price (FP) contracts
Cost-Plus-Fixed-Fee (CPFF) or Cost-Pius- Percentage-Fee (CPPF) contracts
Guaranteed-Maximum and Shared Savings (GMSS) contracts
Fixed-Price -Incentive-Fee(FPIF) contracts
Cost-Pius-Incentive-Fee (CPIF) contracts
Fixed price (FP)
In this form of contract, the price of the goods that are to be supplied
by the vendor is fixed. The vendor negotiates this price depending on his
expected target cost1. The target costs vary from contract to contract in-spite
of having the same objectives. This form of contract is risky to the vendor as
he has to bear losses if the estimated target costs are lower than the actual
cost of production.
Although this type of contracting transfers maximum risk to the vendor, it
also has some disadvantages for the vendee:
The contract increases procurement process time: Since a contract value
(price) has to be fixed in advance, the vendor takes more time to calculate the
contract value. This makes the procurement process time-consuming.
 It increases contract value: Since the contract value (price) is fixed in
nature, vendors tend to incorporate huge margins to cover-up any possible risks
arising in the future.
Thus, organizations should be very careful in selecting this type of
contracting as it will delay the procurement process and at the same time
inflate the contract value.

Cost-plus-fixed-fee (CPFF)
In this type of contract, die vendee bears all the costs of the product or
service and die vendor is paid a fixed fee for supplying diese goods. This fixed
fee is usually a percentage of the actual cost of the goods supplied or the work
done. This type of contract is taken up only when there is no possibility of
arriving at an exact price for the contract. In these kinds of contracts, the
vendor is bound to finish the work agreed upon in the contract. The vendor in
diese types of contracts carries a small degree of risk. These contracts consume
less time to execute and it can be judged quickly by the project organization.
Take the example of construction projects where die construction material and
labor costs are borne by the project organization and the vendor gets a fixed
amount as fees on die completion of the project or contract. The project
organization can reward the vendor on the quick and successful completion of the
contract.
CPFF contracts ensure a cooperative work culture between die organization
and the vendor by seeking mutual help in solving problems pertaining to
technical, commercial and financial aspects. The only disadvantage of this type
of contracting is that the contractor may not minimize the costs of
administering the contract as he is assured of his fees. The vendee can punish
such vendors by keeping them away from future contracts. The advantages of this
type of contracts are as follows;
Makes the contract more flexible for the procuring firm
Minimizes profits for the vendor
Reduces the costs of negotiation and preliminary specification
Accelerates the initiation and completion of the project
Provides choice in selecting the most efficient vendor rather than selecting
the least bidder
Facilitates the involvement of the same vendor right from consultation till
the completion of the project.
However, this type of contracting has the following disadvantages;

The vendee cannot be assured of the final cost

There s no financial reward for the vendor if cost and time are minimized
It allows the members of the vendee s organization to give specifications for
costly features in the products
It allows rapid changes in die design by the vendee s staff which inflates the
cost and consumes more time to complete the project.
Guaranteed maximum share savings (GMSS)
These type of contracts are similar to cost-plus fixed fee contracts. The
only difference is that in this contract, the reimbursement given to the vendor
cannot exceed a limit ("guaranteed maximum"). The contract is not awarded by
inviting tenders. The vendor has to complete the contract within this
"guaranteed maximum" to get a share in the savings. Both the vendor and the
vendee share the risk. The vendor has to bear any cost
overruns (above the guaranteed maximum.) The organization can check the risk of
inflated project costs as the upper limit is fixed in the form of pre-negotiated
"Guaranteed maximum". When the actual cost incurred is less than the Guaranteed
maximum, then the vendor and the project organization have to share the
differential amount between them. However, when actual costs go beyond the
guaranteed maximum, the vendor has to absorb the cost overrun. This form of
contract has the merits and demerits of the aforementioned two contracts. GMSS
contracts are different from others in that the financial risk is absorbed by
both the parties involved in the contract. The vendor is also rewarded for early
completion of the contract and minimization of costs. The advantages of this
type of contracts are as follows:
It provides assurance of final cost to the vendee at an early stage.
Provides proper advice to the vendee pertaining to any delays and cost
overruns due to changes.
Provides mutual benefit to both parties if the project is completed in time
and within the budget.
Facilitates a conducive atmosphere for both parties in implementing the
project.
The disadvantages are;
It requires a thorough audit to be carried out by the vendee s staff
Feasibility engineering tests have to be conducted before getting into price
negotiation.
Fixed-p rice-incentive-fee (FPIF)
These type of contracts are similar to fixed-price contracts. The requirements
of the project to be undertaken are set-up stringently, except altering the
total profit with a formula according to the actual cost incurred by the
completion of the project. This adjustment is mentioned in tire contract. In
these contracts, if the vendor is able to minimize the costs, he is rewarded
which adds to his profit. Both the risks and savings are absorbed by the vendor
and vendee.
Cost-plus-incentive-fee (CP1F)
These type of contracts are similar to that of cost-plus contracts, except
for the flexibility of altering the fee basing on a formula which compares the
total project costs with target costs. This formula is mentioned in the
contract. Usually organizations handling long-tenn and R&D type of projects
enter into these type of contracts. Here, vendors are the maximum risk takers
and they also have to plan and minimize the costs. The advantages of these
contracts are as follows:
• The vendor seeks maximum benefits because it fixes a slightly greater
percentage
of total cost.
• It minimizes the verification and evaluation of the vendors services.
The disadvantages are:
• The process can encourage the vendor to minimize his costs in conducting
economic studies and description of maps and drawings which can finally lead
lo higher operational, building and maintenance costs during the latter
stages. It also has all the demerits of cost plus fee contracts.
Selecting a proper contract type to carry on procurement activities in a
project organization is the most crucial and complex task on which tire total
success of a project is dependent. It is therefore necessary for the top
management and the project manager to plan procurement management very carefully
and prepare the procurement management plan and statement of work. Exhibit 20.1
talks about the factors influencing the type of contract selection.
