Module 1

Introduction to
Project Management
What is Project Management?
Project : A group of milestones or
phases, activities or tasks that support
an effort to accomplish something

Management : is the process of

Planning, Organizing, Controlling and
Measuring
Project...
A collection of linked activities,
carried out in an organised
manner,with a clearly defined
START POINT and END POINT to
achieve some specific results
desired to satisfy the needs of the
organisation at the current time
A project is a temporary and one time
endeavor undertaken to create a unique
product or service.
This property of being a temporary and one
time undertaking contrasts with processes,
or operations, which are permanent or semi-
permanent ongoing functional work to
create the same product or service over-
and-over again.
CHARACTERISTICS OF PROJECT
Objectives : A project has a set of objectives or a
mission. Once the objectives are achieved the
project is treated as completed.

Life cycle : A project has a life cycle. The life

cycle consists of five stages i.e. conception stage,
definition stage, planning & organizing stage,
implementation stage and commissioning stage.
Uniqueness : Every project is unique and no two
projects are similar. Setting up a cement plant and
construction of a highway are two different
projects having unique features.

Team Work : Project is a team work and it

normally consists of diverse areas. There will be
personnel specialized in their respective areas and
co-ordination among the diverse areas calls for
team work.
Complexity : A project is a complex set of
activities relating to diverse areas.

Risk and uncertainty : Risk and uncertainty go

hand in hand with project. A risk-free, it only
means that the element is not apparently visible on
the surface and it will be hidden underneath.
Customer specific nature : It is the customer
who decides upon the product to be produced or
services to be offered and hence it is the
responsibility of any organization to go for
projects/services that are suited to customer needs.
Change : Changes occur through out the life
span of a project as a natural outcome of
many environmental factors.

The changes may very from minor changes,

which may have very little impact on the
project, to major changes which may have a
big impact or even may change the very
nature of the project.
Optimality : A project is always aimed at
optimum utilization of resources for the overall
development of the economy.
Sub-contracting : A high level of work in a
project is done through contractors. The more the
complexity of the project, the more will be the
extent of contracting.
Unity in diversity : A project is a complex set of
thousands of varieties. The varieties are in terms
of technology, equipment and materials,
machinery and people, work, culture and others.
 Project Management
A dynamic process that utilizes the appropriate
resources of the organization in a controlled and
structured manner, to achieve some clearly
defined objectives identified as needs.
It is always conducted within a defined set of
constraints
Why is Project Management
used?
It is necessary to Track or Measure the
progress we have achieved towards a
Goal we wish to accomplish
We use Project Management to Aid us
in Maximizing and Optimizing our
resources to accomplish our goals
Advantages
In built Monitoring/ Sequencing
Easy and Early identification of Bottlenecks
Activity based costing
Identification and Addition of missing and new
activities
Pre-empting unnecessary activity/expenditure
Timely Completion
Assigning tasks
Reporting
Road to Better Project Management

Find a Project plan that fits your style of

project management needs
Formation of a Project Management committee
Listing out all the tasks and sub-tasks to
accomplish a goal
Jot down the time period and person
responsible against each task/sub-task
Road to Better Project Management
Identify a Project Manager
Identify Task Managers
Sequence the activities in relation to
time period
Present to the PMC
Finalize by reaching an agreement and
start work
 Scope of the Project

It covers the following arenas as part of its scope:

They are initialization, planning and development,

project execution, project monitoring and finally
project closing.

There are many different approaches and these

include traditional approach, critical chain,
extreme, and event chain methodology.
The project manager must be able to effectively
communicate requirements, handle the decision-
making process with respect to project scope and
goals, manage employee activities, negotiate with
other members of the team, build a good team and
allocate resources according to requirements.
As part of the management process, it should
make use of tools that help them to organize
tasks, track hours, create a centralized location
from where everything can be taken and
collaborate with partners.

In order to keep the project on the right track it is

essential to have project control mechanisms in
place.
The appropriate level of control must be
implemented because too much of control can
be really time consuming

A project's success is determined if or not the

project was completed within the stipulated
time period and within the set budget and if it
has met customer requirements.
 Project Life Cycle
Project lifecycle is spread over a period of time.

There is an unavoidable formation/developing

period for the complex of activities involved to
attain the objectives in view.

This formation period,however, varies from project

to project but it is possible to describe.

In general term,the time phasing of project

planning activities common to most projects
The principal stages in the life of a project
are :
• Identification
• Initial formulation
• Evaluation (selection or rejection)
• Final formulation (or selection)
• Implementation
• Completion and operation
 Identification
Development projects are expressly designed to
solve the varied problems of the economics
whether in the short or long run.