Procurement Management Plan
This document details the manner in which other procurement processes will
be managed i.e. starting from the solicitation planning till the contract
closing. It contains answers related to:
The type of contracts to be administered.
The person in charge of developing the independent estimates acting as
evaluation criteria.
The kind of decisions that can be taken by the project team independently
without consulting the procurement management team.
The place from where to access the standard procurement documents.
Managing multiple vendors.
Effectively combining the procurement activities with scheduling.
The degree of detail and formal structure of a procurement management plan
can change depending on the needs of the project.
Statement of Work
It is a detailed description of the product or service to be procured, for
the vendor to decide on his potential to serve the project organization with the
product or service that matches their expectations. The details vary depending
on the nature of the product or service to be procured, the requirements of the
project organization and the type of contract to be administered.
The statement of work is continuously reviewed and evaluated as it
progresses across the procurement process because the vendor may suggest an
alternative cost effective product or service to substitute the one planned
originally. This document should be transparent, complete and precise. It should
also mention its expectations from the vendor especially when it requires any
special services like after-sales service of the product being procured. For
some industries, there can be a specific detail and format for statement of
work.
SOLICITATION PLANNING
According to PMBOK, solicitation planning is the process of developing the
documents that are needed to support solicitation. It involves preparing the
procurement management plan, the statement of work, standard forms and expert
evaluation that forms the procurement documents and criteria for judging the
vendor. These documents support solicitation.
Procurement Document
This is a document that is used to invite proposals2 from eligible
vendors. The procurement document uses terms like "bid" and "quotation," when
the vendor selection is price sensitive, and the term "proposal" when the vendor
selection is more dependent on non-financial aspects like technical skills. The
term proposal is used while procuring die sendees of a consultant or an
architect. The procurement documents are also known as Invitation For Bid (IFB),

Request For Proposal (RFP), Request For Quotation (RFQ), Invitation For
Negotiation (IFN) and Vendor Initial Response (VIR). Of all diese types of
procurement documents the RFP is die most expensive for the vendor, especially
when the contract involved is so large tfiat the proposal needs to present
different sections covering various factors like cost, technical performance,
background of the management, quality of the processes, infrastructure support,
management of subcontractors and so on. A typical RFP covers the topics as
mentioned below.
A brief overview of the project.
Scope of the request for proposal.
Product specifications pertaining to its performance, technical functions
and quality.
Provision for alternatives in case of anything going wrong.
Communication of information.
Mode of supply of products and services.
 Setting up and maintaining services in case of machinery or software.
Mode and time of payment.
Span of insuring the products or services.
Means of analyzing the proposals.
Nature of confidential reports.
Key people with authority and responsibility to take decisions on areas
like change requisitions.
Procurement documents should contain a format that should get out as much of
information as possible from eligible vendors. The documents should seek the
depth, the accuracy and completeness of the information provided. It should
also contain a statement of work, description of the response sheet and any
other additional documents required like confidential statements or
agreements. There are strict regulations pertaining to the format and
content of procurement document when it is prepared by or for a government
organization. An ideal procurement document should be balanced by two
factors i.e., on the one hand, it should be rigid in seeking responses
that are corresponding and comparable but on the other hand, it should be
flexible to encourage suggestions from the vendor so as to enhance ways of
satisfying the need.
Criteria for Judging the Vendor
This involves evaluating the various proposals received from different
prospective vendors, by rating them. The criteria can be objective or subjective
in nature and they have to be clearly mentioned in a procurement document. When
the organization has the list of approved vendors from whom the product can be
readily sourced, then the criteria for judgment is usually narrowed down to the
price of the product. But in the absence of such a vendor list, cost effective
and reliable criteria for judgment should be developed and documented. The
following should be the factors to evaluate under such circumstances:
Need interpretation - as given by the vendor.
Total cost of procurement (purchasing costs + operational costs).
Can the particular vendor deliver the product or service at the lowest
possible cost?
Technical expertise - Is the vendor technically competent and can he adopt
tire technology needed to produce the required output?
Management style - Does the vendor have the substantial management practices
to complete the project?
Financial position - Is die vendor financially capable of carrying on with
die procurement project?
SOLICITATION
Solicitation is a process of obtaining quotations, bids, offers or
proposals from all prospective vendors. The process involves handling the
procurement documents
Shortlisted vendor list
Vendor meetings
Advertising and
Accepting proposals.
Short listed Vendor List
The short listed vendor list contains all information pertaining to their
expertise in different functional areas. These lists are usually available with
the organization. But in the absence of the list, it is the project team s
responsibility to develop their own source. If it is general information that is
required, then it can be sourced from regional associations (e.g., local
management and engineering associations), trade yellow pages etc., but if the
information required is specific, then die team has to put in greater efforts to
source it by visiting die sites, getting in touch with old customers and so on.
Procurement documents can be presented to prospective and potential vendors.
Vendor Meetings
These are meetings with prospective vendors before they present the
proposals. These are conducted to make sure that all the vendors understand the
requirements from all perspectives. Though it is a fact that the project
organization gains maximum advantage at this stage of the project, judicious use
of power and authority will result in a win-win situation for both die vendor
and the vendee. All major issues in die negotiation should be addressed towards
the benefit of the project. Negotiations can in negotiations when the project is
of high value. The negotiating team under such situations comprises
representatives from all functional departments such as engineering, accounting,
marketing, human resources and so on, depending on the type of the product or
service being procured. The team should plan for the meeting in advance and
should decide on the objective of the meeting and the technical and financial
issues. The crucial task is to select a team leader and authorize him to commit
the company s resources. Because it is the procurement department that has the
power to commit the company s resources, the team leader should be an expert in
these activities. To shield the project interest and to ensure the correct
understanding of the product or service standards and specifications, it is
advisable to include the project manager in the team. The two parties in a
negotiation meeting have two different goals to achieve. For instance, the
organization requires a particular product or service at the minimum price
possible, and the vendor desires to make as much of profit as possible from the
deal.
A negotiation meeting can be split into five phases namely, introduction,
identification, bargaining, closing and acceptance. These phases of the meeting
are classified because of the convenience it offers in analyzing the concept.
However there is no demarcating line between the phases. The parties involved in
negotiation should ensure that they do not skip any of the phases in between
without completing them.
The introduction
The introduction phase in a negotiation meeting is a stage in which the
parties involved are introduced to each other. It is this stage that influences
the total climate of the meeting during the rest of the phases.
The identification
This phase in a negotiation meeting involves exploring the competitor s
strengths and weaknesses and their focus areas. The issues are evaluated in
order to interpret the competitor s stand. This phase of negotiation usually
brings a change in the objective of negotiation because of any information
revealed by the competitors in discussion.
The bargaining
The bargaining phase in a negotiation meeting is the crux of the meeting.
The actual discounting process happens here. The bargaining between the vendors
and the vendee is basically because of time, cost and performance expectations.
The next phase of the meeting begins only when the gap between the expectations
of the two parties is reduced.
The closing
The closing phase in a negotiation meeting documents the final consensus
oetween the two parties.
The acceptance
This phase in a negotiation meeting involves the most complex tasks i.e.,
ensuring that the vendor and the vendee interpret the consensus reached (terms
in final contract) similarly. Though this phase signals the closing of the
meeting, the parties have to sign a written contract before calling off the
meeting.
 Negotiation is more of a human process than a technical process, because
several psychological factors influence the outcome of negotiations. Therefore,
the team leader has to use certain techniques to ensure a positive influence of
human behavior on the outcome of the meeting.
Negotiation and its Goals
The project manager likes to get the best price deal along with the
completion of the project on time and as per the standards. The organization
likes to exert some degree of control over the vendors performance by including
some clauses in the contract. The project organization should continuously seek
vendor support during the contract administration and at the same time exercise
control. Another important goal of the project organization is to maintain a
harmonious relationship with the vendor. A harmonious and supportive
relationship at the beginning of the negotiation eases the process of resolving
potential problems or disagreements arising in the future. A good relationship
between the vendor and vendee also enhances the chances of the vendor gaining
future contracts of the project organization.
Advertising
Advertising is a tool used by the project organization to invite proposals
in the form of sealed bids from prospective vendors. There is no bargaining
involved in this kind of solicitation. The vendors pricing is influenced by
market forces and the contract is bagged by the vendor quoting the minimum
price. Advertising updates the list of potential vendors present with the
organization and this list acts as a databank for future use. The channels of
advertising could be regional newspapers, professional newsletters or magazines.
Advertising in mass media is mandatory because of the regulations imposed by the
government, especially for all the subcontracts or contracts involving
govermnent agencies.
Accepting Proposals
Once the procurement documents are prepared and a vendor list is selected,
the project organization takes up the task of selecting the vendor. After
reaching a consensus with the procurement document, the vendor presents his
agreement to supply the required product or service to the organization as per
the specifications and standards mentioned in the procurement document.
VENDOR SELECTION
Vendor selection is a process of receiving quotations or proposals from
prospective vendors and evaluating these proposals to choose the right vendor.
Though this is a complex and difficult task, a properly documented vendor
proposal makes the process simple. Although price is the primary selection
factor for readily available products, bidding at lowest possible prices docs
not guarantee the contract if the vendor fails to supply the products on time.
In order to simplify the process, the proposals received are classified into two
disciplines namely technical and commercial to evaluate each of these
separately. Also it is advantageous to seek proposals from multiple vendors if
the nature of the product is technically complex. The tools and techniques used
for selecting a vendor are as follows:
Contract negotiation
Weighing system
Screening system
• Developing independent estimations
Contract Negotiation
Contract negotiation is a process aimed at enhancing the clarity and
ensuring mutual consensus on the structural and procurement aspects mentioned in
the contract before signing the contract. The final contract should clearly
convey the agreements reached between the two parties. The various topics to be
mentioned in the contract include the price of procurement, technical approach,
management style, terms and conditions, legal bindings, responsibility and
authority of the people involved and other related issues, depending on the
nature of the product to be sourced. While procuring highly technical and
complex product or service, the final contract may take the shape of a
Memorandum of Understanding (MoU) which is independent with its own sources and
outcomes.
Weighing System
A weighing system is a process in which all the information pertaining to
the qualitative aspects of the vendor is quantified. Weighing reduces the impact
of individual bias on vendor selection. The process involves identifying and
scoring all the significant activities from the proposal, setting up a range for
qualifying them based on the significance level and weighing diem against the
total scores.
If the range falls below the total score even with a single percentage
point, the vendor can be disqualified. In general, the following approach is
used to arrive at a particular score value:
• Each and every parameter taken up for evaluation should be given a
numerical
weight.
All potential vendors should be ranked based on each of the evaluation ^
parameters.
Multiply the numerical weight with the rank of the vendor.
• Add all the output of the above multiplication results in the total
score.
Screening System
Screening is a process of establishing basic performance standards for
qualifying the proposals. The vendor has to qualify in the performance
specification test developed by the screening system.
Developing Independent Estimates
This process is aimed at checking the audienticity of the price quoted by
the vendor. The project organization develops its own estimations of product
pricing. If the gap between the vendor and vendee s price estimates is high, it
clearly means that the data in the statement of work is insufficient or the
vendor failed to correctly interpret the statement of work.
CONTRACTING
After evaluating the quality of the prospective vendors thoroughly, the
project organization has to sign a contract with the vendor to bind him legally
to deliver the specified product. Both the parties in the contract are mutually
accountable and legally bound. The vendor is responsible for delivering the
product as agreed upon in the contract and the vendee is responsible for paying
die vendor the price that is agreed upon in die contract on die successful
completion of delivery or in phases as per the terms and conditions of payment.