The surveys and studies will give us ideas and

throw up suggestions which would be worked out
in detail later and then evaluated objectively
before being accepted for implementation.
 What types of surveys and
studies are to be undertaken?
Current Socio-political economic situation
On the basis of past trends, extrapolation
may be made
Scientific techniques
 Initial Formulation
Having identified the prospective projects, the details
of each project will have to be worked out

They are analyzed in order to determine which of

them could be reckoned as suitable for inclusion in
the plan, allocate funds and put into execution.

As a follow up to the finding of techno-economic

surveys, and number of feasibility study group are
set up
As the name implies to examine the possibility of
formulating suitable projects and to put concrete
proposals in sufficient detail to enable authorities
concerned to consider the feasibility of the proposal
submitted.
Evaluation or Project Appraisal

After the socio-economic problems of an economy

have been determined and developments objectives
and strategies agreed,concrete steps have to be taken.

The main form this takes is that of formulating

appropriate development projects to achieve plan
objectives and meet the development needs of the
economy.
Proposals relating to them are then put
to the plan authorities for consideration
and inclusion in the plan
These proposals as pointed out above take
the following forms of feasibility studies :
• Commercial viability
• Economic feasibility
• Financial feasibility
• Technical feasibility
• Management
The process almost invariably involves making decision
relating to technology, scale, location, costs and benefits,
time of completion (gestation period), degree of risk and
uncertainty, financial viability, organization and
management, availability of inputs,know-how, labor etc.

The detailed analysis is set down in what is called a

feasibility report.
 Formulation
Once a project has been appraised and approved, next step
would logically, appear to that of implementation.

This is, however, not necessarily true, if the approval is

conditional to certain modifications being affected or for
other reasons, such as availability of funds.

The implementation stage will be reached only after these

pre-conditions have been fulfilled.
Project formulation divides the process of project
development into eight distinct and sequential stages.
These stages are

• General information

• Project description

• Market potential

• Capital costs and sources of finance

•Assessment of working capital requirement

• Other financial aspect

• Economic and social variables.

Project Implementation
Every entrepreneur should draw an implementation
time table for his project.

The network having been prepared, the project

authorities are now ready to embark on the main task
of implementation the project.

To begin with successful implementation will depend on

how well the network has been designed.
However, during the course of implementation, many
factors arise which cannot be anticipated or adequately
taken note of in advance and built into the initial
network.

A number of network techniques have been developed

for project implementation.

Some of them are PERT, CPM, Graphical Evaluation and

Review Technique (GERT), and Line of Balance (LOB).
 Project Completion
It is often debated as to the point at which
the project life cycle is completed.

The cycle is completed only when the

development objectives arerealized.
Implementation
Regular Monitoring

Resource Support

Critical issues discussed and solution

Meeting with the team on completion of each

major milestone

Track the progress against the plan

System to add/delete tasks in the PMT

Consequences of not using PMT
 Delay
 Cost

 Waste of resources

 Quality

 Dissatisfaction

 Reputation
 Capital Investment

Allocation of funds means investment of funds in

assets or activities. It is also called investment
decision because we have to select the assets in
which investment has to be made.
These assets can be classified into two parts :
Short-term or Current Assets.
Long-term or Fixed Assets.
 Meaning and Features of
Capital Expenditure Or Budgeting Decisions

A capital budgeting decisions may be defined as the

firm’s decision to invest its current funds most
efficiently in the long-term assets in anticipation of an
expected flow of benefits over a series of years.
 In other words, “capital budgeting is used to evaluate
the expenditure decisions such as acquisition of fixed
assets, changes in old assets and their replacement.”

Activities such as

- change in the method of sales distribution

- undertaking an advertisement campaign or a research

- development program have long-term implication for

the firm’s expenditure and benefits

Therefore, they may also be evaluated as investment

decisions.
Features of Capital Budgeting Decisions
Investment of fund is made in long-term
assets.
The exchange of current funds for future
benefits.
Future profits accrue to the firm over
several years.
These decisions are more risky.
It is significant to emphasize that expenditure and
benefits of an investment should be measured in cash.

In the investment analysis, it is cash flow which is

important, not the accounting profit.

It may also be pointed out that investment decisions

affect the firm’s value.

The firm’s value will increase if investment are

profitable.
Investment should be evaluated on the basis of a
criteria on which it is compatible with the objective of
the shareholder’s wealth maximization.