The nature of the contract is legally binding on both parties, which makes the
approval process more stringent and mandatory. The stress is on ensuring that
die product or service description in die contract has the potential to satisfy
the project requirements. In general, the following are the parameters to be
covered in a final contract:
The beginning of the contract should always start with the definitions of
the vendor, vendee or description of other complex terms.
An overview of the responsibilities of the vendor and vendee.
The type of contract being administered along with die mode of payment.
Change requisition process and the authorization for its approval.
Vendor s warranty on the products or services being procured.
Frequency of conducting inspections and its cost distribution.
Terms and conditions for closing the contract.
Consequences for deviating from the agreement for example, late delivery of
the products.
CONTRACT ADMINISTRATION
According to PMBOK, contract administration is the process of making sure
that the
vendor s performance satisfies the project needs mentioned in the contract. If
the
project is so large that it requires multiple vendors to satisfy its needs, then
die major
area of concentration should be on handling die interfaces among die multiple
vendors.
Since die contracts signed are also the legal documents, die project team should
keep in
mind that any action taken by them makes diem legally accountable. To be
precise, contract administration is about applying the project management
vendor-vendee relationship and integrating the results of these practices back
into the project. The following are the project management practices that are
rejected into the contract:
Project planning and implementation - To check whetger the vendor
progressing as per die time scheduled.
Progress reporting - To check the vendor s performance in technical aspects.
Quality management - To check and constantiy monitor the quality of the
product being produced.
Change management - To chepk the approval and implementation of potential
changes and communicating die incorporated changes to the people requiring
it.
Financial management - To ensure timely and periodic payments as agreed in the
contract.
In order to administer the contract in an effective and efficient maimer,
die project organization should employ a contract administrator to manage the
total contract administration activities. It is his responsibility to see to it
that the end product or sendee matches the performance expectations of the
project. His basic responsibilities involve:
Managing change.
Ensuring that the vendor understands specifications completely.
Ensuring conformance to quality.
Managing warranty on the products being procured.
Managing die sub-contractors under the vendors.
Monitoring the manufacturing process.
Handling deviations from the contract.
Resolving conflicts.
Managing payment schedules and contract termination.
Job Status
Information collected during the project planning and implementation phase
gives the status of the vendor s job such as the tasks that have been completed
and the ones that have not been, the degree of quality being matched, the
expenditure incurred and so on.
Requisition for Change
Any changes to be made to the terms and conditions of the contract or to
the product or service specifications are covered in the statement for change
request. Further, if the job done by the vendor fails to impress the contract
administrator and the project manager, then the decision to terminate the
contract can also be treated as a requisition for change. But if there is a
disagreement between the vendor and the vendee on accepting the change, then
such a situation can lead to conflicts and claims.
Vendor Billing Process
The vendor should ensure timely and periodic submission of bills to the
contract administrator for payments for the completed work (or as agreed in the
contract). The billing documents should contain all supporting statements as
mentioned in the contract.
CONTRACT CHANGE MANAGEMENT SYSTEM
This change management system is similar to the overall change management
system discussed in the chapter on "Project Control". A contract change
management system is all about describing the process of handling a requisition
for change, i.e., it involves the necessary documentation needed to request for
a change, authority required to approve the change requisition and similar
issues related with change. Since any requested change can have a significant
impact on the contract i.e., it can bring in new jobs or remove an existing one,
all the guidelines pertaining to change acceptance should be mentioned in the
contract before signing it. The contract should mention the people who have the
authority and power to request and approve the changes so that any party seeking
change does not waste time by approaching the wrong persons. The contract should
also mention the general conflict resolution techniques if possible. All the
changes that are initiated are not disadvantageous, but it is belter to control
these changes by setting up proper change management practices in place. This
helps evaluate the changes that are initiated and then decide on whether to
accept the change or not depending on the results of evaluation. And once it is
approved, it is the contract administrator s responsibility to see to it that
the changes are incorporated. While considering the changes for implementation,
the contract administrator should evaluate the impact of the changes on basic
project parameters such as cost, time and performance. It helps further if die
project manager and the contract administrator try to integrate the contract
change management system with the project change management system.
Progress Reporting System
Progress reporting system is the process that keeps the project
organization updated on the performance of the vendor i.e., the way in which he
is achieving the objectives of the contract. An effective progress reporting
system demands frequent interaction between the contract administrator and the
project manager. To enhance the efficiency of the project communication system,
it is advisable for the project manager and the contract administrator to
integrate the functions of contract progress reporting system with that of the
project progress reporting system.
Managing Vendor Payments
Once the vendor submits the bill, the contract administrator has to check
and revise all the components of the billing system, as agreed upon in the
contract. And after seeking approval from the contract administrator, the
invoice should then be put on to the accounts payable system of the project
organization. The project manager has to approve the invoice.
CONTRACT CLOSING
Contract closing is a process involving verification of the product along
with updating all the project documents with the final results and storing all
project information for future retrieval. The contract closing procedure may
also be mentioned in the terms and conditions of the contract. The process of
contract closing usually involves four steps:
Contract documentation - Tins contains the complete contract as well as all
the supporting schedule documents, change requisitions and approvals,
technical documents developed by vendors, vendor performance reports,
financial literature such as invoices and payment records and documents
pertaining to any contract related audits or inspections.
Procurement audits - This is a process of formally reviewing the procurement
process starting from procurement planning stage till contract administration.
The purpose of this process is to determine the success and failure that
assures shift to other procurement items on this project or to other projects
in the organization.
 Contract files - This is a total set of indexed documents developed to include
it in the final project records.
Formal acceptance and closing - This is a process wherein the contract
administrator or the individual or the department responsible for contract
administration submits a formal written notice to the vendor saying that the
contract is complete. All the requirements for formal acceptance and closing
are usually specified in the contract.
The project organization has the authority to put an end to a continuing
contract at any point of time depending on the nature of the contract and the
terms and conditions. But when the contract has to be terminated at a time which
the vendor has already incurred some expenditure in the process of delivering
the product, then the project organization has to reimburse the vendor the money
spent on contract activities. The following are the possible reasons for the
project organization closing a contract:
The product being procured is not required any more.
Technological advancement that can by-pass the product requirement.
Change in the allocation of funds.
Availability of substitute products.
Lack of profit expectancy.
The following could be the reasons behind termination of a contract by the
vendor:
Failure to supply the product or service as per die schedule.
Lack of progress in die activities of the contract (no positive
performance).
Failure to stick to the terms and conditions of the contract - deviating
from the contract in terms of quality and performance standards.
If there is a breach of contract from the vendor s end, tiien the vendor
may not even receive the payment for the work being carried out and which is not
been approved. But it may also happen that the vendor has to pay back if he was
paid in advance for the same work. Once the contract is being terminated, it is
the responsibility of the contract administrator to examine, approve and check
the breach of contract. In case of a disagreement between the products and the
contract, the contract administrator can:
Refuse to accept the products.
Refuse to accept defective products.
Accept a portion of the total batch of products.
The project manager should see to it that die contract is not closed out
financially immediately after delivering the product, because there is always a
chance of the products coming back for repairs or replacement for which tiiere
can be extra charges or reduction in the contract value. This problem increases
the burden on the contract administrator to control all the performance, cost
and time-related factors with a high degree of perfection. Therefore^
terminating a contract is the most challenging task for the project manager to
achieve.

UNIT – IV
PROJECT INTEGRATION
PMBOK defines project integration as all those processes required to ensure
that the various elements of the project are properly coordinated. Project
integration involves.
Project Plan Development
Project Plan Execution
Overall Change Control
Project plan development involves examining all the project processes and
sequencing them in a consistent and coherent manner so as to achieve the project
objectives. Project plan execution is the carrying out of the project according
to the project plan. The final step, overall change control, aims at
coordinating changes across all the project processes. Figure 5.1 shows the
different steps in project integration.
PROJECT PLAN DEVELOPMENT
Project plan development takes into account the result of all other planning
processes to develop a consistent, coherent document, which is used as a guide
for project execution and control. This process is repeated several times. Until
a final plan emerges, which specifies the resources to be used and the time
frame for the completion of the project.
The final document provides a baseline for measuring the progress of the
project for controlling the project. It lists all assumptions made in the
project planning stage and documents the planning decisions regarding the
alternative chosen. The document facilitates communication among the project
stakeholders. It specifies what issues should be covered in management reviews
and when these reviews should be conducted.
The steps involved in project plan development are :
Collecting data
Designing the Project Management Information System (PMIS)
Preparing project management mythology.
Collection of Data
In the process of project plan development, the project manager collects the
following data.
Outputs of other planning processes : The project manager considers the
outcomes of the planning processes of other knowledge areas such as scope
planning, activity definition, resource planning, cost estimation and schedule
development. These outputs include the Work Breakdown Structure, Cost
Performance Baseline and other supporting details.
Historical information : Records and databases relating to past projects are
used in developing the project plan. These records help the project manager
check the validity of assumptions and assess alternatives as part of his project
plan development.
Organizational policy : Every organization has a set of format and informal
policies that influence the project plan development. These policies relate to
different areas like quality management, personnel administration, and financial
controls. Hiring and firing policies, accounting codes, and standard contract
provisions are some of the policies that the project manager must keep in mind
while framing the plan.
Stakeholder skills and knowledge : Apart from the project manager, all
project stakeholders contribute to the development of the project plan, For
example, while awarding a fixed – price contract, the project cost engineer
plays a major role in determining the contract amount. In the case of technical
projects, the project client produces the design of the project which becomes
the basis for developing the project plan.
Limitations : Limitations are factors that reduce the number of options the
project manager has in developing the project plan, For example, when the
resources allocated by the top management for the project are fixed, the project
manager has to complete the project within the given budget. This budget
limitation the project manager’s options regarding quality, scope, cost etc. In
the case of projects performed under contract, contractual norms become
limitations.
 Assumptions : Assumptions are factors that the project manager consider to
be real or true. While preparing the project plan. For example, if the project
manager is not sure about the exact date on which certain spare parts would be
available, he assumes that they will be available by a specific date and the
plan is prepared accordingly. But the project manager should make sure that he
does not base his plan on too many assumptions.
Designing PMIS
The project manager uses the project Management Information System (PMIS) in
order to gather, integrate and disseminate the information and outcomes of other
project processes. The PMIS supports all project management processes such as
initiation, planning, implementation, control and closing. For complex projects,
the PMIS helps in identifying, sequencing, scheduling and tracking all project
activities. It shows the costs incurred, variances, and earned values of the
project at any point of time.
The PMIS enables the project manager to distribute the required information
to the project team members and other project stakeholders in the form of
reports. It allows the project manager to regularly update all project
schedules. By showing up variations, the PMIS helps the project manager to
monitor the project processes. Based on the performance of the current
operations. PMIS shows at what point of time the difference between the actual
and planned performance exceeds control limits. This allows the project manager
to take initiatives to keep the difference (between the actual and planned
performance) within control.
The PMIS should be designed in such a way that it facilitates the
application of appropriate project management standards and tools that work
towards achieving the client’s product quality and delivery goals in the most
economical manner.
Preparing a Project Planning Methodology
Any of the structured approaches used by the project manager to guide the
project team during development of the project plan is referred to as project
planning methodology. The Structure can be a standard form or a template.
Project planning methodologies use project management software and simple tools
like facilitated start-up meetings.