An investment will add to the shareholder’s wealth, if

it yields benefits in excess of the minimum benefits
as per the opportunity cost of capital.
Capital Investment: Importance and
Difficulties
Importance:

Long-Term Effects: The scope of current activities

of a firm is governed largely by capital
expenditures made in the past. Likewise, current
capital expenditure decisions provide the
framework for future activities.
Irreversibility:

A wrong capital investment decision often cannot be

reversed without incurring a loss.

Substantial Outlays: Capital expenditures usually

involves substantial outlays. An integrated steel plant
For example, involves an outlay of several thousand
crore
Difficulties:
Measurement Problem:

Identifying and Measuring the costs and benefits of a

capital expenditure tend to be difficult. Especially in
case of Tangible and Intangible cases.

Uncertainty:

It is difficult predict exactly what will happen in the

future. Hence, there is usually a great deal of
uncertainty characterizing the cost and benefits of a
capital expenditure decision.
Temporal Spread:

The costs and benefits associated with a capital

expenditure decisions are often spread out over long
period of time, usually 10-20 years for industrial and
20-50 years for infrastructural projects.
 Types of Capital Investments

Based on Simplest level

i. Physical Assets
ii. Monetary Assets
iii. Intangible Assets
Physical Assets:

Physical assets are tangible investments.

Example: Land, building, plant & machinery, vehicles

& computer etc.

Monetary Assets:

Monetary assets are financial claims against some

parties.

Example: Deposits, bonds, equity shares etc.

Intangible Assets:

- Intangible assets are not in the form of physical

assets or financial claims.

- They represent outlays on research and

development, training, market development,
franchises that are expected to generate benefits over
a period of time.
Based on Corporate level
i. Strategic Investments.
ii. Tactical Investments.
Strategic Investments: A strategic investment is one
that has a significant impact on the direction of the
firm.
Example: Tata Motor’s decision to invest in a passenger
car project may be regarded as a strategic investment.
Tactical Investment: A tactical investment is meant to
implement a current strategy as efficiently or as
profitably as possible.
Example:An investment by Tata Motor’s to replace an
old machine to improve productivity represents a
tactical investment.
Based on different Companies

i. Mandatory Investments.

ii. Replacement Investments.

iii. Expansion Investments.

iv. Diversification Investments.

v. R & D Investments.

vi. Miscellaneous Investments.

• Mandatory Investments

A mandatory investment is a capital expenditure

required to comply with statutory requirements
Example: pollution control equipment, fire fighting
equipment, medical dispensary.
• Replacement Investments: A replacement
investment is meant to replace worn out equipment
with new equipment. The reason of such investment
is to-

1. Reduce operating costs.

2. Increase the yield.

3. Improve quality.
 Expansion Investment

An expansion investment is meant to

increase the capacity to cater a growing demand.

Diversification Investments: A diversification

investment is aimed at producing new products
or services or entering into new geographical
areas.
• R & D Investments

R & D investments are meant to develop new

products and processes which would sharpen the
technological edge of the firm.

• Miscellaneous Investments

Miscellaneous investments represent a catch - all

category that includes items like interior decoration,
recreational facilities, and landscaped gardens.
 Phases of Capital Budgeting
Planning

Analysis

Selection

Financing

Implementation

Review
 Phases of Capital Budgeting:
Planning:

• The planning phase involves investment strategy and

the generation and preliminary screening of project

proposals.

• The investment strategy provides the framework that

shapes, guides and circumscribes the identification of

individual project opportunities
Analysis:
• If the preliminary screening suggests that the

project is worth investing, a detailed analysis of the

marketing, technical, financial, economic, and
ecological aspects is conducted
Selection:

• The selection process addresses the question—is the

project worth investing? A wide range of appraisal

criteria has been suggested to judge the worth of a
project.

• There are two broad categories:

- Non-Discounting criteria

- Discounting criteria.
Selection Methods:
Financing:
• After selecting a project, suitable financing have to
made.

• The two broad sources of Finance for a project are

equity and debt.

• Flexibility, risk, income, control and taxes are the key

business considerations that influence the capital
structure decision and the choice of specific
instruments of Financing.
Implementation:

• The implementation phase for an industrial project,

which involves the setting up of manufacturing
facilities, consists of several stages:

1. Project and engineering designs

2. Negotiations and contracting

3. Construction

4. Training

5. Plant commissioning
For expeditious implementation of proposal at reasonable
cost the following are helpful:

• Adequate formulation of projects

• Use of Principle of Responsibility

• Use of Network Techniques

Review:

• Once the project is commissioned, a review phase has

to be set in motion.