PROJECT PLAN
The PMBOK defines the project plan as ‘a format, approved document used to
manage and control project execution’s It provides all relevant details about
every aspect of the project. The project manager prepares the project plan on
the basis of the information obtained from the PMIS, project planning
methodology, and the stakeholder’s skills and knowledge.
The project manager distributes the project plan to all functional heads and

top management. The plan given to the top management gives an overview of all
project activities, rather than the details of every activity in the project
plan. For functional heads, the plan provides details of a specific functional
area. Figure 5.3 shows a model project plan.
Changes are made in the project plan when more information is available
regarding the project. Depending on the needs of an individual project, the
project plan also includes other project planning outputs. For example, a
project organizations chart is included in the project plan for large projects.
Along with the project plan, the project manager also provides supporting
details like technical documents (technical requirements, standards,
specifications, designs etc.), additional information such as assumptions made
in the development of the project plan, and the outcomes of other planning
processes that are not included in the project.
PROJECT PLAN EXECUTION
In the execution stage implementation activities included in the plan are
carried out. To make sure that the final product is of desired quality, the
project manager must ensure that the project processes meet the schedules,
estimates and standards specified in the project plan. While executing the
project plan, the project manager and his team should understand the various
technical and organizational interfaces existing in the project and ensure that
all of them are properly coordinated. Figure 5.4 depicts the project plan
execution.
Inputs for Project Plan Execution
The project plan along with the supporting details, organizational policies,
corrective actions, managerial skills, and product knowledge are some of the
inputs that the project manager requires to execute the project plan.
The project manager analyzes the project plan, and subsidiary management
plans like the scope management plan, quality management plan, etc. and the
performance measurement baselines to execute the project plan. He must also make
sure that the project is in keeping with the organizational policies. The
project manager should know what corrective action is to be taken when there is
any deviation from the project plan.
The project manager and his team must have leadership, communication,
motivation, delegation and negotiation skills and the ability to motivate others
and delegate work, if they are to execute the project plan successfully. The
project team should also have complete knowledge of the project product and
various alternative ways of producing it.
Work Authorization System
This is a formal procedure followed by the project manager to assign the
project work to an individual or a group of individuals so that the work can be
completed within the specified time and in the given sequence. In general, a
written authorization is given to begin the work. For small projects, verbal
authorization is enough.
Status Review Meetings
The entire project team meets periodically in order to review the project
status. The project manager and his team exchange information about the
execution of the project work. In general, these meetings are held once a work,
or once a month. Sometimes, these meeting are conducted after the completion of
specific project milestones.
Outputs of Project Plan Execution
Work results and change request are the important outcomes of project
execution. Work results are the outcomes of the various activities performed to
meet the project objective. Work results provide information about the project
deliverables that are already produced and that are yet to be produced. They
also show whether the deliverables meet and specified. (in the project plan)
quality standards and how much costs the deliverables incurred. The entire
information collected about the execution of the project is presented in the
performance report.
The project manager also considers various requests made by project
stakholders to modify the present execution process. Requests are sometimes made
to widen or narrow down the scope of the projects, or to modify the time and
cost estimates. If these requests are practicable, the project manager makes the
requested changes.
OVERALL CHANGE CONTROL
Overall change control involves managing the factors that bring about
changes in such a way as to make sure that the changes are beneficial to the
project. It is also concerned with identifying changes in the project plan and
managing them as and when they occur.
Overall change control is considered to be successful if it maintains
integrity of all performance measurement baselines. All the changes should be
reflected in the project plan. Overall change control ensures that any of the
changes in the product scope are included in the project scope (the changes made
to the project scope may not change the product scope.) Overall change control
coordinates the change made across all functional areas.
The project manager studies the project plan, performance reports, and
change requests from project stakeholders before starting the overall change
control process. The project plan specifies what the project has to produce and
what resources are allotted for this purpose. The performance reports provide
information on how the project is being executed. The project manager also
studies the changes in the project and product scope. Figure 5.5 shows how
various changes are coordinated.
Techniques in Overall Change Control
Overall change control uses several techniques like change control system,
configuration management, and performance measurement.
Change control system
The Project management Body of Knowledge defines the change control system
as’a collection of formal documented procedures that defines the steps by which
the project document may be changed. The system includes tracking systems and
other approval procedures necessary to authorize the changes.
Big projects have independent boards called the Change Control Boards (CCB)
that approve or reject change requests. The powers and responsibility of the
board are well defined. If the project is very big and complex, multiple CCBs
are set up. With different responsibilities.
The change control system is allowed to make changes without any approval in
case of emergencies. But all the changes that are made and the situations
because of which the changes had to be made, should be documented for future
use.
Configuration management
Configuration management is a documenting procedure that is used to ensure
the description of the project product is accurate and complete. In several
projects, configuration management is considered as a subsystem of overall
change control. It documents all physical and functional characteristics of all
the project products and controls any changes to these characteristics. The
system records the changes made to characteristics of any of the project items
and confirms that the changes are appropriate and reasonable.
Performance measurement
Performance measurement techniques like earned value method help the project
manager to assess whether the variances are within specified limits or not.
Earned value is a useful technique which assess the project performance by
finding whether there is any change in scope, cost and schedule for the project.
THE FUNDAMENTALS OF PROJECT CONTROL
Project controls are tools developed to diagnose the system for deviations

from the actual plan and reset them back with the actual plans/schedule. Project
controls are required to check whether the project is progressing in accordance
with the plans and standards set during the planning phase. In fact, project
controls are measures taken by the project manager in order to minimize the gap
between the planned output and the delivered output.
Answering the following questions will help us ir designing an effective
control system:
Who sets the standards?
How realistic are the set standards?
How clear are the standards?
Do these standards achieve the project s goals?
What are the outputs and behaviour that need to be monitored?
Is monitoring of people required?
What kind of sensors are to be used?
 Where should the sensors be placed?
How frequently should the monitoring be done?
What should be the tolerable gap between the actual and the planned output
before
taking the corrective measures?
What are the corrective measures available to take corrective action if
needed?
How ethical are these corrective measures?
What rewards and penalties can be used to get the desired results?
What kinds of actions are to be taken and by whom?
An effective control system is one that appears sensible and acceptable to
those who use it and those who are controlled by it.
Characteristics of an Effective Control System
For a control system to be effective and efficient it should fulfill the
following requirements:
Comprehensiveness: The control system should give a detailed overview of the
work to be performed. It has to estimate the time, labor and costs required to
finish the project.
Communicability: The system should communicate the scope of the project.
Authenticity: The system should reflect budgetary discipline and authentic
expense tracking by accounting tangible progress and cost expenditure in time.
Timeliness: The control system should be able to frequently re-analyze the
cost and time required for the completion of the remaining work. This is done
by comparing the delivered output with the actual/scheduled output in terms of
performance, cost and time thereby rendering the system cost effective.
Simplicity: The system should be simple to operate.
Flexibility: The system should be open to extensions and alterations and it
should also be easy to maintain.
Morally sound: The system should conform to all the ethical standards.
THE OBJECTIVES OF CONTROL
The primary objective of control is regulation. The purpose is to monitor the
delivered output by comparing it with the actual/scheduled output suggested in
the planning phase. The regulatory function of control helps in:
Translating the objectives into performance standards that are represented
by program activities and events.
Formulating budgets in order to compare the delivered output
with the actual/scheduled output.
The secondary objective of control is conservation of resources. The
project manager is entrusted the responsibility of protecting the physical,
human and financial resources of the organization. The process of guarding each
of these three assets is different. Resource control involves evaluating the
utilization factor of resources. Human resource control tries to determine
whether the individuals are capable of the efforts required to finish the task
on time. It is hardly possible to dedicate the resources totally to a specific
project. When the human resources are shared between the projects, some projects
may not be able to achieve its objectives due to mismanagement or misallocation
of their personnel.
Physical asset control is the process of controlling the use of physical
assets. It includes the preventive or corrective maintenance of the assets. A
project manager has to schedule the maintenance/ replacement plan in a way as to
minimize interruption to the work in progress and without overlooking the
quality aspect. Controlling the inventory is/also a key aspect that involves
receiving, inspecting, storing and recording to ensure genuine payment to
vendors. This also involves proper material handling techniques.
Human resource control is the process of controlling and maintaining the
growth and development of the human capital of the organization. Unique projects
enable people gain rich experience within a short period of time. Conserving
human resource is therefore a significant aspect of the control system.
Financial resource control is a combination of regulatory and conservatory
functions. The conservatory function of control on capital investments requires
the meeting of certain conditions before investments are made. The same
conditions also regulate capital flows for a higher return on investment. The
regulatory and conservatory techniques of financial resource control consist of
a control on current assets and project budgets along with capital investments.
These controls are implemented through a series of analysis and audits by the
controller or the project manager.
The tertiary- objective of project control is to facilitate
decision-making. Effective decision-making by the management requires the
following reports:
A report comprising the plan, schedule and budget made during the planning
phase.
Data consisting of the comparison between the resources spent in order to
achieve the delivered output and the scheduled output. Tins report should also
include an estimation of the remaining work.
An estimate of the resources required for the completion of the project.
These reports that are submitted to the project managers and team members are
useful in the following manner:
They provide feedback to the management, planners and team members.
They identify the deviations from the scheduled plan.
They implement a contingency plan at an early stage in order to protect the
project from higher losses due to cost, performance and time overruns.
Need to Control Performance, Time and Cost
Talking of control always brings three parameters into the discussion: the
performance, the cost and the time of a project. These three aspects are of
utmost importance to any project manager because he is answerable to the client.
This makes the project manager to check whether the project is progressing as
per the expectations and if it is operating within the time frame and budget.
The need to control the performance, cost and time arises from this:
Controlling performance
It is necessary to control performance because;
Technical problems may spring up any moment
Resources may become scarce
Complicated teclmical snags may develop
Quality problems may arise
The client may request for changes in the system specifications
Inter functional complications may arise
Technological breakthroughs can also affect the project.
Controlling costs
Some of the reasons that necessitate cost control are;
More resources are required to solve the technical problems
Cost of the project increases proportionately with the scope of the project
Low estimations were given initially
Poor reporting structures
Inappropriate budgeting
Failure to put a corrective measure in place in time
Change in the prices of inputs.
Controlling time
Some of the reasons that necessitate time control are;
Solving a technical snag may require more time than estimated
Time estimations that were done initially were very optimistic
 Tasks were inappropriately sequenced
Shortage of material, personnel or equipment when required
Incomplete preliminary tasks that were necessary to complete a series of
activities
Changing government regulations.
REASONS FOR MEASURING DURATION AND COST DEVIATIONS
Before going into the reasons behind measuring duration and cost
deviations, it is necessary to talk about variances and kinds of variances.
Variances are deviations from the actual plan. Based on the parameters of time
and cost, variances can be classified into Positive variances and Negative
variances.
A positive variance is one in which the delivered output is ahead of the
planned schedule or the cost incurred is less than the planned cost. Though
positive variances are good news for the project managers, they can be as
threatening as negative variances. Positive variances are capable of advancing
the project completion date and allocating lesser resources than estimated.
However, these variances can also occur as a „ /result of missing an activity
that was supposed to be completed during the reporting period. It needs to be
examined thoroughly before reporting a positive variance.
A negative variance is one in which the delivered output is behind
schedule or the cost --incurred is more than the planned cost. The project
manager would want a detailed report on the schedule accomplished and the costs
incurred, along with the reasons /or the delay.
It is important to measure duration and cost deviations because they play
a significant role in the project management life cycle. Though all the
parameters of project management have their own levels of significance, time and
cost share a special place. Exhibit 15.1 gives the reasons behind cost overruns
during different phases in the project.