• Performance review should be done periodically to

compare the actual performance with the projected
performance.
In this stage, feedback is useful in several ways:

•It focuses on realistic assumptions

•It provides experience, which will be valuable in

future decision making

•It suggests corrective action

•It helps to uncover judgmental biases

•It advocates the need for caution among project

sponsors.
 Levels of Decision Making
Capital budgeting decisions could be categorized into these
three decision levels.
• Operating capital budgeting
This may include routine minor expenditures, such as
expenditure on office equipment. The lower or the middle
level management can easily handle the operating capital
budgeting decisions.
• Administrative capital budgeting
- This involves medium-size investments such as
expenditure on expansion of existing line of business.

- Administrative capital budgeting decisions are semi-

structured in nature, and they may also involve some options,
such as option to delay.

- Generally, the senior management is assigned the

responsibility of handling these decisions.
• Strategic capital budgeting
- This involves large investments such as acquisition
of a new business or expansion in a new line of business.
- Strategic investments are unique and unstructured
and involve simple or complex options, and they cast a
significant influence on the direction and value of the
business.
- Top management, therefore, generally handles
such investments.

Keeping the view the different decision making levels, capital

expenditures could be classified in a way, which would reflect
the appropriate managerial efforts to be placed in planning
and controlling them.
 Levels of Decision Making
Operating Administrative Strategic Decision
Decision decision

Where is the Lower level Middle level Top level

decision taken? Management Management management

How structured is Routine Semi-structured Unstructured

the decision

How is the level Minor resource Moderate Major resource

of resource commitment resource commitment
commitment commitment

What Is the Time Short term Medium term Long term

Horizon
Key issues in major investment Decisions
Investment Story:

• Management must be convinced that the firm enjoys a

comparative advantage from the investment story, this
will facilitate investment in project. A positive NPV stems
from a sustainable comparative advantage.

Risks:

• The firm must carefully assess the risk associated with

the project and its ability to handle the same.
DCF Value:

• This criteria Like NPV and IRR are commonly employed

to judge the financial attractiveness of projects.

Financing:

• The financing mix chosen should result in a low cost of

capital and yet provide enough flexibility.
Impact on Short-term EPS:
• Investors and equity analysts consider EPS as a key
indicator of a firms performance.
• The incentive compensation of managers is often linked
to some measure of earnings like profit after tax or EPS.
Options:
• The options embedded in a capital project are the option
to delay, to expand, to change the output or inputs of the
project and the option to contract or abandon the project.
• These options are valuable because they provide flexibility
to the managers.
 Objective of Capital Budgeting

i. Expansion of production.

ii. Replacement of equipment.

iii. Modernization of techniques.

iv. Technological development.

v. Production diversification.
i. Selection of alternative project.

ii. Improvement of R & D.

iii. Maximizing society's welfare.

iv. Efficiently uses of scarce resources.

v. Promoting the welfare of shareholders.

 Common Weakness in Capital Budgeting
i. Poor Alignment between Strategy and Capital
Budgeting.

ii. Deficiencies in Analytical Techniques.

iii. No linkage between Compensation and Financial

Measures.

iv. Reserve Financial Engineering.

i. Weak Integration between Capital Budgeting and
Expense Budgeting.

ii. Inadequate Post – audits.

Poor Alignment between Strategy and Capital-
Budgeting
• Most companies seem to draw up a vision statement and
a strategy to accomplish their goals.
• However, the capital budgeting system is often not well
integrated with the strategy.
Deficiencies in Analytical Techniques: Companies often
employ techniques and procedures. The commonly
observed deficiencies are:
1. The Base Case is poorly identified.
2. Risk is treated inadequately.
3. Options are not properly evaluated.
4. There is lack of uniformity in assumptions.
5. Side effects are ignored.
No linkage between Compensation and Financial
Measures:
• Companies often use discounted cash flow criteria like net
present value (NPV) and internal rate of return (IRR) for
project selection, but link compensation to according
measures like profit or average rate of return.
Reserve Financial Engineering:
• Capital investment analysis is often afflicted by a subtle
malaise in the form of reverse financial engineering.
• This involves twisting the figures and projections to fulfill
certain criteria laid down by the firm.
Weak Integration between Capital Budgeting and
Expense Budgeting:
• Capital budgeting and expense budgeting are often done
somewhat independently.
• Even if the two budgets are developed in a mutually
consistent manner, the pressure to perform in the short
run may lead to a cutback in expense budgets.
Inadequate Post – audits:
• The post – audit of a project involves comparison of its
actual performance v/s its planned performance. However,
in many companies, post – audit is not handled properly.
• It oftens end up a policing device, leading to scepticism
and distrust.
Project Management….

Work Smart Not Hard !!!