Identifying Deviations from the Curve Early
When the project manager plots the actual performance or cost curve
against the planned performance or cost curve, he may observe some deviation
between the curves. This deviation between the curves cautions the project
manager about cost and performance overruns. Tins enables the project manager to
initiate timely corrective measures to minimize the deviations.
Dampen Oscillation
A constant, continuous and identical pattern should be displayed by curves
representing the actual and the planned performance over time. Proiects with
high behind schedule, overspending during one phase and going out of control in
next corrective measures that would nip problems in the bud.
Facilitate Early Corrective Action
A schedule or a cost problem is better reported to the project manager at
an early stage of its development. The project manager has more opportunities
for a corrective action plan when the problem is detected early.
Estimating Weekly Schedule Variance
Weekly reports on the work in progress have to be made, to give the
project manager enough time to take corrective measures before the situation
gets out of control.
Determining Weekly Effort (Person Hrs/Day) Variance
The variance between the planned/scheduled effort and the delivered effort
has a direct impact on the planned cumulative cost and schedule. A lower
delivered effort than the scheduled effort indicates that the potential has not
been optimized i.e., a person failing to enhance his/her effort in the following
phases of the project. However, if the delivered effort is more than the
scheduled effort, where progress is not in proportion with the effort put in,
may result in a cost over run. It is very important to detect the out of control
situations early. The longer one takes to detect a problem, the harder it will
be to put the project back on track.
PROJECT REVIEW
IMPORTANCE OF PROJECT REVIEW
Once the project enters the implementation phase, the project manager
should take up the responsibility of reviewing the status of the project in a
timely and phased manner. Project review conducted at various stages of project
implementation play a major role in the success of a project. The project
manager conducts review to find out;
If the project can accomplish the business goals.
Whether the rules of the organization are understood properly and
implemented
If it is worthwhile to take up the project all the before entering into
major contracts
Whether the project is managed effectively and the team members are sure of
completing the project, by following the guidelines.
Reviews give the project manager and the organization a chance to solve
problems before they get out of hand, or to improve the way in which the
projects are being handled. To derive the maximum benefit out of the review the
project manager has to take follow-up action with an open mind. Reviews ensure
that the project utilizes the available funds to gain business advantage. On the

whole, a review helps the project manager;

Keep in mind the purpose of carrying out a project
Determine the appropriateness of the project activities from time to time
Gauge the way in which the objectives are being accomplished
Verify the completion of the project
Evaluate the cost of the project
Understand the project requirements.
Types of project reviews
A project manager has to conduct various reviews throughout the life of a
project to ensure that it is progressing towards achieving the planned
objectives. The manner in which these reviews are conducted decides the success
of current and future projects.
In general, a project manager conducts three types of reviews;
Status reviews
Design reviews
Process reviews
PROJECT REVIEW STAGES
A review should always be conducted before taking any major decisions that
can affect the future of the project. Some of the important points or stages at
which a review is conducted are as follows;
In the initial stages of the project life cycle, i.e., after the project
proposal has been submitted.
At the stage when an in-depth evaluation is conducted i.e., after die
primary business case has been accepted.
During the implementation of the project, i.e., while the activities of the
project are being carried out, particularly at die following points:
Before entering into major contracts.
When the major output of die project is to be delivered.
At points where die risk is substantially high.
At points where major problems occur.
When the project is completed.
When auditing has to be conducted.
Review after Submission of Project Proposal
A review at tiris point would help die project manger to know whether:
The proposal is worth die resources on undertaking an initial investigation.
 The proposal is in keeping witii die existing business strategy.
The proposal is flexible, in case it does not comply with the existing
business strategy.
Review in the Implementation Phase
There are different types of reviewing techniques to monitor the project
in die implementation phase. Status reviews, design reviews and process reviews
are carried out during this phase of die project.
Review at the Time of Completion of Project
A project is closed either when it accomplishes its objectives (successful
project) or when it fails to do so. Closing a project is a formal activity aimed
at discharging all the assets belonging to the project in a proper manner. The
project manager conducts a review at this stage to
Evaluate the project efficiency by comparing the delivered output with the
planned one, in terms of time, cost and performance standards.
Ensure that the benefits are well documented for use in future projects.
Document the lessons learnt as these may be helpful in die management of
future projects.
Significance of Post Project Review
Project review is probably the most effective tool for improving project
results and project management practices. An effective and thorough review of
project performance can help the project manager find out what was right and
what was wrong about the conduct of the project. Project reviews should be
target oriented and realistic i.e.. they should be conducted efficiently and
lay emphasis on overall project goals and objectives. To sum up, post project
reviews should analyze the performance of the project so as to build on the
project achievements and avoid problems in the future. Post project reviews
help evaluate the performance of the project from various perspectives:
Was the project a total success?
Was it a well defined project?
Did the project deliver the expected results?
Was the project implemented according to established project management
policies and procedures?
Was the progress of the project monitored and controlled properly?
Was the project a success from the stakeholder s point of view?
Is the project team happy with the performance of the project?
Even project has some valuable lessons for improving future projects and
developing professional skills. Post project reviews help uncover those
valuable lessons
Review in the Post-implementation Stage
This kind of review is usually conducted any time between three to six
months after the completion of the project. The project manager undertakes the
review to judge whether the project was successful in meeting its goals or
not. These reviews should;
Evaluate the benefits of the project and compare them with the benefits
envisaged in the initial plan
Judge the effectiveness and efficiency of the delivered output of the
project when it is put to use in real-life situations
Suggest corrective measures, if necessary
Document the lessons, as these may prove helpful in managing future
projects
Be conducted keeping in mind the information requirements of the various
stakeholders, like the sponsor of the project, the functional departments,
the end-users and the clients.
Post project reviews have a special significance in project management as
given in the above.